Harte-Hanks, Inc

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Harte-Hanks, Inc.

200 Concord Plaza Dr.
San Antonio, Texas 78216
U.S.A.
Telephone: (210) 829-9000
Fax: (210) 829-9403
Web site: http://www.harte-hanks.com

Public Company
Incorporated: 1928
Employees: 7,026
Sales: $944.6 million (2003)
Stock Exchanges: New York
Ticker Symbol: HHE
NAIC: 754186 Direct Mail Advertising Services; 541870 Advertising Material Direct Distribution Services

Harte-Hanks, Inc. is a diversified direct marketing company offering a host of services to customers worldwide. The company's specialties include data analysis, strategic planning, and market research. Originally a newspaper business cofounded by Houston Harte and Bernard Hanks, over the years the company acquired additional interests in television and radio stations. In the 1970s it established a direct marketing segment, which became responsible for targeted mailings, advertising shoppers, telemarketing, and web sites featuring searchable databases of shopper ads. In the 1990s, as growth in the newspaper industry stalled, the company began to shift more of its resources to its direct marketing division, until it finally sold off its remaining newspaper and other media outlets to the E.W. Scripps Company in 1997. Today, Harte-Hanks, Inc. serves a range of clients in the retail, financial, pharmaceutical, technology, and health industries.

Partnership Between Rivals in the 1920s

Houston Harte, owner of the San Angelo Standard, and Bernard Hanks, owner of the Abilene Reporter, met for the first time at a publishers' meeting in Dallas in the early 1920s. Their papers, located only 90 miles apart, had for years competed fiercely in the primarily rural areas where their territories overlapped. That rivalry, which continued throughout their partnership, did not prevent the two from taking a liking to each other. When Harte heard about an opportunity to purchase a weekly in Lubbock, Texas, he joined with Hanks and another investor to purchase it. The partnership might have ended with the sale of that paper six years later; however, a new purchase by Harte and Hanks, of the Corpus Christi Times, sealed their relationship.

By then, both men had several decades of newspaper experience. Born in 1883 in Knob Noster, Missouri, Harte worked as a reporter for the Los Angeles Examiner while studying at the University of Southern California. In 1913, while finishing a journalism degree at the University of Missouri, Harte bought his first newspaper, the Knob Noster Gem. Three years later, Harte took over the Central Missouri Republican, based in Boonville. The U.S. entry into World War I briefly interrupted Harte's newspaper career; by 1920, however, Harte had returned to civilian life, selling his Missouri paper and moving to Texas, where he began publishing the San Angelo Standard, a paper founded in 1884. Harte worked to expand the paper's circulation, slowly widening its reach into 40 west Texas counties. In 1922 Harte purchased two more papers. Soon after that, he and Hanks formed their partnership.

Hanks, born in 1884, began his newspaper career as a horseback carrier for the Abilene Reporter when he was 12 years old. When Hanks's father moved to another town, Hanks moved in with Reporter publisher George Anderson. In 1907 Anderson incorporated his newspaper and allowed Hanks to purchase shares in the new company. In 1923 the company separated into two parts: Anderson took over the printing operation, while Hanks became the newspaper's publisher and owner.

After selling the Lubbock weekly, Harte and Hanks decided to remain partners. Harte had heard that the owner of a Corpus Christi paper, the Times, was having financial problems. Hanks and Harte took out an option to buy the paper, and went down to Corpus Christi to inspect it. As reported in a company publication, Harte recalled: "The Times was printed on an old flatbed press on a vacant lot in back of its building. . . . It was under a tarpaulin. It was quite a feat to print the paper out in the open in the South Texas rain." The partners nevertheless bought the paper.

The Corpus Christi Times was then the number two paper in town; a dismal first year brought Harte-Hanks Newspapers only $2,800. Instead of fighting a newspaper war, the young partnership took a different approach: they formed a new partnership, called Texas Newspapers, Inc., with two other investors, and bought out the rival paper. Texas Newspapers would go on to buy several more Texas papers over the next three years, but moving into the Depression the partnership proved unprofitable and was disbanded. Harte-Hanks took control of the Corpus Christi Times and a second paper, the Paris News, in Paris, Texas. By then, Harte-Hanks had also added the Big Spring Herald to its newspaper chain. Nevertheless, the Harte-Hanks partnership remained a more or less informal arrangement, with no written contract. Harte tended to handle the operational and editorial end, while Hanks focused on the partnership's finances. Newspapers were primarily bought on credit, with the former publisher holding the note, and often a share in the newspaper as well. Harte-Hanks generally retained a newspaper's former management. Purchases usually involved buying a town's second paper, which often would suffer from poor circulation and operations.

Harte-Hanks added several more newspapers, all based in Texas, during the 1930s and 1940s. In 1945 the partners took on their first corporate employee, Bruce Meador, who would later become trustee of Hanks's estate. Bernard Hanks died in 1948. By then, the second generation—Houston H. and Ed Harte, and Andrew Shelton—were already learning the newspaper trade. The company continued adding newspapers to its fold. One acquisition, of the Greenville Daily Banner, sparked a bitter newspaper war that led Harte-Hanks to purchase and then consolidate the rival Greenville Herald. The owners of that paper took Harte-Hanks to court, charging them with unfair competition, but Harte-Hanks was acquitted of this charge.

Expanding into New Markets and New Media: 1960s–70s

During the 1960s, Harte-Hanks acquired a number of newspapers, including its largest to date, the San Antonio Express-News. By the end of the decade, Harte-Hanks controlled a 13-paper empire. In 1962 the company moved beyond newspapers for the first time with the purchase of KENS-TV, a CBS affiliate based in San Antonio. Prior to the Harte-Hanks acquisition, that station had been understaffed and underbudgeted and was consistently ranked last in its market. Under Harte-Hanks, however, the station's fortunes improved, and it quickly captured its market's top rating, a position it would hold until the 1990s. The company moved its corporate headquarters from Abilene to San Antonio in 1968.

As the company moved into the 1970s, however, the family faced the future with uncertainty. Harte's health was failing, and the chain—made up of 27 family-owned corporations—offered no clear line of succession. New technology was also entering the newspaper industry, and the company worried about its ability to keep pace. Meador, who by then was running the company, approached outside consultants. They proposed three options for the company: do nothing, which might lead the company to break up; sell out; or go public. Over Harte's objections, the family chose the last option. Their first step, in 1971, was to consolidate the 27 corporations into a single entity, called Harte-Hanks Newspapers, Inc. Their next step was to find the person to lead the company into its initial public offering (IPO).

At about the same time, Robert G. Marbut, a graduate of the Harvard Business School and a former corporate director with Copley Newspapers, was making plans to start his own publishing company. Marbut approached Harte-Hanks for financial backing for his venture; instead, the Harte family proposed that Marbut lead their company instead. Harte-Hanks went public on March 13, 1972. Houston Harte died six days later.

Marbut set about transforming the company, instituting a modern control system, a budgetary process, market research, and, as a first for the company, a system of long-range planning. Marbut also took Harte-Hanks outside of Texas, beginning in 1971, by buying the Journal-News (Hamilton, Ohio). Other new markets included Ypsilanti, Michigan; Anderson, South Carolina; and Yakima, Washington. Funds raised in the IPO allowed the company to step up its expansion: by the end of 1972, the chain had more than doubled, to 27 newspapers. Importantly, Marbut began to transform the character of the newspapers themselves, adding lifestyle and other service features to the newspapers to boost their circulation, and turning at least some of the papers into what Forbes described as "aggressive marketing vehicles tailored for advertisers."

While adding new papers, Marbut also began shedding others. Harte-Hanks focused its chain on smaller markets where its newspapers could hold monopoly positions. The average circulation of these papers was 10,000 to 30,000. Larger papers—such as the San Antonio Express-News, bought by Rupert Murdoch for $19 million in 1973—were sold, with the exception of the Corpus Christi paper, which had a circulation of about 85,000. By 1974, the company's revenues had reached $79 million, with profits of $6.5 million, compared to income of around $1.5 million at the time of the company's IPO.

Company Perspectives:

Our Business Philosophy: We operate select marketingrelated businesses in markets where we can sustain a competitive advantage by adding value and meeting customer needs better than our competitors. We are innovative, flexible, and focused to respond proactively to opportunities and challenges in the market environment. We are results oriented—setting aggressive goals and improving our performance through hands-on management and active individual participation.

The number of available small-market papers was shrinking, however. To continue expanding company revenues, Marbut took Harte-Hanks deeper into other communications areas. In 1975 Harte-Hanks bought a second television station, WTLV in Jacksonville, Florida, an NBC affiliate. Two more stations were added by the end of the decade in Greensboro, North Carolina, and Springfield, Missouri. The company also moved into radio with the 1978 purchase of Southern Broadcasting's AM and FM station holdings. By then, Harte-Hanks had also begun to build its advertising shopper empire. While newspapers remained the company's chief revenue source, its growing diversity prompted a name change, to Harte-Hanks Communications. Revenues jumped to $243 million in 1979. Income topped $19 million.

Radical Restructuring in the 1980s

By 1980, the company's holdings included 29 daily newspapers, 68 weekly newspapers, four VHF television stations, 11 radio stations, four cable television systems, and three trade publications. Its fastest-growing division was its Consumer Distribution Marketing (CDM) unit, which consisted of its advertising shoppers, three market research firms, and three direct mail distributors. Also included in CDM were electronic publishing and video entertainment software businesses. Moving into the recession of the early 1980s, Harte-Hanks's emphasis fell more heavily on CDM. As one analyst told the New York Times, "Harte-Hanks is much less newspaper-oriented than the other newspaper companies. It's more interested in information transfer. It's much more financially oriented." Marbut confirmed this, telling the New York Times, "Our job is not just to produce newspapers. Our job is to meet people's needs for information."

By 1983, CDM represented 28 percent of the company's revenues. Holdings had expanded to include 23 direct mail systems, seven research companies, a cable television shopping channel, seven delivery systems and a trucking service, and nine shoppers. Harte-Hanks' revenues neared $445 million, with earnings over $33 million, placing it on the Fortune 500 list. But the emphasis on CDM, as well as Harte-Hanks's plans to invest aggressively in cable television, had begun to make investors nervous: by 1984, the company's stock was trading below $20 per share, despite being valued as high as $30 per share. The company was becoming a potential target for a hostile takeover. To prevent this, Marbut, along with Houston and Ed Harte, Andrew Shelton, and other corporate directors, took the company private in a leveraged buyout (LBO).

The LBO, executed in 1984, saddled the company with $1 billion in debt, just as the Texas economy, crippled by the oil crash of the 1980s, was going sour. The company began streamlining its operations, quickly shedding 56 of its 113 units, including three of its four television stations, its cable television systems, and all of its radio stations. Sales of these units, of which all but three were profitable, brought $200 million to pay down debt. The company also traded seven of its Texas, Washington, Ohio, and Michigan papers for 19 papers in Dallas and Boston. By 1988, revenues had grown to $450 million, with operating income of $70 million. The company had reduced its debt to just $375 million in zero coupon debentures, bringing its interest payments down from $81 million paid in 1986 to $20 million.

By 1990, the company had reinvented itself. The company's restructuring had turned its focus to three key areas—the shoppers, by then zoned into 465 separate editions, reaching 5.8 million households, which made Harte-Hanks the largest distributor of advertising shoppers; direct marketing; and the company's nine newspapers. KENS-TV also continued to contribute a small share to the company's revenues. Marbut retired in 1991, turning the company over to Larry Franklin, his longtime chief operating officer and executive vice-president. By 1992, the company had reduced total long-term debt to less than $220 million. Yet, with stock divided among the Harte and Shelton families, the company once again faced a problem of succession. In 1993, the company went public for the second time.

Revenues grew to $463 million in 1993. But problems with Harte-Hanks's 14-paper Boston chain drove the company to a $52 million net loss that year. The company sold off the Boston papers in 1995. In the meantime, the company acquired Select Marketing, a high-tech industry marketer, and Steinert & Associates, another marketing group. With revenues topping $532 million in 1995, the company continued to shore up its marketing and high-technology industry capacities; its efforts included purchasing a minority interest in the SiteSpecific Internet adplacement firm.

Key Dates:

1913:: While finishing a journalism degree at the University of Missouri, Houston Harte buys his first newspaper, the Knob Noster Gem.
1923:: Bernard Hanks becomes publisher and owner of the Abilene Reporter.
1928:: Harte and Hanks establish a partnership.
1945:: The partners take on their first corporate employee, Bruce Meador.
1948:: Bernard Hanks dies.
1962:: The company moves beyond newspapers for the first time with the purchase of KENS-TV, a CBS affiliate based in San Antonio.
1968:: The company moves its corporate headquarters from Abilene to San Antonio.
1971:: The family-owned network of 27 corporations is consolidated into a single entity, called Harte-Hanks Newspapers, Inc.; Robert G. Marbut takes over leadership of the company, extending its business interests outside Texas for the first time.
1972:: Harte-Hanks goes public on March 13; Houston Harte dies six days later.
1977:: The company changes its name to Harte-Hanks Communications, Inc. to reflect its diversified interests.
1978:: The company moves into radio with the purchase of Southern Broadcasting's AM and FM station holdings.
1984:: To avoid a hostile takeover, Marbut, Houston and Ed Harte, Andrew Shelton, and other corporate directors take the company private in a leveraged buyout.
1993:: The company goes public for the second time.
1997:: Harte-Hanks sells off remaining newspaper, television, and radio outlets in order to focus exclusively on direct marketing.
1998:: The company changes its name to Harte-Hanks, Inc. to reflect a new focus on targeted marketing.

A New Direction for a New Century: The End of a Newspaper Business

By the mid-1990s, Harte-Hanks began to develop a new strategy tailored to the changing face of the news and marketing businesses. In recent years the newspaper industry had begun to stall, with distribution rates hitting a plateau in the 1980s, and the market over-saturated with competitors; under these circumstances, the company's newspaper business seemed to promise limited profitability for the foreseeable future. On the other hand, revenues in the direct marketing segment had demonstrated a consistently high rate of growth over the past several years. Circulation trends reinforced these conclusions: between 1986 and 1996, nationwide daily newspaper readership actually declined, dropping from 60.9 million to 58.6 million; over a similar period, the country's 3,000 shoppers saw circulation increase from 42 million to 51 million.

In order to capitalize on these developments, the company began to seek out strategic alliances and acquisitions in the late 1990s, in the hope of bolstering its profitable direct marketing division. In February 1996, the company announced its intention to purchase DiMark, Inc., a Pennsylvania-based direct marketing firm serving the pharmaceutical, telecommunications, and healthcare industries. Prior to the merger, Harte-Hanks specialized in providing marketing services to high-tech firms and financial institutions. With the addition of DiMark, the company saw a golden opportunity to expand its client base into new areas. That same year, Harte-Hanks acquired the Lead Management Group, a response-management company specializing in the high-tech sector, further bolstering its nationwide response-management network.

These acquisitions forecasted major changes for Harte-Hanks. The company's increased emphasis on marketing had already begun to pay off in the spring of 1997, when second quarter net earnings surpassed those from the previous year by 26.2 percent; by itself, the direct marketing business saw net earnings increase by nearly 37 percent. Meanwhile, the company had watched its newspaper revenues drop steadily between 1995 and 1997. Now firm in its belief that its future success lay in direct marketing, in May 1997 the company entered into a preliminary agreement with E.W. Scripps Company to sell off its remaining media outlets—six daily newspapers, 25 non-daily papers, a television station, and a radio station—for $775 million. With this sudden infusion of capital, Harte-Hanks planned to pay down its debt, as well as seek strategic acquisitions to bolster its direct marketing division. Although the Scripps deal did not become finalized until the end of the year, Harte-Hanks wasted no time executing its new strategy. The company's first purchase came in July 1997, when Harte-Hanks agreed to acquire four shoppers from The Walt Disney Company, for $104 million. The transaction raised the company's nationwide shopper circulation to 9.5 million, a 33 percent increase.

Toward the end of the decade, the company also found itself confronting new technological challenges. Facing the increasing complexity of communication in the information age, the company needed to develop a marketing strategy that utilized the potential of the Internet to transport data in a rapid and cost-effective manner. Harte-Hanks took one of its first steps toward achieving this goal in December 1998 when it acquired Spectral Resources Inc., a pharmaceutical data provider that specialized in Internet and CD-ROM technology. During this period the company also established a new subsidiary, Harte-Hanks Data Technologies, which became responsible for developing a range of new products to address the company's growing electronic marketing needs. One of the key elements of the new subsidiary was its Trillium Software Division, which was soon creating innovative software solutions for a number of high-profile clients worldwide. In February 2004, Harte-Hanks acquired the British software company Avellino Technologies Ltd., integrating its product line into the Trillium Division.

Although Harte-Hanks was clearly positioning itself to remain competitive in an increasingly technological world, market fluctuations in the high-tech industry, combined with the costs of transforming the company's core business, delivered an initial blow to the company's revenues. Although profits rose 12.3 percent between 1999 and 2000, from $72.9 million to $81.9 million, in 2001 net earnings actually declined by 2.7 percent from the previous year, dropping to $79.7 million. With the American economy in turmoil, financial and technology sectors stalled, and the retail industry slashing marketing budgets, it remained to be seen whether or not Harte-Hanks would eventually emerge as a major player in the direct marketing industry.