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The Master Builder
by Pam Bixby Losefsky
DALLAS, TX. -- He’s the man behind Stetson hats, the Dallas Stars, Ricky Williams’ baseball contract, and an expanding international media empire. Will Thomas O. Hicks, BBA 68, soon lead the largest private equity investment firm in the world?
A crew from Channel 5 sets up in the media room at Hicks Muse to discuss the Rangers’ pitching staff, the Stars’ Stanley Cup chances, and a real estate plan to revitalize uptown Dallas. Latin American executives fly in to consider cable acquisitions in the Southern Cone. There’s a question about the new European Fund: will close at $1.5 or $2 billion? Then there’s a personal matter to attend to, finalizing the purchase of a little rodeo in Mesquite, Texas.
This is all in a day’s work for Tom Hicks, sports franchise owner, private equity investor, and one of the world’s preeminent dealmakers. Everyone’s life involves making deals. For most people, the stakes might be a house, a salary increase, possibly a small business. For Hicks, the stakes are always businesses, usually very large ones. Over the last ten years, as Chairman and CEO of the Dallas-based private investment firm Hicks, Muse, Tate, & Furst, Hicks has bought and sold 250 companies, an average of two a month. To keep up this pace, he and his partners have raised $10 billion of private equity funds and consummated $32 billion in leveraged acquisitions. In a typical year, Hicks trades three times the gross national product of Belize.
Buy and Build
Hicks’ industry, sometimes known as mergers and acquisitions, is a business that many people still associate with the 1980s: hostile takeovers, junk bonds, Drexel Bernham Lambert going defunct and Michel Milken going to jail. The M & A business hit a lull after the stock market crash of 1987, but in the 1990s it reemerged with a friendlier, more long-term outlook. According to industry analysts, Hicks Muse personified the new approach through their focus on particular industries (presently media) and their concentration on building businesses, not just stripping them for parts.
In the industry, Hicks Muse is known for “buy and build,” a signature process of acquiring core companies, then using capital and expertise to build satellites around the core. Hicks learned the strength of buy and build when his previous firm, Hicks & Haas, rebuilt Dr Pepper in the 1980s. In 1984 they bought the gutted bottling operation from investment firm Forstmann Little, which was completing a standard, 80s-style leveraged buyout, breaking up Dr Pepper and selling its parts.“
The Forstmann Little investors made six or seven times their investment through the process of being dealmakers, buying undervalued assets and taking them to arbitrage,” says Hicks. “Our investors made a lot more by buying a core business and then adding pieces and building a real company.”
Hicks Muse investors who got out of the Dr. Pepper deal in 1988 earned seventeen times their investment over three years. Those who kept their stakes earned substantially more when Cadbury Schweppes acquired Dr Pepper/ Seven Up in 1995. In all, Hicks & Haas earned a $1.3 billion return on $88 million of investor funding. Hicks said he learned that the rate of return could be super-charged if he leveraged the acquisition of a company at the right price, then built it beyond the point of its organic growth.
Tired of working in a 50-50 partnership, he teamed up with investment banker John Muse in 1989 and became the lead partner of Hicks Muse. Facing stiff competition from large institutional investors, he raised $250 million for the firm’s first fund. The fourth fund just closed at over $4 billion, and Hicks Muse is now the second largest private equity firm in terms of funds under management, with a very realistic shot at overtaking Kohlberg Kravis Roberts and becoming number one.
Milestone deals have included the lucrative sale of Berg Electronics (Hicks used his share to buy sports teams) and the imminent merger of Capstar Broadcasting and Chancellor Media. The Capstar/ Chancellor deal is especially impressive. When complete it will create the largest group of radio stations in the world, a chain that started in 1994 with just an AM and an FM in Sacramento. Hicks Muse has accomplished this feat right under the noses of major media firms like Disney, NBC, and TimeWarner, thanks to a quick reading of the 1996 Telecom Act. Hicks believes the deal might ultimately pay out as much as $15 billion against a total capital investment of $1.3 billion.
“That will probably be the most successful private equity investment ever made by anybody in our industry, and that might be true even if it’s only worth eight or ten billion.”
Secrets of a Dealmaker
Corporate dealmakers are supposed to be hard-nosed men who swim with sharks, which makes it interesting to hear Hicks describe the importance, in his business, of being fair, even nice. “We work real hard not to get an attitude of arrogance or haughtiness, which you see in this business all the time,” he says. One of his important jobs is to keep all parties to a deal relatively happy. “If you take the approach that you want to scrape every last nickel off the table, that’ll work one or two times, but after awhile, your reputation will precede you.”
Hicks’ partners emphasize his fairness and, above all, his skill with people. “Most of the things we do,” says firm President Charles Tate, “revolve around relationships. At the end of the day it has to be a transaction that makes sense for both sides, but who you’re doing business with makes a big difference.” Tate says his partner is a master at building and maintaining relationships.
“Tom is terrific at relationships, at getting people to trust him, because he is trustworthy,” adds principal Dan Blanks. He specializes in eliciting the cooperation of everyone in the room. “Some dealmakers maybe back people into a corner,” says Blanks, “but Tom doesn’t do it that way. Alignment of interests may be an overused term, but he knows how to do that – he knows how to give.”
A corporate dealmaker who knows how to give? “Well, his returns wouldn’t be so good if he gave too much,” says Blanks, “He is not a patsy.”
There’s one other key ingredient to Hicks Muse’s success: the partnership has five Texas Exes. Hicks, Blanks, and David Deniger all attended UT in the late 60s and were members of the same fraternity, Sigma Phi Epsilon. “Tate was in the wrong fraternity,” says Hicks, “Phi Delts.” Jack Furst, MBA 84, hailed from the wrong generation, but his presence makes for a majority of UT alumni among the partners.
The addition of these Texas Exes (and three non-UT partners) has helped the firm grow exponentially in recent years. “A lot people in this business have elected to go it alone,” says Blanks. “Tom made the decision to bring in others, and the firm has grown ten-fold as a result.” As Deniger puts it, “Tom Hicks has built a firm that is bigger than just himself, and he’s proud of that.”
Hicks is senior partner, but by his own arrangement he pursues deals only with complete consensus from his associates. This empowers each partner to halt a transaction and reduces finger pointing if deals go sour. Hicks views the organizational policy as a key to the firm’s success, and Tate agrees. “The landscape is littered with organizations that were successful for awhile,” says Tate, “then when something bad happened the fingers started pointing and they came apart.”
Burnt Orange Blood
Going into business with Texas Exes is only one way that Hicks has kept strong ties to UT. Until March of this year, he served on the Board of Regents, where Chancellor William Cunningham cited him for “making some of the most far-reaching contributions through the history of the University [leaving] a legacy of lasting importance for Texas higher education.”
One pillar of that legacy is the UT Investment Management Company (UTIMCO), the private company that has overseen UT System investments since 1996. As a new regent, Hicks saw that UT was managing its investments inefficiently, with no long-term policy. He suggested privatization, but was told it would be impossible due to bureaucratic hurdles. This merely fueled Hicks’ drive, and today UTIMCO is the envy of other public schools.
Texas football fans benefit from the other pillar of Hicks’ legacy – the renovations to Royal-Memorial Stadium. As a sports team owner, Hicks knew that UT’s facilities had been left behind by other college powers. Pushing for change, he once again faced opposition. “For a long time the Board of Regents took the attitude that we wanted to put our emphasis on academics, not athletics,” says Hicks. He felt this was short-sighted, “because athletics get people excited about their communal experience, and from a practical point of view, if people are excited, they write big checks.”
Whether he is building a stadium or buying a rare manuscript (see sidebar), Hicks’ goals for UT are part of a larger vision. “I think the University of Texas has the chance to become the finest public university in the country,” he says. To reach that goal, the leaders of the University “have to recognize our competition isn’t in College Station or Lubbock or Houston or Dallas, our competition is really the University of Michigan, Cal Berkeley, Wisconsin, Virginia.” In athletics and academics, Hicks believes, “We need to raise the bar and hold ourselves accountable on that basis.”
He says that the current leadership is on the right track, both on and off the football field, and he hopes that UT will fulfill its potential to be “one of the top ten or fifteen universities year in and year out in every category.”
The Future
At 53, Tom Hicks could easily retire, watch his children grow up and his sports teams mature, and wait for his induction into the Texas Business Hall of Fame. The drive that brought him this far, however, appears unrelenting.
Hicks Muse’s original goal, says president Tate, was to take a regional firm and turn it into one of the leaders in the country. The partners feel they reached this status sometime over the last three years. “So we redefined the objective,” says Tate, “into becoming one of the leading firms and the largest firm in this business in the world.”
Toward this end, Hicks Muse has made major headway in European investments, and has pursued an aggressive strategy in Latin America, expanding especially in media and communications, areas that the firm knows well. “They are one of the most high profile firms today,” says Stephen P. Galante, editor of Private Equity Analyst. “They are extremely active on the deal side, and very innovative in how they look for deals and how they do deals.”
Galante says it is unusual for a buyout firm to do so many deals outside the US. The Latin American initiatives in particular, he says, are considered daring, but “Hicks Muse has taken the idea that they know how to do it, and so far they’ve appeared to be right.”
Can they reach their goal of becoming the biggest private investment firm in the world? “I think it’s certainly possible for Hicks Muse to reach their goal,” says Galante. He should tell Tom Hicks it’s impossible – then for sure he will do it.
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