Last week, the news that the CEO of Liberty Media, John Malone, increased the size of his voting-share stake in Rupert Murdoch's News Corp. made headlines and held out the tantalizing prospect of a boardroom duel between two grizzled media titans. But rather than signaling an imminent struggle for control of News Corp., the transaction—which flies in the face of Malone's avowed efforts to streamline and simplify his business—is another sign of the entrepreneur's near-compulsive tendency to craft intricate deals.
A flinty New Englander—Connecticut-born, with an undergraduate degree from Yale in economics and engineering and a Ph.D. from Johns Hopkins in engineering—Dr. Malone has frequently seemed the smartest guy in the media business. (Granted, in the late 1990s, that distinction may not have signified much.) Over the past 30 years, cable pioneer Malone has built, sold, and dismantled several empires. In doing so, the engineer has always favored complexity over simplicity.
Since founding Liberty in 1990, he's presided over a bewildering succession of recapitalizations and stock splits, mergers and spin-offs and distributions that seem to have amounted to a somewhat dubious feat of engineering—devising a structure that the market values at less than the sum of its parts. It is taken as a given that Malone's deals are shrewd and brilliant. But most investors have had a tough time puzzling out his logic. Over the past five years, Liberty's stock has badly lagged the major stock market indexes.
Liberty Media today is a strange hybrid—part venture capital fund, part mutual fund, part asset shuffler extraordinaire, and part long-term operator of businesses. Its astonishing array of holdings (click here and download the PDF file to see the 9-page chart) includes bits and pieces of television channels like Game Show Network, Animal Planet, and significant pieces of massive publicly held companies like Interactive Corp. and Sprint. (He even owns two-thirds of MacNeil/Lehrer Productions.)
Starting in 1973, Malone built Telecommunications, Inc. into a gigantic cable company. In 1990, he formed Liberty Media as an affiliate of TCI. As the cable business evolved from the simple delivery of signals into a content business, Liberty became a vehicle for Malone to invest in the new channels that were filling the upper reaches of the cable spectrum—the Starz! movie channel, QVC, the Discovery Network, the USA Network.
In the late 1990s, the cable TV business in general—and Malone, TCI, and Liberty in particular—stood at the white-hot nexus of broadband and e-commerce, telecommunications, entertainment, and sports. Malone parlayed his position into stakes in a range of companies, from Motorola to Sprint, from Time Warner to News Corp. A separate venture arm, TCI Ventures Group, invested in Internet access providers like AtHome Corp.
In 1999, when AT&T bought TCI in a misguided megadeal, it also acquired Liberty—and John Malone. Malone joined AT&T's board, and TCI Ventures was folded into Liberty Media, which remained Malone's province and investment vehicle. Throughout 2000, Malone continued acquiring stakes in technology companies at a furious pace. And at times, he proved no better an investor than David Denby. In 1999, he spent $425 million to acquire a 31 percent stake in Astrolink, bruited as the "first global wireless broadband venture." In April 2000, he blew $200 million buying 5 percent of the perennial media underachiever Primedia. In August 2000, Liberty and Microsoft co-founder Paul Allen agreed to buy $190 million worth of Priceline's stock.
These investments quickly soured. In the meantime, many of Liberty's longtime telecommunications and cable holdings melted down throughout 2001 and 2002. In 2001, Liberty Media split off from AT&T and began trading as an independent, publicly traded company again.
From the moment it became independent again, analysts recommended buying Liberty Media stock based on the assumption that the market would ultimately recognize the worth of its manifold holdings. But that has proved easier said than done. The problem is that Malone has assembled a set of businesses and assets whose value aren't easily comprehensible, even to professional investors. Most publicly held companies are valued on some multiple of the earnings of their operating units. And most investment vehicles—say, mutual funds—are valued based on the sum total of the investments they hold. But since Liberty has always owned comparatively few businesses outright, it has never received recognition for the earnings power of its holdings. A Liberty investor today has to make some judgment of the value of the shares Liberty holds in public companies (easy), in private companies (not so easy), and gauge the worth of the businesses it owns outright, and those of which it owned only a piece. And the magnitude of the total assets (Liberty's market capitalization is about $38 billion) is enough to daunt a buyer who might pay a premium for the whole company.
So, in the past year and a half, Malone has embarked upon a campaign to simplify by taking full ownership of companies and assets in which Liberty previously owned only a minority stake. (Liberty's press releases neatly sum up his activities.) The boldest stroke came last summer when Liberty, which owned about 40 percent of QVC, bought out Comcast's 57 percent stake. And earlier this month, Liberty acquired all the shares of Class B common stock of UnitedGlobalCom, Inc., a big European cable company, that it didn't already own.
How does the News Corp. transaction fit into this new scheme? It doesn't. In fact, this complicated deal, in which Malone swapped a chunk of voting shares and cash for a larger number of voting shares, would seem to run counter to his streamlining strategy of the past year. In this excellent analysis, George Mannes of TheStreet.com crunched the numbers and concluded that Malone managed to acquire the News Corp. shares at a substantial discount to its market price. In other words, it was another clever deal that the smartest guy in the business simply couldn't resist.