“If you are a TCI shareholder, pass on the swap, if you are considering buying Liberty now that it is trading on a when-issued basis over the counter, don’t chase it” — Forbes article, late 1990
By the end of this post, you will find out whether following that advice was worthwhile.
The year is 1990. John Malone, the Cable Cowboy, decides to take a pre-emptive action and split TCI’s holdings before the Justice Department would force him to do so. For the uninitiated, I will give a very brief background first and then discuss the 1991 deal.
John Malone, an ex-McKinsey consultant, was recruited in the early 70’s by Bob Magness to try and turn TCI’s cable business around. He masterfully managed to do so and over the years made it the most dominant player in it’s field. The full history of this great man is described in the book I linked to above — Cable Cowboy. His financial and strategic genius led TCI to become very big and control not only the distribution of media but also some parts of the content creation and packaging. This, by the way, happened thanks to a significant competitive advantage that TCI enjoyed. So by 1991, he became worried that the department of justice might force him to break TCI in pieces and that takes us back to the 1991 complex split-off…
So Malone chose to split the different assets that were a part of TCI. The company issued a complex 345-page prospectus document, that looked as if it was purposley meant to keep investors in the dark. Some commentators said that it “defied understanding by mere mortals.” Those who chose to participate, had to give up 16 shares of TCI for one share of Liberty Media, the newly created entity — doesn’t seem very appetizing, or does it? More than half of the shareholders, encouraged by newspaper articles and Wall Street “experts advice”, chose not to partake in the split-off.
But why would Malone want to passively discourage owners of TCI from buying into Liberty? Because the fewer shareholders who participated in the Liberty deal, the more equity each of them would hold in the new company. Malone went all in. Eventually, Liberty built more wealth to Malone and Magness, his partner, than TCI has ever created and in a much shorter timeframe.
(Those of you who are curious can read more about Malone and find out about similar moves he did that exhibited a very similar pattern. The outcome was, in most cases, significant value creation but not as significant as in this specific deal)
The Outcome & How to Measure CEO’s Performance
You can also read about the outcome on this piece from the NYT archive. Malone and the investors who followed him made a bundle of money in very short time. Not only that — the value he created over his career is almost unparalleled in business history and makes him one of the best business executives ever. That brings me to the question of how should we measure the performance of a top executive?
When most people are asked to name the best CEO they have ever heard of they will usually come up with names like Jack Welch or Bill Gates. However, is that a subjective question? I think the answer is no. There is a clear way to measure it: value creation, on a per share basis, over a long period of time that preferably includes a few economic cycles (recession and expansion). On that basis, John Malone emerges as a big winner.
Those who invested with John Malone in 1973 and stayed until the business was acquired by AT&T in 1999 made a whopping average annual return of 32%. That leaves even Buffett, who made an annual average of 26.3%, in the dust. Just to illustrate what these numbers mean: $100 that were invested with John Malone in 1973 would have been worth $181,200 in 1999. The same $100 invested in Buffett’s Berkshire Hathaway would have been worth “only” $54,500. Wow!
So why did I call this post “Days of Future Past” (besides “stealing” the name form the new X-Men movie)? I will tell you later…
Here are some highly recommended John Malone videos, watching these can make you a lot smarter, no matter which business you are in:
1. 1h41m Q&A session at the University of Denver – click here
2. Short interview about Telcos vs. Cable companies – click here