Increasing amounts of this slack have gradually been taken up by mutual funds and large institutional investors. Only a few years ago they accounted for 50 percent of total trading volume on the New York Stock Exchange; in the mid seventies, institutions do about 75 percent of the business. Indeed, this business has become so vital to the lives of most brokerage firms that many maintain special departments where tailor-made reports for institutional consumption are prepared.

Much of this information necessarily is derived from the headquarters of the company about which the report is written. Of course, the companies themselves are very pleased to be courted, especially if the report is favorable. They realize that virtually nothing improves confidence in a company and attracts buyers to its products more than being harnessed to a rapidly rising stock. The higher the price goes, the cheaper the costs of financing and the greater the value of its stock options.

The pride of management in bringing this about is an important factor too.

An entire profession has thus developed around the function of informing and influencing institutional investors. Take XYZ, for example, a dormant, do-nothing issue with a dull history. Perhaps new and aggressive management is about to take over, or some revolutionary product has been developed; a beneficial merger may be pending, or a spin-off of assets is in the works. In order to capitalize such developments, the company must sell itself to securities analysts. Just as nature adorns a bird with brilliant plumage to lure a mate, so must a company present itself in the brightest light possible to attract institutional attention.

Few experiences are more flattering, or disarming, to a securities analyst than to be flown to a company’s headquarters by private jet to confer with its top officials. As an analyst for the Keystone Funds, I certainly was no exception when one day in 1968 at Boston’s Logan Airport, a Jet Falcon landed to pick up five or six aerospace analysts, including myself, for a flight to Texas.

An impossible-to-refuse invitation had been received from a no-doubt gorgeous secretary who purred seductively into the phone: "Mr. LeBaron, won’t y’all come down to Dallas and have dinner with Jim Ling? He’d like to tell you some of the things he’s doing with LTV (Ling-Temco\Vought). As you are a large investor, it’s important that he know your views."

Our party boarded the jet at Butler Terminal—noting that the copilot was Paul Thayer, president of LTV Aerospace—and took off for Texas, via Illinois. Jim Ling was in Illinois to dedicate a steel plant for Jones & Laughlin, which LTV had partially acquired. LTV was then a very aggressive conglomerate, having used debt, warrants, and preferred stock along with intricate accounting techniques, to create a multibillion-dollar empire.

Complex financial programs, designed to enhance the computation of reported earnings per share, were a typical hallmark of Ling, but in his quest for companies, he had been stymied suddenly by a lack of cash. In looking around for a means to offset this deficiency, Ling’s gaze had fallen on cash-rich Jones & Laughlin. It seemed the answer to a prayer, for it could add immeasurably to his asset base.

Yet the acquisition proceedings were destined to travel a rocky road. The management of J & L was not cooperative. Like an overly bashful bride on her wedding night, it rebuffed the advances of the lanky Texan, who dressed habitually in grey slacks and dazzling tweed jackets. At the time of the Dallas conference, Ling had already exhausted his short-term borrowing ability to acquire J & L stock.

James Ling personified the popular idea of a corporate entrepreneur: tall and lean; a self-made millionaire, quick with figures. His money-making capacity seemed to rub off easily on close associates, and he had an instant grip on everyone connected with LTV. Most securities analysts liked him for his lack of formality.

Ling and Roscoe Haynie boarded the Falcon in Illinois. Haynie, the chairman of LT\7’s executive committee, was also a former chairman of Wilson & Company, which LTV had acquired several years earlier. He sat opposite me in the cabin; when drinks were served, he quickly dispatched several double scotches. I asked Roscoe what was troubling him, angling for an inside scoop on what was to come. However, I learned that the issue was not business or investment, but aeronautical.

Jim Ling occupied the captain’s seat on the port side and was taxiing the jet out for takeoff. It was a hair-raising experience, which reminded me more of nervous reindeer trying to get airborne than anything connected with corporate aviation. Roscoe then confided that Jim had only four hours of dual instruction, all in a jet, and that he was not taking kindly to flying suggestions from the company’s pilot in the adjacent seat. I had the fleeting thought that we may be in the hands of an egomaniac.

The jet landed at Dallas, after an unusually bumpy and eventful flight, and we were joined by a group of about a dozen investment managers pulled together from all over the country. Our hosts for the evening were the LTV management: Jim Ling, the board chairman; his main associates, Clyde Skeen and Roscoe Haynie; and three or four corporate officers. Dinner was served in a suite of offices at the top of the Tower. The moment it was over we filed into the Board Room, a large space decorated in the Spanish motif, where the heads of several animals shot on an African safari or at Ling’s ranch in northern Texas stared down at us from the walls.

Ling immediately began one of his magnificent presentations. He explained that he would offer a package of securities—LTV Aerospace, LTV Electro-System, and certain Wilson companies—in exchange for common stock of the parent company, warrants, debentures, and a little cash. The package he would offer in a day or two had a market value approximating $150 million, compared with a price of about $100 million that he was asking the institutions to give in exchange.

There stood Jim Ling, blandly offering the institutions an opportunity to participate in each of the "Baby Lings" at an obviously generous discount from market prices. The proposal seemed reasonable and rational, yet it was also very complex. Was there a hidden "gimmick"?

The usual questions were aske4 about the exact date of the offering, the total number of shares of each item to be outstanding, and so forth. Everyone was relaxed and friendly, until one analyst prodded the hornet’s nest by asking how well Lehman Brothers and Goldman Sachs, LTV’s investment bankers in New York, understood such a complex proposal. The question seemed to catch Ling temporarily off guard, but more likely it rubbed his most sensitive nerve. With the majesty of an iceberg and the tone of voice to match, he snapped back: "They understood a million dollars annually in fees and that’s all they have to understand."

The mood of the gathering changed abruptly. Ling was no longer master of the situation, explaining carefully and patiently a complex problem to a receptive audience. The hunter and the quarry had suddenly changed places. Even certain institutions that had always been fans of Ling now balked at his proposal. The plan was little different from many others that succeeded; a mere exchange of paper was not the important stumbling block. It was the subterfuge! The cash that was to go from the institutions to LTV was relatively small. But, in this instance, it was essential, for LTV’s coffers were virtually bare of funds.

The meeting concluded with both sides at loggerheads. The institutions had rebuffed Ling for the first time, yet still he insisted that the deal would go through. If they didn’t accept it, individual investors would.

We left the hotel at eight o’clock the next morning for return flights to our respective cities. Just as the Boston plane was about to take off, I was summoned to the LTV pilot’s room where Jim Ling waited on the phone. "Dean," he began, "I’ve now discovered that the deal has some tax problems. I wanted you to know that the exchange offer is not going to be made as planned and I’ll let you know when we get something different. I suggest that you not mention this to anyone but, given your role of last evening, I thought you should have this information today." I thanked him for his hospitality and for keeping me informed. Five minutes later we were en route to Boston.

As one can imagine, I did not keep the information to myself. Since we were airborne during stock exchange trading hours, there was nothing any of us could act upon; however, at Logan Airport we learned that LTV had appreciated sharply in price that day. The other jets from Dallas had landed earlier than ours, and the participants of the meeting, believing that the exchange offer would take place and benefit Ling’s cash position, had relayed this bullish information to their offices. Only we on the Boston plane knew the inside story.

Another company I visited as a securities analyst was Executive Jet Aviation, a separate but wholly owned subsidiary of Pennsylvania Railroad. E.J.A. wanted a member of the Keystone group (a speculative bond fund) to purchase a high-interest-rate mortgage on several aircraft in its corporate fleet. The deal included an equity kicker in the form of warrants, which might have considerable value at some future date. Keystone considered the idea intriguing and sent me and two other analysts to Columbus, Ohio, to check it Out. My job was to write the report.

The two-hour meeting with E.J.A.’s officers and directors was the most unusual I ever attended. Former military brass was everywhere. Even the man who set up the projection screen was a retired lieutenant colonel. The gathering was friendly and informal, but I had no impression that many decisions were reached on the basis of the preliminary briefings by various F.J.A. officers. Apparently, the company relied upon its "big gun"—General Curtis LeMay, the vice-chairman—to present most of the salient facts.

LeMay proposed immediately that E.J.A. buy a fleet of Lockheed C-5A’s and enter the world air-cargo business. He rolled through the financing problems involved in buying these at $25 million apiece. He unfurled a chart giving ton-mile costs, which showed that air-freight costs contracted while other transportation forms expanded. Finally, he diagrammed a new terminal loading facility. One did not have to be clairvoyant to see that he wanted to put E.J.A. into the air-freight business in a big way.

It seemed quite natural, considering LeMay’s military background and high position with E.J.A., that all of the company’s internal procedures, repair forms, and the like would be modeled along the lines of Strategic Air Command. Indeed, the entire organization was a close facsimile of SAC. The setup seemed to confirm what I heard more than once during my visit.

When the time came that the nation needed more flying officers, as it surely would some day, E.J.A. would respond instantly as a fully functioning unit. The idea that such a need would ever arise again certainly was chilling. But I knew Curtis LeMay would be prepared. He had already advocated the bombing of any nation which exceeded certain limits of aggressive action as a means of preventing World War III.

The general concluded his presentation and opened the meeting to questions. Surprisingly, there were none. The audience was apparently satisfied that the company was following a normal and logical course. It had no specific problems, hence, there were no decisions to make. But, in my view, several of the proposals were quite revolutionary. I glanced at my Keystone associates who only smiled contentedly, so I decided to break the ice on my own. "Wouldn’t it be better to lease these planes as the regulated air carriers do, rather than buying them at a huge expense to E.J.A.?" I asked General LeMay.

He rewarded me with a look, almost of surprise, as though I was the first person ever to ask him a direct question. Then he asked politely if I had been in the service. I replied that I had, and he wanted to know what rank I held. I said I was a corporal and heard loud groans around the room. The general pursed his lips and in a low voice replied that he did not answer questions posed to him by corporals.

He said it in such an offhanded way—as someone might refuse a cigarette by saying, "I don’t smoke"—that I didn’t believe he actually intended to be rude, but was merely stating a fact. Naturally, I felt put down and was embarrassed by the remark but, since there was nothing in my report that depended upon his answer, I simply shrugged off the incident and studied my notes.

On the way downtown to the Columbus Club where we were to be joined for lunch by other military people from the area—major generals predominating as it turned out later—I sat beside LeMay, who occupied the middle of the rear seat, puffing the habitual black cigar. I wondered if he was trying to further spell out his low opinion of a corporal’s rank after a batch of his cigar ashes landed in my lap.

Our conversation in the car was very pleasant nonetheless. The general proved to be rather a charming and colorful luncheon companion, especially in describing his political aspirations and his consideration as a Republican presidential candidate in the 1968 primaries. Yet, in common with other people at SAC, LeMay had a rather odd streak.

"You know, Dean," he boomed across the table, "the reason we are working on Executive Jet is to prove to our civilian business friends that we are people who can make it also in ‘civvies.’ No one has said so directly to us, but we know that people who are not in the service think the only thing we can do is soldier. The military is the biggest business going. Our motives here are to show that it’s no different in or out of uniform. It’s still a business, and we know how to do it." I couldn’t help wondering if his reference to uniforms included enlisted men. But since 1 was supposed to analyze the company and not the vice chairman, I made no comment.

E.J.A. was almost impossible to analyze by traditional methods. Probably its greatest asset was the backing by Pennsylvania Railroad. On the debit side, the leasing of jet time through use of its system was a brand new business, and one had to rely mainly upon intuition about the people involved. Moreover, the company appeared quite out of touch with reality; the chief legal counsel seemed the only officer with a level head.

I did not forecast in my report that the company would fail, but I did assert that any money invested there should be covered by something more tangible than the fortunes of Executive Jet. The warrants that came with it seemed devoid of any promise. But the collateral backing of a jet aircraft at 50 percent of market value appeared like good support for the loan which Keystone finally granted.

Executive Jet evolved into one of those "almost but not quite" companies. It had the potential of becoming a bonanza; unfortunately, it was only a puff of smoke. It barely survived alone and was a contributor to Penn-Central’s demise in 1970. E.J.A. is still operative, but in a much lower key and only after a thorough financial overhaul.

The field of corporate financial relations is broad and complex. It involves much more than just trying to win analysts’ approval of a merger, a new product, a change in management or a proposed exchange of securities for LTV or a mortgage for Executive Jet Aircraft.

Corporate officials are often looked upon as a source of numbers that may be used to sell investment committees and brokerage clients on the merits of a stock. Expressions like "in the ball park," or "it gives me a feel"—referring to an earnings estimate—do not actually violate the inside-information disclosure laws, but they do damage its spirit.

Following are certain pitfalls which analysts should guard against:

1. Some companies simply do not have good numbers, especially at critical turning points in the business. My first written analysis of a company included a guarded reference to quarterly figures that had been given me after the close of the accounting period but which I could not openly use. Imagine the shock I felt when the official numbers released two weeks later showed that my estimate, based on inside help, was 30 percent on the high side.

2 Analysts often tend to be overly friendly with management. They should be reminded that the investment-corporate relationship is basically antagonistic.

The officers of a company naturally want its stock to sell at a high price. Potential investors, on the other hand, want it to sell at the lowest price possible, until they have bought it and become partners in the company. Their relationship thereafter is based almost entirely on the way the stock performs. Just as bankers who hoard money are the natural adversaries of builders who try to borrow it, so are investment analysts and corporate officials locked continually in competition for the public’s dollar. An overly friendly attitude on the part of either one dulls the competitive spirit which is the pillar of their success. Both analysts and the companies involved must recognize that in the field of determining a correct price level for a security, their positions are not cooperative, but competitive.

3. An analyst’s greatest mistake is asking the officer of a company for an opinion about its stock. Opinions so received should be ignored.

Corporate officials and directors obviously are the fountainheads of information about dividends, earnings, mergers, spin-offs, stock splits, acquisitions, and the like. Their opinions on such subjects are invariably worthwhile. Yet most directors and officers are poor judges of the stock market, particularly the prospects for their own company’s stock. There is no dividing line between the forest and the trees. If a director owns the stock himself, he may be prejudiced about it. He is too close to the situation for his judgment to be the best.

When business is good, he is bullish on the stock; when business booms, he becomes ecstatic. But if sales start to slide and profit margins start to erode, or the stock zigs instead of zags within a gradually narrowing trading range, he may turn overly pessimistic. If he has sold some or all of his holdings prematurely, a similar condition will prevail. No one is more bearish than a sold-out bull! An officer or director may describe his company’s future honestly and clearly as he sees it. But his glasses are too often clouded by personal prejudices.

4. Insider buying of a stock is a much more reliable barometer of the future than insider selling, especially in the case of new and smaller companies with relatively limited capitalizations. With large companies, little significance should be attached to insider activity.

The founders or older officers may have acquired substantial stock positions over a period of time through stock splits or dividends or by exercising options. Any sales they make of the stock may be only for the purpose of putting their financial house in order to meet inheritance taxes later on. Moreover, their selling may be well absorbed or offset entirely through simultaneous purchases being made by newcomers to the company who are interested in the stock as long-term investment. Insider transactions involving large companies, such as IBM or General Motors, mean very little in terms of future market performance.

Communications between corporate management and the investment community are maintained on fine wires of nervous tension. The company wants to maintain its security at a high and stable price; the analyst wants to maintain a degree of controversy. He wants it to keep active—what some investors call a "turnstile stock"—one that is in the public eye with many buyers and sellers at all times.

Whereas the analyst will try constantly to uncover negative developments which might otherwise be surprising, the company will try to conceal any negative information. The analyst cannot expect to be told of bearish news in advance, but he must certainly establish and maintain a liaison with the company in order to stay abreast of developments—good or bad.

It is a sham to consider that the president of a company plans for future growth all the time. Often the chief executive spends his entire day dealing with problems. But he can take off his problem hat and put on his snow-job hat whenever an analyst comes to call. The analyst rarely asks the president, "How do you spend your day?" The analyst cannot expect a company to advise him in advance of surprise negative information. On the other hand, he must establish some sources if he is following the company for this type of input.

Competitors are useful sources of information. Sometimes junior members of management are very open. In fact, those who are most candid with the investment community are the senior or junior people. The middle group, with whom the analyst might have his greatest contact, is generally much too reserved and discreet.

Nearly all publicly owned companies have some program to influence the investment community to favor their stock. They hope that by so doing the market price will be higher than would otherwise be true, and investors will thereby do their part to provide the company with cheaper sources of equity capital. A high stock price is of course also good for management’s ego and stock options. While there’s some conjecture about the real value of such programs in markets such as we’ve had in the early seventies, I have a few suggestions.

As I’ve mentioned, there is nothing a company management can do to influence an investment analyst more than send the company plane for him. I once was picked up in Boston by a Gulfstream from American Can and flown in glorious splendor in back of the aircraft to Newark Airport where I was met by a limousine that wheeled out onto the apron, with the chauffeur opening his door as the ramp came down. That was heady stuff for a young analyst and, regardless of the dull outlook for American Can, they had won a friend through ego bribery. There was little that I could see the rest of the day that compared with my appreciation for the company 5 ability to treat me with proper respect.

The second activity that benefits a company is to call all analysts by their first names and to encourage the analyst to do likewise with the company officials. It is important for an analyst to feel "close to" the companies he follows. One example of this is his use of the first name for people who run the company, particularly where a single dynamic individual is at the helm. It is always useful to be on a familiar basis with famous or well-known people.

Introductions to politicians or movie stars are also ego-gratifying. Some brokerage houses for years have had programs where they bring in famous consultants for discussion on topics that are only remotely concerned with the investment field, but where the first-name basis is encouraged.

I met Dr. Henry Kissinger in his Harvard office, under the auspices of a brokerage-house consulting arrangement to discuss foreign affairs. Kissinger was quite famous at the time, although his only formal status was as foreign policy advisor to Governor Nelson Rockefeller. During the meeting, which ran from 8 P.M. to 11 P.M., a group of five investment people consumed Elsie’s roast beef sandwiches, picked up from a famous eatery of that name in Harvard Square, and discussed Vietnam.

During that discussion, Kissinger went out of the room to arrange a telephone call to Secretary of Defense McNamara in Vietnam. One had the feeling of being involved with major events; surely, this was well worth the commission dollars that this brokerage firm received. How it helped investment decision-making is a bit more obscure, but it certainly bolstered the confidence of young, inexperienced portfolio managers in dealing with large issues. It produced instant global maturity and may have well been worth the investment on those grounds.

Incidentally, Kissinger and other consultants are quite candid in these small groups. They recognize that their first job is to impress and to develop close associations, and their observations tend to be quite accurate. Kissinger, for example, commented—this was during the latter period of President Johnson’s administration—that the Vietnam war was the wrong war, in the wrong place, being fought by the wrong people. So many mistakes were being made it was difficult to unscramble which was causing us the most problem. He suspected that we would have to negotiate our way out—a procedure which would be considered tantamount to defeat. On the other hand, it was just possible that the military bungling was sufficiently great that by correcting a few things on the ground, which would essentially increase the mobility and force on the north, we could win a military victory. This would be preferable for America’s position in the world and its own morale, he felt, to having a nominal defeat.

In a sense he was hinting at the dual policy which we later followed of talking peace and waging war simultaneously. It was outstanding insight into policy which was to become dominant for the first four years of the Nixon administration.

Another activity which can benefit a company is to follow a policy of elitism. The company tries to develop a special relationship with a small group of analysts or investment people, usually from brokerage firms, on the basis of a greater sharing of information than would be customary—greater, in fact, than would be possible by law.

Many such analysts may be consulted on corporate dividend polices and asked to help with speech writing; in fact, they may be drawn within the company on a consulting basis. The analyst thus becomes "part of the family"—an ego-satisfying experience—especially for a young analyst who is then put on a more or less equal footing with the more mature executive. Few analysts can fail to respond favorably to such a situation.

I have helped companies write speeches, which gave me access to information prior to other investors. Once I was in a close working relationship with a large company in its early days. The president called me regularly to explain major corporate developments that were scheduled in coming weeks. I assumed these were just for information, until after several occasions he asked me: "Dean, are you making money for yourself on what I’m telling you?" I said, "Of course not, it wouldn’t be ethical." He replied, "Hell, why do you think I’ve been going to all this trouble?" In other words, he was attempting to pay me back for help I had been to the company in recommending the stock earlier.

The more freewheeling practices tended to go out of style in the late sixties. Today, analysts respond to companies which provide them with good industry statistics. One company even has a weekly recorded message for analysts on a toll-free phone. Usually there will be one company identified as the leader in its industry, and analysts will turn to the corporate financial people of this company for help in doing long industry reports. The analyst is interested in direct plagiarism and will accept company figures as his own. This is one of the things which establishes a close working relationship. It also usually increases the price/earnings ratio of the stock.

The company can, by design, elect to be aloof from Wall Street. There is no special evidence that this procedure backfires. Companies which have done so in many cases create a mystique. If their record is impeccable and the industry in which they operate has an aura of growth, aloofness may work as a strategy in maintaining a high price.