I think that John Malone is one of the best CEOs and capital allocators out there. Here’s what he does and why he’s good.
Why Malone is smart:
- He takes advantage of Mr. Market. Malone has constantly bought undervalued assets and used overvalued stock as currency for acquisitions. He also tries to get other companies to overpay for his companies.
- Circle of competence. Malone really understands the cable industry as he used to run TCI.
- He understands the importance of good management. He learned this the hard way when he watched his net worth in AT&T stock evaporate before his eyes. What happened was that AT&T bought Liberty Media/TCI at a premium. However, one of the takeover conditions was that Malone wasn’t allowed to sell his stock. AT&T’s CEO promptly destroyed a lot of value at AT&T while Malone was powerless to stop him.
- He is pretty good at finding quality businesses with good CEOs. Sometimes he will try to take control of a good business and install his own CEO.
- Tax efficiency. Malone is always looking for ways to reduce his companies’ expenses, one of which is taxes.
How Malone achieves all these things is often very complicated. Here are some pages from his playbook:
- Operating synergies. He looks for mergers where there are beneficial synergies. He is one of the few CEOs that actually create value in mergers. At TCI, he would often “roll up” nearby cable companies so that the combined company would enjoy economies of scale. In particular, larger cable companies had a huge cost advantage when negotiating rates for content.
- Wheeling and dealing. Malone (and his lieutenants) are often trying to trade bad businesses for good businesses and otherwise trying to do advantageous deals. They want to buy low and sell high.
- Complicated rights offerings. When Liberty and TCI Ventures split from TCI through a rights offering, Malone created a situation where institutional investors were “dissuaded” from participating in the rights offering. Those who participated in the rights offerings ended up receiving a disproportionate amount of value.
- Spinoffs. Malone will sometimes split off a “bad” business so that it can be sold off (hopefully in a tax efficient manner). In other situations, a spinoff might receive a much higher valuation because it is now a “pure play” company. Companies that are in only one business are easier to analyze, are easier to sell through sexy stories, and more mutual funds are allowed to own them. These spinoffs can use their overvalued stock as currency for acquisitions.
- Tracking stocks. Tracking stocks allow a company to split up with tax advantages over a spinoff. Tax losses in one tracker can be used to offset taxes in another tracker. The disadvantage of tracking stocks is that the trackers have conflicts of interest with one another. AT&T and Liberty were involved in a tax-related lawsuit after they split.
- Taxes. Malone is always taking advantage of esoteric tax law.
- Installing good CEOs.
- Gaming the banks and bondholders. See my writeup on bondholder games.
- Debt. I’m not a fan of high leverage myself. It seems to deliver extraordinary investment returns… until leverage cuts the other way and you lose a lot of money. However, leverage does have some tax advantages. And Malone keeps separating his companies so that one business failing won’t completely destroy his entire net worth.
A brief history of John Malone
Malone is always splitting up his companies, merging them back together (!), and merging his companies with others. Here’s a diagram illustrating the insanity:
*There may be some errors in the diagram.
Malone started at TCI before it split into TCI/Liberty. The rights offerings around that time were very good special situations investments and covered in Joel Greenblatt’s book You Too Can Be A Stock Market Genius (a good book with a bad title).
Subsequently Malone’s Liberty flagship merged with AT&T and he lost a lot of money in AT&T stock. Fast forward several years and his net worth is spread out among several different companies. During 08/09, Malone actually became a forced seller of his own stock when it was an amazing time to buy. I unfortunately didn’t buy any Liberty Capital/Interactive during 2009 and missed out on making several times my money. So it doesn’t always make sense to sell when Malone is selling.
Shortcut #1: Buy whatever he’s buying. If he is buying stock, it’s not to promote the company. It’s because he is greedy, sees that his stock is undervalued, and wants to make money.
Shortcut #2: Figure out which company he owns the most of. His best ideas will probably go there. Recently, LMCA announced that it would be buying a stake in Charter (a cable company). LBTYA (Malone’s cable company) likely would have been a better fit due to synergies from the cable companies negotiating for content. LVNTA would also have been a better fit because LVNTA is sitting on too much uninvested cash. The other thing to watch out for is the conflicts of interests between his various companies. These conflicts could end up favoring the company he owns a bigger percentage of.
Shortcut #3: If one of his companies is buying back its shares, it is probably undervalued.
Shortcut #4: You usually want to buy the really difficult to understand and complicated tracker. If it’s difficult to comprehend then the stock is more likely to be undervalued. As pure play companies tend to receive higher prices in the stock market, the opposite is true for complicated companies. If Malone splits up a company into a simple part and a complicated part, it is possible that he is looking to get rid of the simple part (e.g. because it may be a bad business in the long run).
Shortcut #5: Does Malone sit on the board? If he really cares about his money, he will try to sit on the board of directors to make sure that the company doesn’t do anything stupid. He wants to watch his money carefully. One of the issues with sitting on a board is that he would be subject to insider trading rules and must report his trades. So if he is thinking about selling something, he may decide to leave the board to give himself more flexibility in selling.
Malone’s current empire
Many of Malone’s companies have an A and B share structure. (Discovery has 3 shares of classes.) Malone typically owns mostly the shares with more voting rights. He learned the importance of control from losing money in AT&T. Historically, the shares with more voting power end up being valued several percent more than the normal shares. Whenever the share structure collapses, owners of the B shares are given a premium. Arguably this is unfair since Malone typically owned most of the B shares. (One can make the argument that A/B share structures are usually unfair.) However, Liberty has continually done deals where the B shares were collapsed at a premium.
I will pretend that all share classes are equivalent for the sake of simplicity.
Malone owns stock in the following companies:
- LMCA/B. Liberty Media. ~9.24% of shares outstanding. Chairman.
- STRZA/B. Starz. ~9.23% of shares outstanding. Not on the board of directors.
- LBTYA/B. Liberty Global. ~6.41% of shares outstanding. Chairman.
- ASCMA/B. Ascent Capital. ~6.27% of shares outstanding. Resigned from board Sept 2012.
- LINTA/B. Liberty Interactive. ~5.83% of shares outstanding. Chairman.
- LVNTA/B. Liberty Ventures. ~5.58% of shares outstanding. Chairman.
- DISCA/B/K. Discovery. ~4.3% of shares outstanding. Director.
*He may or may not still own stock in DTV. Malone also privately owns land and cattle operations. I do not believe that his private assets generate unusually high returns or cause conflicts of interest with his publicly-traded companies.
I believe that the stock to watch right now is LMCA. It seems that Malone has been putting all his best ideas into it. It is also his largest holding (percentage-wise) and he sits on the board of directors as chairman.