The Malone Factor
Monday, January 08, 2018
In November, we flew to New York to attend Liberty Media’s Investor Day. Over the past 20 years, Liberty has transformed itself several times over by acquiring and spinning off various companies, all the while retaining “Liberty” in its name. Today, the web of cable and media entities is known in the analyst community as the “Liberty Complex,” and is the brainchild of cable baron, John Malone. While we don’t officially recommend any company in the Liberty Complex, we do cover Charter Communications, where Malone has a significant influence.
In our pursuit of investing in great companies run by excellent managers, we are constantly studying the track records of superior capital allocators and trying to understand how they’ve guided their companies through the times. Malone’s track record, in this regard, is among the very best – rivalling the likes of Warren Buffett.
Malone’s track record stems mostly from his time at Tele-Communications Inc. (TCI), which was eventually sold to AT&T at a large premium. A dollar invested alongside Malone would’ve grown to over $900 in 26 years, while the same dollar would have grown to approximately $30 if invested in the S&P 500 Index.
When Malone began at TCI, the company was overleveraged and at the mercy of many banks. Early on, Malone’s job consisted mainly of managing costs and keeping TCI solvent. Under such constraints, he managed to transform TCI into one of the most successful companies of all time. How did he do it? We believe a combination of the following elements helped Malone propel TCI to its eventual success.
Industry Specialist and Disciplined Capital Allocation
The ability to make good acquisition decisions is an essential part of any great executive’s toolkit. Unfortunately, most executives make poor capital allocation decisions. Many acquisitions fail because the price, timing, fit or some other factor went awry.
At TCI, Malone saw value where others weren’t looking. Back in the early 1980s, well-known companies like General Electric (GE) and American Express were scouring the acquisition landscape, buying up cable businesses in urban markets. Meanwhile, during this frenzied environment, Malone and TCI focused on acquiring assets in suburban and rural markets at more reasonable prices. While GE and American Express are huge conglomerates, they lacked critical experience running cable operations. Ultimately they made unrealistic promises, which resulted in huge cost overruns. When the furor came to a halt and their urban cable acquisitions failed to fulfill the promises that they had made to the regulators, Malone stepped in and acquired the businesses for pennies on the dollar. Due to Malone’s experience in the industry and TCI’s scale, they were able to cut costs, renegotiate contracts, and deploy cash flows from the newly acquired operations to fund additional acquisitions.
Growth for growth’s sake often leads to bad outcomes. The best type of growth results in value creation. Some companies show growth simply to meet analyst expectations and others grow to fulfill management’s hidden agendas. TCI’s growth on the other hand was strategic, driven by Malone’s desire to enhance the company’s economies of scale. Economies of scale are incredibly valuable in the cable business. Larger companies can centralize administrative functions, negotiate better terms from suppliers and lenders, and spread capital investments over a larger customer base. These elements combined accelerated TCI’s value-creating growth for shareholders.
Malone is also not averse to shrinking the company if it benefits shareholders. In its quest to maximize shareholder value, Liberty Media “grew” shareholder value by actually spinning off various entities and buying back shares.
At TCI, Malone correctly identified and embraced digital compression technology as a means to improve the company’s ability to offer more channels and provide a telephone service through the same coaxial pipes. Decades later, compression technology continues to benefit the company – this time through improved internet services. Cable companies can now offer faster broadband speeds than ever before using those same coaxial pipes. This segment is evolving into a growth driver, which is offsetting declines now experienced in cable television subscriptions.
Today, Malone is looking forward yet again. Content creators are struggling due to a confluence of factors such as: increased competition; stronger negotiating power of buyers; and cord cutting (the transition audiences are making from traditional television to online platforms like Netflix and other streaming services). While these are all important shifts in the marketplace, Malone knows that the crown jewel is live content. Liberty Media is well positioned in this regard because of Malone and his team’s ability to transition with the changing times. Liberty Media has investments in the Formula One racing league, LiveNation, Sirius XM, and the Atlanta Braves baseball team – all champions of live entertainment.
Malone’s success has elicited various nicknames from regulators and peers. Al Gore once called him “Darth Vader,” while peers and analysts coined him the “Cable Cowboy” and “The Godfather” of cable television. Irrespective of his nicknames, his exceptional track record speaks for itself.