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MICHAEL MCDONALD: Hello.
Welcome to Henry Stewart Talks.
My name is Michael McDonald.
Today I'll be discussing
Neustar Incorporated,
The Challenges of Diversification.
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Neustar is a publicly traded
company founded in 1996 as part
of Lockheed Martin Corporation.
Today, it's ticker symbol
is NSR on the US exchanges.
Originally, Neustar was part of the
larger Lockheed Martin Corporation,
and it was developed in
order to hold a key contract
that Lockheed Martin had won.
Subsequently, Neustar was spun
off of the larger parent company,
and it went public on the US
exchanges in June of 2005.
This case study examines the capital
structure choices made by Neustar,
and asks viewers to think
through how they would have
approached the situation if
they'd been in charge of Neustar
during that period.
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Neustar's main
contract in June, 2005,
involved the administration
of what's called
the North American Numbering Plan.
This contract enables
phone companies
to use telephone
numbers, area codes,
and helps to facilitate
the routing of calls.
It's extremely critical for
phone companies on the back end,
but one of the most important
features of the contract
is that it benefits all
different phone companies
across the United States and Canada.
As a result, neutrality in the
contract is a critical element.
And so, Neustar was spun
off of Lockheed Martin
in order to maintain
that neutrality,
so that it had no connections to
any of the existing phone companies.
The contract, the North
American Numbering Plan,
carried very high margins,
and was awarded by the Federal
Communications Commission
to Neustar based on its position
as an independent entity.
This status, as an
independent entity,
was preserved after Lockheed
Martin spun the company off.
But once Lockheed Martin
had spun Neustar off,
the now independent Neustar
had this long term contract,
which was generating large
amounts of free cash flow,
and the company had very
little to do with this money.
As part of the larger
Lockheed Martin company,
Neustar's excess cash flow could
be reinvested in other parts
of Lockheed Martin's business.
Once Neustar was spun off, these
investment opportunities went away,
and so Neustar was faced
with a difficult decision,
in terms of how they'd use
this excess capital in order
to benefit their shareholders.
