A key consideration for the investor relations department is the number of shares available for trading, which is known as the float. A large float creates a significant level of liquidity, which means that investors can easily buy and sell shares without any undue delays to find counter parties. Also, a large float means that investors can buy and sell large blocks of stock without having their actions negatively impact the stock price, which is of particular importance to institutional investors, which routinely invest large amounts in a company’s securities.
The investor relations staff can have an impact on a company’s float by paying attention to the following float management activities:
- Issue more shares. When a company has the option of raising funds through a debt or equity issuance, the finance staff favors obtaining a loan, since it is (usually) quicker and less expensive to obtain than funds raised through a stock offering. However, if the company has a small float, it could make quite a difference from a stock liquidity perspective to obtain funds through selling stock, and then registering those shares as soon as possible. Going to the trouble of issuing new shares may be less worthwhile if the company already has a sufficient float.
- Register stock (company initiative). If a company has a large amount of unregistered stock, consider having the company’s securities attorneys file with the SEC for a stock registration. This will take a number of months to accomplish, as well as a significant amount of legal fees, but can be worthwhile if the result is a large amount of registered shares. Indeed, some shareholders may have required the company to register their shares as part of a private placement of the company’s stock. Since these investors are likely to sell their shares immediately following registration, it increases the amount of readily available stock, and therefore the size of the float.
- Register stock (employee initiative). If employees hold unregistered stock and the company has no plans to register the shares for them, then inform the employees of their right under the SEC’s Rule 144 to have their shares automatically registered after a six month holding period. This can include the recommendation of brokerages to employees who can sell the shares for the employees once the holding period has been completed. Selling these shares into the market can be a lengthy process.
- Only issue common stock. When a company issues a wide range of securities, only some may be registered for trading. Alternatively, each type may be registered, but the volume of securities of each class represents too small a float to create an active market. Accordingly, consider simplifying the capital structure of the business, so that it is only comprised of a large pool of common stock. At a minimum, keep an offer open to the holders of all other types of securities to swap them for whatever number of common shares appears appropriate, so that the common stock float gradually increases over time.
- Minimize stock repurchases. When a company has an excess amount of cash, a common use is to repurchase some of the outstanding stock. Doing so tends to prop up the stock price, and also increases the earnings per share for the remaining shares. However, a stock repurchasing initiative also reduces the float. This is a minor issue when a company already has a large float. Nonetheless, if the amount of the repurchase is expected to be large, or if the existing float is small, it may not be a good idea to repurchase shares.
- Break up stock blocks. A company may have a large number of registered shares outstanding and yet have a relatively small float, if some investors have accumulated large positions in the company’s stock. These large holdings have effectively withdrawn stock from circulation, leaving a vastly smaller effective float. It may be worthwhile to contact these investors about selling off at least a portion of their holdings, which may represent a substantial increase in the size of the available float.
- Conduct road shows. The company should regularly engage in non-deal road shows to create interest among investors to own the company’s stock. From a float perspective, road shows are particularly effective if the presentation team visits entirely new geographic regions on regular basis, thereby accessing new pools of potential investors.