Hickory Tech Corporation

January 1, 1998May 5, 2008 Roger Matz

If you still harbor doubts about the benefits of telecommunications deregulation and competition, consider Mankato Citizens Telephone Co. as a case study. If you want a stock bargain, consider Hickory Tech Corp., its parent company.

Established in 1898, Mankato Citizens reorganized in 1985 as Hickory Tech Corp., a holding company with annual revenues of $67 million in 1996. Its core business is providing local telephone service to 24 Minnesota and Iowa communities, but it also owns companies furnishing computerized billing services and software, selling and servicing telecom equipment and developing unique telecom products.

For most of its 99 years, Mankato Citizens was a sleepy (but consistently profitable) little company furnishing service first to Mankato and eventually to 11 nearby small towns. It began to stir in the 1960s, discovering that the computerized billing system it developed was marketable beyond the city limits of Mankato. But it was nearly 20 years before deregulation, and the fierce competition that followed, shook it fully awake in the late 1980s.

Bob Alton arrived as Hickory Tech’s chairman, president and chief executive officer in January of 1993, after the company was already wide awake. He seems determined to perpetuate a climate of insomnia and alertness rather than see any part of the business doze off. He’s focused on a single mission: Growth in shareholder value. Simply put, he wants to see the stock price climb. “No matter what you’ve read or learned in school, the role of management is to maximize shareholder wealth,” Alton smiled.

In the past couple of years, Hickory Tech shares ranged from $24.50 to $35.75. Alton calls it “mattress stock,” the kind people buy, tuck away and never think about until the dividend check arrives. (The company paid $5.5 million in dividends in 1996, or $1.10 per share, its 15th year of increased dividends.)

Alton maintains that the stock is worth considerably more than its high of $35.75. “We so strongly believe it’s undervalued that we bought back 620,000 of our own shares, trying to posture ourselves for the day we can make a secondary offering,” he said. “We’re such a quiet, closely held little public company that you could argue that we’re not a public company at all.” Hickory Tech’s 4.5 million shares are owned by only 1,800 to 2,000 shareholders, and most of them reside in the Mankato area.

“We need to increase the number of shareholders and the geographical dispersion of those shareholders. That will create a much stronger market for our shares. Nobody’s ever heard of us,” Alton said.

“We need to increase the visibility of the company and increase the trading so that we establish a market-based value.” Two steps have been taken in that direction. The stock, which had only been available on the over-the-counter market, was listed on NASDAQ in 1995. (Symbol: HTC) Hickory Tech also climbed on the Internet with a home page touting its diversity, potential and financial strength. “All of a sudden we’re getting calls from investment banking firms and institutional investors that up to now would never have heard of us,” Alton said.

Mankato Citizens began emerging from its quietly secure cocoon in the late 1960s when it developed its own software for computerized billing. That led to formation of a subsidiary, Computoservice, recently renamed National Independent Billing, Inc., which now processes the monthly customer billing for more than 40 local exchange telephone companies, several long distance companies including Sprint and MCI, and a few municipal utilities. The subsidiary also sells its software packages to firms wanting to do their own billing. With 95 employees ranging from programmers to marketing representatives, it contributes $10 million to Hickory Tech’s $67 million annual revenues.

Although Computoservice enhanced Mankato Citizens’ profitability, provided diversity and created new jobs in Mankato, it did little to shake the company out of its comfort zone. That came with deregulation of the telecommunications industry and the breakup of AT&T’s monopoly in the mid-1980s. “The rules of business started being changed,” Alton said. “We went from the day where you had no choice but to rent a black phone from us to everybody offering all kinds of alternatives, from the very cheap to the feature-rich system.” Mankato Citizens saw a “rapid encroachment of competition. Long-distance carriers were directly connecting to our biggest customers, bypassing our network. We lost a significant amount of revenue to that,” he said.

Such situations present “a couple of choices,” according to Alton. “You can sit back on your haunches and watch all this happen, or you can become a little more aggressive and adopt an offensive stance yourself.” Directors of Mankato Citizens “became convinced they needed to diversify into other markets to stimulate growth,” Alton said.

The net result of all the deregulation turmoil has been “very healthy” for both consumers and the industry, according to Alton. “The customer now has choices with a wide range of quality and price, and companies found they could scale back on what was the most expensive part of the business, which was servicing terminal equipment,” he said. He repeats the comment of an Iowa telephone executive who said “if you can judge the success of deregulation on the basis of the number of telephone suppliers, it’s been a success.” The executive used Grinnell, Iowa, as an example, saying it had 16 suppliers offering telephone equipment to the town’s 8,900 residents.

Mankato Citizens’ first acquisition was St. Paul-based Collins Communications Systems Co. in 1990. Collins sells and services telecommunications equipment in the metro area and in Southern Minnesota. “We saw Collins as another potential avenue into a market beyond Mankato in a discipline that’s close to home, something close to our core competency, which is telecommunications,” Alton said. (He defines telecommunications as the “transmission and receipt of voice, data and/or video by whatever means, including wired, wireless, TV, computer terminal, fax machine and your telephone.”) Collins, with 98 employees, generated $18 million in 1996.

A few months after Hickory Tech bought Collins, it acquired Digital Techniques, Inc., in Allen, TX, near Dallas. “It’s a little development company with 45 employees, creating very specialized components compatible with Nortel communications products,” Alton said. Nortel, a Canadian company, is a major supplier of telephone switching equipment with a market share equal to AT&T. The Texas acquisition makes highly technical devices, including one that isolates the exact source of 911 emergency calls that might be dialed through a central switchboard serving a college or a multi-tenanted office building. DTI also makes a digital-to-analog converter that’s essential in high-tech communications. “When you make a phone call, more than likely it’s going over a digital line, which reduces your voice to a series of zeros and ones. But I can’t hear zeros and ones, so for me to understand you, something has to assemble them back into your voice, and that’s this device,” Alton said. DTI generated $7 million in 1996.

While Collins and DTI provide diversity, Hickory Tech also strengthened its core business of providing local telephone service with two acquisitions in Iowa in 1994 and 1997. One is rather small, the Amana Colonies Telephone Co., with just 1,500 local customers living in the seven communities forming the Amana Colonies. “But the gem in that was one large customer Amana Refrigeration,” Alton said. Hickory Tech also gathered 13,000 new customers when it purchased Heartland Communications from U.S. West. Heartland serves nine towns in Northwest Iowa, including Sibley, Rock Rapids, Rock Valley, Hull, Doon, Boyden, Haywarden, Akron and Ireton, and two in North Central Iowa Bancroft and Lakota.

Along with the buying has come some selling. In the past couple of years, Hickory Tech divested itself of Coastel Communications, a California company which Alton described as “competing at the low end of the systems sales market.” It also sold Direct Vision, which brought satellite TV service to the Mankato area. “We bought the right to provide the service in seven counties for $1 million and sold the company for $7 million,” Alton said. “If there’s a dark side, it was that we should have bought the rights to 21 counties. If you don’t have sufficient mass in terms of customers, you have no control over your programming costs.” Even though Direct Vision had potential, Hickory Tech sold it because “we didn’t see it as being a big part of our future strategic direction,” Alton said. “We had a number of people who wanted to buy it from us, so we sold it for a very large gain.”

Selling a company like Direct Vision is something you don’t do unless “you have a place to redeploy the capital and we think we have several,” Alton said. Hickory Tech used the sale proceeds for the stock buy-back and to acquire a firm Collins Communications had been partnering with in the metro area Datacomm Products, which builds data networks. Another chunk of the profits went toward an investment with SePro, an Irish software company, for joint development of a wireless billing platform. That partnership “will jump-start us into wireless billing capabilities and eventually into a totally convergent billing system, the kind that’s capable of billing for wire lines, wireless, cable TV, gas and electric utilities, anything that is billed on a per-unit basis,” Alton said.

But there’s much more in Hickory Tech’s immediate future than acquiring more companies or engaging in a programming frenzy to achieve convergent billing capabilities. The company plans to open two new fronts soon, offering its own long-distance service and competing in other markets for local phone customers.

The first round of deregulation gave rise to a host of long-distance companies, including MCI and Sprint. (Mankato Citizens’ customers can choose from more than 20.) But Alton feels there’s room for another launched by Hickory Tech. “I think we can compete. I think there’s a growing demand for an understandable, flat-rate, don’t-bug-me price,” he said.

A new form of deregulation, brought via the Federal Telecommunications Act of 1996, opened the local monopoly market to competition. It gives consumers an opportunity to choose among competitors for their local phone service, just as they have been choosing long-distance companies since 1984. The 1996 telecommunications act “left us sitting here and saying every bit of our business is now open to competition,” Alton said. “We could take a defensive posture and ask ‘what can we do to prevent competition from coming into our market?’ or we can take the offensive and see where we could compete and grow.” The 1996 legislation is what “drove our board to start looking at other market opportunities, acquisitions and partnering,” he said.

Hickory Tech plans to prowl the Upper Midwest, looking for places it might compete. Without being too specific about locations, Alton said Hickory Tech will consider “markets where it makes sense. I would be very surprised if a year from now you wouldn’t see us competing for local telephone business elsewhere.”

Alton was recruited by an executive search firm in 1992 to succeed retiring president Paul Stevens, who’d led Hickory Tech into its initial spate of growth. Alton brings a perspective on the industry gained by what amounts to a lifetime association with Continental Telephone Co., a national firm. It owned the local exchange in New London, IA, (Population: 1,800) where Alton grew up. His father, Bob Alton Sr., was ConTel’s plant manager in New London. After graduating from Iowa State University in 1970, he joined the company’s accounting department in St. Paul but was drafted five months later. When he returned from Army duty in Germany, ConTel had moved its headquarters to St. Louis, where Alton worked for the next 15 years.

His last job in St. Louis was president of a nine-state region. Then it was off to Bakersfield, CA, to become western region president for 18 months before assuming the presidency of Contel’s entire telephone operation. With it came two million customers, 15,000 employees and $2 billion in revenues. In 1991, GTE bought ConTel and offered Alton “a very nice position in Dallas,” which he rejected. “I just thought if there ever was a chance to take a bit of a risk and do something out of the ordinary, this was it,” he said. “So I struck out looking for something else to do.”

The combination of Hickory Tech’s potential and Mankato’s ambiance enticed Alton back to the Midwest. He and his wife have four children and the opportunity of “raising them in an attractive community was a big part” of the decision. “The education system in Minnesota is typically better than in most other areas of the country,” he added.

Hickory Tech’s most compelling attraction was its financial statement. “It was a very strong company, with capacity to grow. I wasn’t looking at a troubled enterprise,” he said. “And it was very much aligned with what I’d spent 25 years doing the local telephone business.” Although just a fraction of ConTel’s size, Hickory Tech seemed “just right. It should be more fleet of foot, it should be fun. I should be able to make things happen.”

Now, after five years at the helm, Alton feels Hickory Tech’s “mission is as clear as it has maybe ever been. We definitely are intent on growing shareholder value. Our biggest problem has been a lack of liquidity in our shares….and what we need is enough profitable growth to support the need for a secondary offering of stock. We’ve got to have a place to put the capital and some assurance it will earn a reasonable return.”

Alton said Hickory Tech these days is “constantly looking for profitable growth opportunities and the good news is there are plenty of them. The problem is picking the right one,” Alton said. “We continue to look at sound acquisition opportunities. At any point, there are two or three on my desk.” The company is “very disciplined” in approaching new opportunities and uses a “set of criteria to evaluate acquisitions.” Too often, Hickory Tech “ends up in a bidding contest. For every 10 deals we look at, we might get one, because other companies are doing the same thing.”

When it comes to acquisitions, even in bidding contests, Hickory Tech remains well-positioned with only $40 million in debt stemming from buying the U.S. West properties in Iowa. “That’s nowhere near our capacity for borrowing,” Alton said. “We are absolutely more profitable than we’ve ever been, and we have a lot of dry powder left.”