Idearc Inc.

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Idearc Inc.

220 West Airfield Drive
DFW Airport, Texas 75261
U.S.A.
Telephone: (972) 453-7000
Toll Free: (800) 789-5756
Fax: (972) 453-3969
Web site: http://www.idearc.com

Public Company
Incorporated: 2006
Employees: 7,400
Operating Revenues: $3.22 billion (2006)
Stock Exchanges: New York
Ticker Symbol: IAR
NAIC: 511140 Directory and Mailing List Publishers

A spinoff of Verizon Communications Inc., formerly known as Verizon Information Services, Idearc Inc. publishes print and electronic "yellow pages" and bills itself as a multiplatform media company whose purpose is to connect buyers and sellers. Each year the company publishes about 136 million Verizon directories in 35 states and the District of Columbia, both full-size White Pages and Yellow Pages as well as smaller companion formats, in English-only, Spanish-only, or combined English-Spanish versions. All told, more than 1,200 directory titles are published. Idearc's electronic products include Superpages.com for the Internet and Superpages Mobile for cellular telephones. In addition, the company provides direct-mail services and publishes Solutions at Hand and Solutions at Home magazines. Based in the Dallas, Texas, area, Idearc is a public company listed on the New York Stock Exchange.

TELEPHONE DIRECTORIES: 19TH-CENTURY ROOTS

The first telephone directory was a one-page sheet produced by the New Haven District Telephone Company in 1878 soon after the telephone was invented. Listing just 47 subscribers, the directory made only a modest attempt at organization. While residential customers were separated from businesses, they were not arranged alphabetically nor were the phone numbers themselves listed. Many of the commercial subscribers were listed under a "Miscellaneous" category, which included the police department and post office. Nevertheless, it was a start and as the telephone proliferated users demanded directories, which the phone companies grudgingly published as seldom as possible because of the expense. The idea to sell advertising to offset printing costs, thereby establishing the Yellow Pages industry, is credited to Reuben H. Donnelley, whose father's Chicago printing company, RR Donnelley, had launched the Chicago Directory Company to print the city's telephone directory. The identity of the person who first thought to use yellow paper instead of white to differentiate between the residential and commercial portions of the directory is lost to time, however. Lore would have it that in 1883 a printer simply ran out of white paper and rather than wait for a fresh shipment used yellow paper for the commercial section to finish the job.

Whatever its origins, the yellow pages were published across the country, and many telephone companies followed Donnelley's lead and began to sell advertising, albeit with little enthusiasm in the early years. Telephone company employees were asked to take on the task in addition to their regular duties, or the work was farmed out to the printer whose employees were equally unenthusiastic. As a result, the early directories featured few ads, and because of that, customers did not reflexively turn to the yellow pages for help, thus fulfilling businessmen's belief that nobody used the yellow pages. It was not until the early 1900s that this cycle was reversed when the likes of Loren M. Berry began to demonstrate that the yellow pages could benefit businesses and, more importantly, turn a profit. Berry had a background selling newspaper advertising, and he had begun a business selling advertising in railroad timetables. It was while performing this job that he was enlisted by a Marion, Indiana, telephone company to take over the job of selling advertising in its directory. His success led to more commissions throughout the Midwest and helped to transform the yellow pages industry.

Idearc's connection to the yellow pages industry dates to the late 1920s when Associated Telephone Utilities (ATU) began selling advertising for telephone directories in Santa Monica and Redondo Beach, California. ATU had been formed in 1926 when California's Associated Telephone Company was acquired by Commonwealth Telephone Company, a Midwest consolidator launched in 1918. Difficult economic conditions during the Great Depression led to ATU going into receivership in 1935, and after reorganization it emerged as General Telephone Corporation. The following year the company formed a subsidiary, General Telephone Directory Company, to publish white and yellow page directories. The new business thrived, so that by 1940 it was publishing directories that served some 600,000 telephone customers in 250 communities.

In 1959 General Telephone Corporation merged with Sylvania to become General Telephone & Electronics Corporation, a name that would be shortened to GTE a dozen years later. With the backing of a larger corporate parent, the directory unit began to expand internationally, doing business in such countries as Costa Rica, Hong Kong, the Philippines, Singapore, and Thailand. In 1972 the company, now known as GTE Directories Corporation and based in Des Plaines, Illinois, cracked the $100 million mark in annual revenues. The headquarters was relocated to Idearc's current location, the DFW Airport serving Dallas and Fort Worth, Texas, in 1983.

VERIZON INFORMATION SERVICES FORMED: 2000

The early 1980s was a period of upheaval for the telephone industry. After a 13-year antitrust suit against American Telephone and Telegraph Company (AT&T), at the time the world's largest corporation, AT&T was split up, resulting in the creation of seven regional holding companies, popularly known as the seven Baby Bells. One of them was Bell Atlantic, which in 1987 established a Maryland joint venture with GTE Directories to serve the Mid-Atlantic states called Chesapeake Directory Sales Company. A dozen years later Bell Atlantic and GTE would merge, bringing together the assets of GTE Directories and other assets that would form the foundation of Idearc. They would include NYNEX Corporation's BigYellow, a web-based product launched in 1996. The following year NYNEX and Bell Atlantic were merged and their directory operations consolidated into a new unit, Bell Atlantic Directory Group. Also in 1996 GTE Directories added a web-based component to its business, creating Superpages.com. By the end of the 1990s, Bell Atlantic Directory Group was a global directory giant, boasting annual sales of $33 billion. Those assets were combined with GTE Directories in 2000 after Bell Atlantic and GTE merged to create Verizon Communications Inc. The new unit took the name Verizon Information Services. In 2003 it became the first to offer a wireless directory, Superpages On the Go.

COMPANY PERSPECTIVES

Idearc Media delivers a multi-dimensional platform of products that help consumers find what they want in the way they want to find it. Likewise, it helps businesses attract the customers they want when those customers are ready to buy.

Verizon's creation was part of an industry trend that began with the passage of the Telecommunications Act of 1996 which opened up competition in all aspects of communications and gave consumers the freedom to decide who would provide their telephone, wireless, television, and Internet services. In response, several of the Baby Bells launched major restructuring efforts. In the new century their traditional landline telephone business faced stiff competition from wireless carriers as well as cable television operators who could not only offer high-speed Internet services but also telephone service through voice over Internet protocol (VoIP) technology, and bundle the services for consumers at an attractive price. Verizon countered cable TV competitors by offering digital subscriber line (DSL) broadband services, which offered much slower speeds than cable modems, and by bundling telephone and Internet services with DirecTV satellite television service. This combination cobbled together through necessity did not offer much promise for the future, leading Verizon to focus on its wireless business and broadband Internet service. To solidify its position in wireless and expand its global presence, Verizon acquired MCI Inc. for $8.5 billion in a deal that closed in early 2006. In order to help pay for this purchase as well as fund a $20 billion plan to replace its copper network with fiber-optic connections in order to offer television and broadband services to challenge cable TV companies, Verizon began to shed many of its noncore assets, one of the most valuable of which was the directory business of Verizon Information Services.

Although traditional directories, both white and yellow pages, were low-growth businesses and faced increasing competition from Internet search engines, they were coveted assets to many American and European investors because of their high profits and consistent cash flow. Unlike other telecommunication businesses, directories required far less investment in new equipment. Buffalo, New York's White Directory Publishers was bought by the Hearst Corporation in 2004 for $300 to $400 million, and the following year California-based TransWestern Holdings paid $1.5 billion for Yell Group, a U.K. directory publisher. For about the same amount Verizon sold its Canadian directory business in 2005, while Sprint Nextel Corporation and Qwest Communications International Inc. also divested directory assets.

With $3.5 billion in annual sales, second only to AT&T's directory unit, and more than $1 billion in profit, Verizon Information Services was well positioned to attract suitors, especially because of its Superpages. com component. After Verizon hired Bear, Stearns & Co. and JPMorgan Securities Inc. as financial advisers and announced in late 2005 that it planned to either sell the unit or spin it off as a separate company, there was no shortage of interested buyers among private equity firms. Financial analysts said that business would fetch at least $14 billion. A number of prominent buyout firms were rumored to be putting together offers to buy the directory unit, either alone or in concert with one another, but Verizon made it clear that the price would have to be high enough to justify a sale because it would saddle Verizon with a massive tax bill; by contrast, with a spinoff the company could make a tax-free distribution of the stock to its current shareholders. While these options were considered, Verizon Information Services continued to grow. In June 2006 Solutions Direct, an advertising mailings product was unveiled. A month later a home improvement magazine, Solutions at Hand, debuted. Also in July 2006 Inceptor Inc. was acquired, adding search marketing comparison assets for the Internet.

IDEARC SPUN OFF: 2006

After some ten months of deliberation, Verizon, dissatisfied with the offers for Verizon Information Services, decided to spin off the business as a new public company called Idearc Inc., a name formed by fusing "idea" and "arc." To help fund Idearc's independence, which came with a price tag of $9 billion in assumed Verizon debt, a team headed by chief executive officer Katherine J. Harless visited 16 cities and met with nearly 400 potential investors, ultimately raising $2.85 billion in high-yield bonds and another $6.5 billion of bank debt. What made the deal team unusual was that all of its members were women, including chief financial officer Doreen A. Toben and treasurer Catherine T. Webster, as well as JPMorgan Chase executives Jennifer Nason, Jessica Kearns, and Melanie Shugart. For her part, Harless was well versed in the telecommunications field. A native of Texas with a degree from University of Texas at Austin, she began working with GTE in 1973. After holding a variety of posts in finance, sales, marketing, and operations, she was named regional president for GTE Telephone Operations in Texas and New Mexico in 1994. Following the GTE and Bell Atlantic merger, she joined the directory unit becoming president of Verizon Information Services.

KEY DATES

1936:: General Telephone Directory Company is formed.
1959:: General Telephone Corporation merges with Sylvania forming GTE.
1996:: GTE Directories launches Superpages.com.
2000:: GTE and Bell Atlantic merger leads to creation of Verizon Information Services.
2005:: Verizon decides to shed its directory unit.
2006:: Verizon Information Services is spun off as Idearc Inc.

According to the terms of the spinoff, Verizon shareholders received one share of Idearc for every 20 shares of Verizon stock they held on November 1, 2006. When the Idearc stock began trading on the New York Stock Exchange in November, it was well received by investors who on the first day bid up the price almost $2, with 8.2 million shares trading hands. As a result, the company's market capitalization topped $4 billion. The game plan for the new company was clear: Use the steady cash flow of its print business to pay down inherited debt while keeping shareholders happy with consistent dividends; move into fast-growing markets, such as Denver and Phoenix; and continue to expand beyond paper directories to build the company's Internet and mobile technology platforms. "Whatever material you pick up or device you pick up," Harless told the Dallas Morning News, "our goal is to make sure advertising content is presented to you over that medium."

Ed Dinger

PRINCIPAL SUBSIDIARIES

Idearc Media Corporation; Idearc Media Sales-East Company; Idearc Media Sales-West Inc.; Idearc Media Services-East Inc.; Idearc Media Services-West Inc.