GROWTH VS VALUE INVESTORS DOs AND DON Ts IN

GROWTH VS. VALUE INVESTORS; DOs AND DON’Ts IN MANAGING EXPECTATIONS By Aviv Boim, CFO BEST PRACTICE 2006 CFO Forum, Eilat, September, 2006 September 2006 CFO Forum Best Practice 2006 1

Who is Wall Street for an IL Company? n Financial Investors l U. S. fund managers, with a range of strategies and industry / geographic focus. Typically meet management on a regular basis l London – mostly emerging markets or European dedicated funds. Typically involves hands-on DD l Israeli funds - rely on meetings with management and local research analysts n Retail investors across the World Wide Web, literally! n Research analysts l Financial buy side and sell side, mainly U. S. -based but also local analysts l Marketing research agencies in the field n Financial as well as marketing press agencies September 2006 CFO Forum Best Practice 2006 2

Who is Wall Street (cont’) n Press interviews and conferences of all sorts, addressing directly or indirectly your company and field, e. g. a negative Wall Street Journal column on your peers could cause your share price to crash September 2006 CFO Forum Best Practice 2006 3

Channel Checks n “Channel checks” – what does it mean? l Communications that research analysts are making with your suppliers and contract service providers, in an effort to gather information on recent events and dynamics that did not become public l Although such communications are likely to breach confidentiality undertakings, they are hard to prevent n In most cases, the results of such checks are released in a note by the analysts days prior to the Company releasing its results; your ability to respond is limited if at all September 2006 CFO Forum Best Practice 2006 4

A Closer Look into Types of Funds/Investors n The focus of the fund/investor can be divided into the following main categories: l l l Growth vs. Value analysis Long vs. Short positions Fundamental vs. Technical trade Momentum driven Event driven (M&A, spin off, hedge convertible issuance etc) n Each of these investor types is looking for a different edge to satisfy its investment criteria, and these criteria could conflict September 2006 CFO Forum Best Practice 2006 5

Market and Technical Thresholds n A number of market and technical thresholds are key in the evaluation for almost all types of investors: l Market capitalization l Trading volume l Share price volatility l Simplicity level of the business model l Key parameters of the financial results (profit/loss, EBITA etc) n For each fund, your market data and parameters could work either way and influence on building or dropping a position n Although it seems like a “chicken and egg” situation – there always funds with investment policies that will suit your company, almost by definition September 2006 CFO Forum Best Practice 2006 6

The Investment Message to the Street n First of all – it should be ready and up-to-date at all times, irrespectively of the business cycle and environment n The message should be: l Clear and coherent l Consistent, subject to market dynamics l Easy to understand by a generalist; most of the funds don’t have the time/ability to dive into the details l Unified message – Regulation FD (Fair Disclosure) addresses it; be strict on “material releases policy” l avoid preferential treatment to “smart” investors l n Second, it should address: l The company’s business model l Risks and the potential upside l Short vs. long term milestones and triggers September 2006 CFO Forum Best Practice 2006 7

The Investment Message (cont’) n Funds do compare their notes of most recent comments made by company’s officers; message that varies and is not unified will hurt credibility n Short term and long term company business targets – their fulfillment or push-backs could have a material and immediate impact on buy/sell decisions n Funds monitor the share price and technical trading parameters on a daily basis; could trigger changes of investment position n Portfolio managers are being evaluated based on daily performance, another driver for market dynamics September 2006 CFO Forum Best Practice 2006 8

Mutual Funds – the Ultimate Shareholder? n Mutual funds focus on long only positions, with a longer ownership horizon n Market capitalization threshold is key to its investment criteria, with less emphasis on trading volume n Tend to accumulate a sizable position (over 5%) over ~ 6 month period, with room to increase over time n Focus on longer-term milestones and expansion prospects n Typically tied to “sell side” analysts, and require quality research coverage; tend to support decisions on internally developed models September 2006 CFO Forum Best Practice 2006 9

Hedge Funds – Driving Trading Volume! n Hedge funds dynamically build both long and short positions; there are many dozens of U. S. hedge funds with over $1 billion in assets addressing equity (shares) n Common strategy is to be market neutral (beta 0), and reduce net long positions to only ~20 -40% of total assets n As a result, hedge funds make aggressive daily modifications to holdings; the market technical thresholds of each company become key in such “adjustments” n Ability to accumulate a sizable position (over 5%) over several weeks can be a key criteria for an investment decision n Compared with mutual funds, positions of hedge funds are subject to a shorter holding period, typically 2 to 3 quarters n Higher focus on short term milestones September 2006 CFO Forum Best Practice 2006 10

Hedge Funds – Short Positions n Long/short strategy has become a common acceptable investment strategy n Short positions are used to allow correlation to the market, typically by shorting large cap’s stock, with higher trading volume n Adjustments to short positions are made on a daily basis n Technically, it is harder to identify size and holders of the short positions; n The benefits of shorts – all positions will be covered with the opposite long trade, and typically over a limited period September 2006 CFO Forum Best Practice 2006 11

Retail Investors – The Broker n Retail Brokers have varying investment horizons and strategies, but generally go less in depth than mutual or hedge fund investors n Brokers generally get information from research analysts, their peers and from the company; both IR and management. IR office plays an important role here n Most brokers require a complete, but simplified message and “story” September 2006 CFO Forum Best Practice 2006 12

Retail Investors – The Individual n Individual investors generally hold small positions, but are regarded as “high maintenance” holder n Rely heavily on Internet-based sources for news, publicly available research and information on companies n Individual investors are more prone to misconception given their tendency to gather information from online message / chat boards n Be sensitive and allow such communications to flow through IR office September 2006 CFO Forum Best Practice 2006 13

Summary n There are hundreds of funds/investors/analysts one can meet, mainly in the U. S. and London; a proper mapping and setting the priorities of the targeted investor base is required n Understanding the investment criteria of prospective funds is important in order to have a productive investor interaction n There is no “right” or “wrong” company message; Need to have a full story, with clear and achievable short and long term business targets September 2006 CFO Forum Best Practice 2006 14