Extended-form Case Study

Neustar. Inc: the challenges of diversification

Published on March 31, 2015   27 min

A selection of talks on Finance, Accounting & Economics

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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.
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.
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.

Neustar. Inc: the challenges of diversification

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