How I did it

Liberty Media's Malone reveals how he's building his media empire


It's no surprise that Comcast's $45 billion bid to buy Time Warner Cable amid plans to spin off 3.9 million subscribers still involves John Malone.

After all, it was Malone, the chairman of powerful Liberty Media, who began the bidding several months ago for Time Warner through his stake in Charter Communications.

John Malone
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Now, as Comcast pushes all the buttons to win the federal government's approval of its ambitious proposal, Charter seems set to acquire 4 million new cable TV subscribers out of the complex deal. One component: Comcast will get Charter's subscribers in Los Angeles, while Charter will acquire a block of customers in the Midwest.

If indeed that comes to pass, Malone will yet again get at least a good chunk of what he wanted when he initially approached Time Warner: to grow Charter into the nation's second-largest cable TV operator, with 8 million customers.

According to Malone, whose career has been marked by intelligence, foresight, tenacity and bare-knuckle deal-making over the last 40 years, the cable TV/broadband industry should be consolidating its resources so it can survive a tumultuous future, considering the competitive landscape in today's U.S. multimedia markets.

Malone knows what he's talking about. Today his Liberty Media is the U.S.'s most profitable media/entertainment combine, a $10 billion programming-and-technology colossus whose best years here and abroad may be ahead of it, much to shareholders' delight.

Hand in glove, the 73-year-old Malone is one of the world's wealthiest businessmen, with a net worth of $7 billion, millions of acres in private land holdings and a castle in Ireland. But he's not taking off to hunt pheasants yet.

By anyone's measure, Liberty Media had a busy first quarter. Malone OK'd a $10.6 billion offer for the 47 percent stake in satellite radio that Liberty Media doesn't already own, then abandoned the attempt; Charter's $37 billion bid for Time Warner Cable, currently the nation's second-largest cable TV company; and a $13.7 billion tender for the majority stake in Dutch cable provider Ziggo; and a $16 billion deal to buy Virgin Media, which counts 5 million U.K. cable/Internet subscribers.

There's also an offer to buy a 49 percent stake in Europe's Formula One racing business; Liberty Media's sale of its Barnes & Noble book-chain stake; and yet another foray into tracking stocks based on the same complex financial concepts that long ago confirmed Malone's mastery of all things Wall Street.

Amid the tectonic changes that have shaken the global media industry in the last 15 years, no one has made more of them than Malone. Penn State University professor Patrick Parsons has described him as a "savant financial genius" whose intelligence "was always in taking this very large financial infrastructure and reorganizing it in Byzantine ways" that usually pay off quite nicely.

For 2013's fourth quarter, for example, Liberty Media posted $1 billion in revenue—up 12 percent from the year-before total, thanks mainly to its 2012 acquisition of a controlling stake in Sirius.

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Comcast reaches deal with Charter
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Comcast reaches deal with Charter

"It's been a large learning curve for me and my guys," Malone said, looking back over the last four decades. "A lot of it has been growing up and making things work in environments as they change."

Raised in Milford, Conn., Malone was a bright middle-class kid with a newspaper route and a small radio-repair service. His dad, who he says was "absolutely" an inspiration, was an electronics engineer who started his own firm. Malone earned an engineering and economics degree at Yale in the mid-1960s and then studied industrial management and operations research at Johns Hopkins.

He went on to high-level work at Bell Labs, where he was present at the creation of the computer industry; McKinsey & Co.; and General Instrument/Jerrold Electronics, which developed the nation's first cable TV systems in the 1960s. That route—lined with a host of strong mentors—eventually delivered Malone to the Denver doorstep of Tele-Communications founder Bob Magness, a crusty old Texas cowboy who loved cable TV but couldn't run a company.

When Malone reported to TCI in 1973, the place was a shambles. The Colorado cable TV company booked $13 million in yearly revenue, but it owed $130 million. Growth was nil, the physical plant decrepit. And TCI's bankers were just about ready to call their loans.

Malone, an engineer-turned-rookie CEO, got down to cases, spending the next six years of what he calls "nuclear winter": squeezing nickels in a bad economy. He could build infrastructure only by the inch, had nothing to spend on marketing and devoted a good deal of time stiff-arming lenders.

By 1979, though, the tide began to turn. Malone refinanced TCI with some progressive insurance companies that gave him carte blanche. Then the feds approved small dishes to download satellite signals, which nurtured cheap distribution of TV programming.

Flush with a few bucks, Malone began to acquire cable systems, invest in programmers like CNN and USA and expand subscribers' TV-channel lineups whether they liked it or not so that TCI could raise monthly rates and strengthen its cash flows.

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In time Malone leveraged TCI into the nation's largest cable TV concern, a $3 billion juggernaut that he ended up selling to AT&T for $48 billion in 1999. By then he'd pretty much written his Bible on deal-making, which the conservative Connecticut Yankee has oft consulted.

"That's where my financial engineering skills developed," Malone said, reflecting on those bootstrapping TCI days in an articulate, measured cadence. "I had to understand tax law, put money down on our acquisitions, understand scale economics and synergies, invest in new programming and reestablish credibility with the banking community."

Worshipping at the altar of scale dynamics and pooled resources, ferreting out partners and lenders to help shoulder heavy financial loads, leveraging assets no matter how scant and taking off the gloves when needed all mark a career in deal-making that has vaulted Malone from cable's narrow hallways to the broad corridors of global finance. All that—and what he calls his "very mathematical modeling mentality": "I'm always trying to find the best structure to ensure the best outcome and diminish any downside risk," Malone explained.

Two current forays carry the classic Malone hallmarks of partnering up, borrowing scads of money to fund the tasks at hand, displaying patience, cocking an eye toward economies of scale and wringing value from assets at hand.

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First is his pursuit of Time Warner Cable, which is still a work in progress as the federal government looks into Comcast's offer. Malone's not talking publicly about Time Warner, but observers agree that he's pacing the sidelines with a hawk's eye. One scenario that appears to be playing at this point: Charter's pick up of nearly 4 million new subscribers. Another long-shot scenario making the Wall Street rounds: If its stock price continues to drop, Comcast's takeover bid may not be the slam-dunk it looked like a month ago. That, in turn, could conceivably open the door to more Time Warner suitors, including Charter.

Then there's Malone's proposal to cleave Liberty Media's common stock along the lines of its cable TV technology assets and media holdings to create two sets of tracking stock that fall in line with his in-it-for-the-long-haul view of business.

Malone's also sketching some pre-retirement plans, appointing successors and parceling out his voting shares at Liberty and other holdings. But he's not going anywhere next week or even next year at this point, especially when he ponders some key counsel he picked up decades ago at General Instrument.

"It came from Moses Shapiro, and it was the old question that came out of Talmudic wisdom: 'If not?' It's all tied to what might happen if your assumptions are wrong," Malone explained. "You always want to live to fight another day, isolate your risk, plan for the downside. You'll never be 100 percent right, so it makes sense to always ask the 'If not' question."

Makes sense at Liberty. If not John Malone, then who?

Lessons learned

—Always understand what the other side is trying to achieve. Have empathy for them and understand what you must do to achieve a satisfactory, eventual outcome.
—Structure your situation so you can afford to be patient. That way, you can say "no" between up and down cycles. Make sure that your board and your shareholders can afford to take the long view.
—Always take a portfolio point of view. Always look at the structure of any deal, keep your powder dry, and keep an open relationship with whomever you're dealing with.
—Never lose a sense of curiosity or learning. Never miss an opportunity to talk to someone about their business.

"The cheapest R&D investment can be a phone call or a plane ticket," Malone said.