Creating Value The Old Fashion Way: The Harcourt General and Neiman Marcus Group Stories

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Creating ValueThe Old Fashion WayThe Harcourt
General and Neiman Marcus Group Stories

• Robert A. Smith
• Vice Chairman, Neiman Marcus Group
• Managing Director, Castanea Partners
• Former Co-CEO Neiman Marcus Group, Harcourt
  General

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H A R C O U R T G E N E R A L

• Building Value The Old Fashion Way
• Company History Evolution of a family
  portfolio
• From GCC Harcourt General
• with Neiman Marcus Group in between
• Building value at Harcourt General and NMG
• Lesson learned

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H A R C O U R T G E N E R A L
Company History
Surplus Cash Flow

• 1960
• Theaters
• Bowling
• Restaurants
• 1970
• Soft Drink Bottling
• Theaters

• 1970
• Soft Drink Bottling
• Theaters
• 1980
• Soft Drink Bottling
• Theaters
• TV Radio

• Film Financing
• Columbia Pict

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H A R C O U R T G E N E R A L
Company History
Searching for a 3rd Leg

• 1980
• Soft Drink Bottling
• Theaters
• TV Radio

• 1990
• Cash (1.5B)
• Specialty Retailing
• Theaters

• Sunkist
• Heublein (RJR)
• CHH85
• Cadbury Schweppes

1987 Restructuring creates The Neiman Marcus
Group
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Building Value the Old Fashion WayThe NMG
Opportunity

• 1985 CHH White Knight
• ?1987 CHH Restructuring
• NMG was born
• Tarnished, under managed brand
• Consistently milked for corporate parent
• Strategic confusion at the top
• Trade down/department store strategies reflected
  in real estate, merchandising and info systems
  strategies
• No performance based managerial disciplines
  applied to human resources, operating or long
  term capital decisions
• ? Poor financial performance plenty of
  opportunity to improve
• strategic focus and capacity to execute

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Building Value the Old Fashion Way Building a
luxury goods powerhouseCorporate and Structural
Focus

• Installed financial and managerial disciplines
• Completely revamped human resource management,
  operating and capital budgeting processes
• Made the company manageable
• Address capital structure now conservatively
  financed
• Converted preferred to common
• Sold equity/refinanced debt at advantageous time
• Receivables financing
• Invest 750 m back into the core business
• Major remodel/expand program
• New stores
• Systems infrastructure

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Building Value the Old Fashion Way Building a
luxury goods powerhouseOperating and Strategic
Focus

• Marketing leadership/relationship selling
• Shift from Mass marketing to targeted programs
• The Book
• InCircle Rewards
• Book Building one to one marketing
• Focus on top decile
• Data base marketing/CRM
• Relationship building
• Built out direct marketing engine
• Horchow/Chefs
• NM Online
• Infrastructure and management
• ? Leads to multi channel marketing opportunity

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Building Value the Old Fashion Way Building a
luxury goods powerhouseOperating and Strategic
Focus

• Human Capital
• Annual and long term compensation more closely
  aligned with budget and strategic process
• Focus on training and development
• Sales Leadership
• Merchandising
• Leveraging the corporate position in luxury goods
  value chains
• Kate Spade
• Laura Mercier
• Galleries

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Building Value the Old Fashion Way

• Building a luxury goods powerhouse
• Results
• Sales Growth 7 yr to 3.1 B02
• League leading sales productivity (gt500 psf)
• EBIT margins improved
• ? 400 BP to best in class position given
  scale and
• structure
• ROIC improved ? 400 BP now among best in class
• NMG now clearly preeminent luxury goods retailer
  in U.S.
• Accomplished this while significantly improving
  the financial characteristics, performance and
  potential of the company

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Building Value the Old Fashion WayThe
Harcourt Opportunity

• Challenge to redeploy capital from beverage sale
  (1.8B,1989)
• Acquisition of HBJ (1.5B) 1991
• Portfolio of companies (15) to add to our
  existing portfolio
• Bought on edge of bankruptcy lots of hair
  consequences of underinvestment
• Bet on enduring value of proprietary content and
  must have information
• Significant technology transformation issues
  associated with present
• business models
• ? Opportunity to improve capacity to execute
  financial management of
• company
• ? Exciting platform value for future growth
  through acquisition

H A R C O U R T G E N E R A L
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Building Value the Old Fashion Way Building a
lifelong learning powerhouseStrategic and
operating focus

• Significant investment back into core businesses
• Core content
• Human resource management
• Systems and infrastructure
• Customer focused learning solution approach
  Market research informing all editorial
  processes
• Significant attention to establishing excellence
  in operating expense management

H A R C O U R T G E N E R A L
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Building Value the Old Fashion Way Building a
lifelong learning powerhouseStrategic and
operating focus

• Acquisition and integration diligence and
  realistic projection
• as core competence
• Significant evolution of core business models and
  product offerings
• Primarily technology driven
• Coincident with, not in advance of customers

H A R C O U R T G E N E R A L
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Building Value the Old Fashion WayBuilding a
lifelong learning powerhouseCorporate and
Structural Focus

• Installed financial and managerial disciplines
• Completely revamped strategic, operating and
  capital budgeting processes
• Aligned annual and long term incentive plans to
  budget and strategic processes
• Made company manageable
• Rationalizing the HG portfolio
• Spin GCC93
• Sold insurance subsidiary (400m)
• Recapitalized and spun out NMG (95-99)
• Built on platform value of core learning assets
• Approximately 1.5 B in acquisitions
• 20 additional transactions

H A R C O U R T G E N E R A L
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Harcourt GeneralImplications of the Strategy
Higher Education
Corporate Professional
Harcourt College HLD HHE Professional
Education
NETglobal ASI TPC DBM
Education
STM
Harcourt School Holt, Rinehart, and
Winston Steck Vaughn Trade
Harcourt Health Sciences MDConsult Academic
Press International

• Premier Learning Solutions company uniquely
• positioned to leverage both superior content
  and
• technology-enabled learning tools through
  multiple
• distribution channels to the most attractive
  global
• learner markets
• 1 or 2 in most all markets in which we
• compete
• Generating
• Double-digit annual revenue growth
• Mid teens operating profit growth
• 20 annual EPS growth
• EBITDA exceeding 1 billion by 2004

H A R C O U R T G E N E R A L
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Building Value the Old Fashion WayHow did we
do?
CAGR 1991 2001 17.0
7/13/01 Sale to Reed-Elsevier
10/22/99 NMG spinout
12/15/93 GC spinout
Note Assumes dividends invested at 5 p.a.
Assumes proceeds from spinouts of GC and NMG
invested at 5 p.a.Source Dow Jones
Reed-Elsevier finance dept.
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Building Value the Old Fashion Way

H A R C O U R T G E N E R A L

• What did we learn?
• Corporate culture matters owner managers and
  the public trust
• Highest standards of integrity in accounting,
  reporting, corporate government and corporate
  citizenship
• Credibility is everything, think like owners, it
  helps mitigate the managerial politics
• Financial and managerial disciplines are lead
  from the top down
• Healthy respect for capital demand clear path
  for ROIC
• Budget and capital allocation process matters
• Integrity on HR management process matters
• ? Focus on profitable growth, healthy companies
• Know when to hold em know when to fold em
• Respect business and economic cycles
• Never fall in love with an asset manage your
  portfolio
• Know your competition and capital markets context

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Whats nextCastanea Commercial

• Assembled a great team blend of operating and
  private equity experience
• 45 Acquisitions
• 25 Divestures
• 3.5 B Debt
• Significant, value added strategic and operating
  experience at firm
• Interest in investment opportunities which can
  leverage our knowledge/experience base
• Information/publishing/media retail, branded
  retail wholesale financial, marketing and human
  resources service companies
• Small initial fund Future?
• 75m of partner capital
• 6 investments 3-5 years
• ? Not willing to be spread too thin
• Want to be a lead, if not control investor
• Seems like a good time to put to work
• ? Have some fun.