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Rising Values

Acquiring companies can be a lot like buying real estate, with one important difference: you have to manage the people who come along with the deal.
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Terry Jacobs is a pleasant enough man, but he has an acquisition strategy that would drive you crazy -- with envy, that is. Simple though his approach may be, it has produced spectacular results for Jacobs and his company, Jacor Communications Inc., of which he is founder, chief executive officer, and largest single stockholder. For 1986, its sixth year of operation, Jacor projects $24.3 million in revenues from its portfolio of 11 radio stations. With 5.9 million shares of common selling at about $8 in early March, investors gave Jacor a market value of $47 million.

That's not bad for a business founded on a modest personal nest egg. It's not bad for a company whose net equity value at the end of 1985 came to slightly less than $1 a share. And it's not bad for a company whose strategy has tended toward the cautious and conservative.

Cautious? With 10 acquisitions and 1,028% revenue growth since 1983? Sure. If being an actuary for 19 years taught Terry Jacobs anything, it was how to figure odds. Now, in the radio business, he's not taking any chances. The Jacor strategy for building a broadcast empire is mainly interesting for the things it doesn't do.

Acquisitions can be a trickly game. In a strong market, the temptation is to start viewing the companies you acquire as properties, pure and simple. That's more or less what's happening in radio these days. "Everybody's looking at broadcast like it's real estate," says Bruce Mittman, formerly general sales manager at WRKO-AM in Boston, now trying to revive WICE-AM, a station in Providence he bought last October, with a new, all-oldies format.

In radio as in real estate, you can buy a property with as little money down as possible, leveraging the rest. Depreciation charges against revenues might put the bottom line in the red, but who cares so long as cash flow covers debt service? You clean up the expense side, boost sales if you can, pray for some market appreciation, and then, after a few years, sell it or borrow against its new, higher value. Either way, you leverage into another, larger building -- or radio station -- and do it all again.

What are the risks? That somebody will flood the market with new radio stations? That can't happen so long as the Federal Communications Commission keeps a lid on licenses. That the market will suffer a recession? Maybe, but radio industry revenues from advertising have gone up every year but one since the end of World War II, including 1971, when on-air cigarette ads were banned. That you'll get caught in an interest-rate squeeze when rates go up? Not if, like Jacor, you take on mostly fixed-rate debt.

So what else is there to worry about? "Jacobs," says Richie Balsbaugh, CEO of Pyramid Broadcasting in Boston, "has no operating experience at all." Ah, operations. That's where broadcasting, and most other businesses, get a lot different from real estate. A building is steel and stone, but a company is mostly people."Jacor is probably making smarter deals than most buyers," says Balsbaugh, a veteran station manager, "but once you close the deal, you've got to make it work."

This posed a significant challenge for Jacobs, who came to broadcasting as an operational novice. What he did have going for him was an understanding of the financial opportunities the industry offered, having been a senior executive at American Financial Corp. in Cincinnati, a financial-services company with investments in media. In particular, he had noted how the value of AFC's Metromedia Inc. stock rose from less than $5 a share to more than $500 in just a few years. "I became fascinated," he remembers. Who wouldn't?

So it was only natural that the broadcasting industry came to mind a few years later, when he began thinking about starting a company of his own. Focusing on the radio business, Jacobs found that there were three ways to grow in the industry, all of them related to the fact that radio stations are bought and sold on the basis of their cash flows. Cash flow in broadcasting means operating income before deductions for depreciation or amortization, taxes, or debt service. Recently, stations have been fetching from 7 to 10 times their broadcast cash flow, depending mostly on the market they are in. (Stations in growth markets command a higher multiple.) So the way to get the price of a station up once you've bought it is to increase the cash flow. The question is: how?

One way is to fire a lot of people. After all, salaries are the biggest part of almost any station's expenses, and it's technically possible to automate the entire operation, so that all you need is a sales force. "Our savings are not in people," says Jacor vice-president and controller Jon Berry, "and we don't want that kind of reputation." That's probably wise, since -- more often than not -- the savings from automation soon evaporate, along with audience and advertising revenue.

Another way is to look for turnaround situations -- stations with little or no market share and no immediate prospects. That approach has worked for Malrite Communications Group Inc., and $83.3-million (1985 revenues) broadcasting company based in Cleveland, which bought a down-at-the-heels New Jersey station, moved its transmitter to the top of the Empire State Building, and, in less than a year, turned Z-100 (WHTZ-FM) into the hottest rocker in metropolitan New York. To pull off such a turnaround, however, you need to have enough money to carry through the process and enough operating talent to make it work. Jacobs had neither.

That left him only the conservative, cautious route -- what Mittman, the Providence station owner, calls the "streamlining strategy." Jacor looks for stations it can improve, not turn upside down or turn around. The company will buy one if the price seems reasonable; centralize some administrative functions -- such as payroll, money management, and disbursement -- in Cincinnati; then let station management get on with the job. And, oh yes, Jacobs throws in a little incentive.

At news-talk WGST-AM in Atlanta, which Jacor bought last August, news assistant Anthony Johnson hustles to pack a day's work into eight hours. "I used to turn the rest over to someone on overtime," says Johnson, "but now I adjust my pacing and it all gets done." Under the former owner, Meredith Corp., the Des Moines-based media company, Johnson was strictly an employee. Now, with the stock Jacor gave him, he's a bit of an owner himself. More important to him, a piece of every additional cash-flow dollar the station generates does into a bonus pool. "They used to give out turkeys at Christmas. They can keep the turkeys," Johnson says, "I'll take the money."

"We had budgets under Meredith, too," says one WGST manager, "and if you met them, they'd pat you on the shoulder and say, 'That's nice.' If you didn't, they'd pat you on the shoulder and say, 'That's OK. You'll make it next time." Because the Atlanta station has consistently outperformed its budget in its short history as a Jacor property, no one is quite sure how the new parent would react to underperformance. Jacobs claims to take the budgeting process very seriously. "You get what you inspect, not what you expect," he says.

The managers seem happy to live with that. "I think it's great," says general sales manager Rob Jackson, "that my new owner is giving me a bonus after just five months." Jackson and senior managers at other Jacor properties also participate in stock option plans and other management incentives.

But while attitudes have changed since the Jacor acquisition, the stations -- WGST and its "beautiful-music" sister, WPCH-FM -- have not. "[Jacobs] bought us," says vice-president and general manager John Lauer, "because we were successful."

In their last 12 months under Meredith, Jacobs says, the stations produced $1.4 million in broadcast cash flow. In just the last five months of 1985 under Jacor, cash flow was $1.2 million. "This year our goal there is $2.75 million," he says, "and we're already ahead of budget." Jacor paid $20 million for the Atlanta stations and a statewide radio network. Jacobs could probably get $32 million for them today, estimates Hal Gore, an Atlanta-based media broker.

Then there are stations WQIK-AM and -FM in Jacksonville, Fla., which Jacor bought two years ago. They generated as much cash in seven months of 1984 under Jacor as in all of 1983 under the previous owner. And only part of that improvement, says Jacobs, comes from eliminating his predecessor's $200,000 annual salary and the boat he was running through the company books.

To be sure, some cash-flow improvement in Jacksonville and in Atlanta comes with the territory. Both cities are growing. Total radio advertising in Atlanta should expand 12% to 15% per year, according to general manager Lauer. Station expenses, mostly salary, should grow no faster than inflation, say 5% to 7%. The difference, as much as 10%, is a gimme, provided only that WGST and WPCH can just retain their market share.

Employee incentives, cash management, rigorous budgeting -- nothing new or exciting here. To hear Jacobs talk about it, the whole approach seems downright dull. "I'd rather be the tortoise who finishes the race," he says, "than the hare who doesn't." Well, the man is an actuary.

But who cares if it's new or exciting so long as it works? Jacor made $1.4 million last year on the sale of two of the trio of small religious stations that were Jacobs's first buys back in 1981. The third, converted to an "urban contemporary" (that is, black) format, is under agreement.

In addition, Jacor's Georgetown, Ohio, station is on the market. "We've spent five years learning the business," says Jacobs, "and now we're going to concentrate on major markets." With no short-term debt, with its long-term debt service and preferred stock dividends covered 1.4 times by projected 1986 cash flow, and with $14.6 million in the bank from an April stock offering, the company is poised for more growth through acquisition.

And success, predictably, has bred boldness.When Jacor bought WEBN in Cincinnati this year, Frank Wood, the station's owner/operator, came with the deal. Wood has the operating experience, and reputation, that Jacobs lacks. He'll be Jacor's president and chief operating officer, and both he and Jacobs are already talking about riskier buys, the turnarounds Jacor wouldn't touch before. "I'd like to build a major company," says Wood, "with a full string of radio stations, TV, outdoor advertising."

Jacobs would, too. He looks across town to the headquarters of Taft Broadcasting Co., which has holdings in radio, television, cable TV, entertainment, and real estate. Taft generated $365 million in revenues during the first nine months of its fiscal year just ended. "They are where we want to be in 10 years," says Jacobs.

Inside this tortoise, there's still a little hare.

Last updated: Jul 1, 1986




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