Chapter 146 - Born to Be Wired: Lessons from a Lifetime Transforming Television, Wiring America for the Internet, and Growing Formula One, Discovery, Sirius XM, and the Atlanta Braves
What I learned from John Malone
Today’s Chapter is based on the book “Born to Be Wired: Lessons from a Lifetime Transforming Television, Wiring America for the Internet, and Growing Formula One, Discovery, Sirius XM, and the Atlanta Braves” by John Malone.
John C. Malone is an American billionaire businessman, philanthropist, and media mogul known primarily for his influential role in the cable television and media industries. He served as CEO of Tele-Communications Inc. (TCI) for over two decades, growing it into the second-largest cable company in the U.S., and later became chairman of Liberty Media, Liberty Broadband, and Liberty Global. He is often nicknamed the “Cable Cowboy”.
Here’s What I Learned:
People Matters
“The reason for our success is no secret. It comes down to one single principle that transcends time and geography, religion and culture. It’s the Golden Rule – the simple idea that if you treat people well, the way you would like to be treated, they will do the same.”
— Isadore Sharp
One of the most profound takeaways from John Malone’s reflections as a CEO of TCI is the irreplaceable value of people and relationships in business. Despite his reputations as a numbers-driven dealmaker, Malone repeatedly emphasizes that the most important assets are human elements. He credits his success not to financial wizardry alone but to the bonds he formed with people, from mentors to team members.
Malone explains, “I have spent my career negotiating deals in telecommunications, music, sports, horses, land, media, and more. I have been a buyer and a seller, depending on the deal and the moment. Altogether, over a lifetime, I figure I have had a hand in hundreds of transactions, maybe thousands. Now, in a lot of those deals, we focused hard on one measure: cash flow, or specifically, EBITDA (earnings before interest, taxes, depreciation, and amortization). It gives a clearer picture of operating performance and a firm’s ability to borrow or invest. Some people say I all but invented the term. I can’t swear to it, though it is true that I helped make it a whole new form of currency on Wall Street. But it turns out that cash flow is the wrong answer, too, in placing a value on a company, or any deal for that matter. The most valuable assets in any business are people and relationships.“
As such, Malone always made sure to focus on evaluating the people in place when acquiring a new company. In fact, this revelation came to him even before he was operating his own business. When he was working as a consultant at McKinsey, he worked on the reogarnization of General Electric. He mentions that “We looked at all sorts of corporate problems, but the thorniest case I worked on was a reorganization of General Electric. One of the biggest companies in America, it was also the same company that had employed my father for most of his career. Connecting with people, understanding their biggest concerns, and mapping their universe proved far more valuable than reading GE annual reports. You have to go in and talk to people to understand why something’s not working. And again, you listen.“
“What I learned, though, as we did more deals, was that an equally important factor was people. The people who had built the business we were buying. And the people who would be working with us after we made them part owners.”
— John Malone
By consequence, Malone understood that he had to surround himself with great people to help him run TCI. And, it is clear that Malone had a preference for “cowboys” which weren’t your typical employees working at big corporations. He explains, “And I liked the team of Western cowboys Bob had assembled. Straight shooters and plain talkers. No fancy suits, no MBAs, and no elaborate business jargon. And no New Yorkers. There is such a thing as a Cowboy Code, and they had it: you finish what you start, stand up for what’s right, and take pride in your work. It appealed to me.“
Similarly, Malone understood his own limitation and was not afraid to delegate responsibilities. He writes, “I have learned that no matter how brilliant you are, there will be other people who are better than you are at executing your ideas. And if you are smart, you will politely step out of the way and leave them to it.”
“For me, winning is the gratification of creating a successful system of long-term involvement that yields cascading benefits as we move forward. If you have created good job opportunities for people and watched them prosper or forged business deals that helped your partners retire comfortably, that is winning.”
— John Malone
This reminds me of what we have learned from Steve Jobs and on the importance of hiring A-players. As a matter of fact, Jobs was also a master at recognizing talent and surrounding himself with exceptional people. He had an almost uncanny ability to locate and convince talented individuals into joining his team, often convincing them to take on roles they might otherwise have avoided. Steve Jobs was well known for working with only A-Players.
“So I’ve built a lot of my success on finding these truly gifted people, and not settling for “B” and “C” players, but really going for the “A” players. And I found something… I found that when you get enough “A” players together, when you go through the incredible work to find these “A” players, they really like working with each other. Because most have never had the chance to do that before. And they don’t work with “B” and “C” players, so it’s self-policing. They only want to hire “A” players. So you build these pockets of “A” players and it just propagates.”
— Steve Jobs
Furthermore, one of Steve Jobs’ biggest quality as a leader is his ability to connect with people who had the skills he lacked. As a matter of fact, when Jobs first started Apple, it was his partner Steve Wozniak, often referred to as the technical genius behind Apple, who was responsible for designing the hardware that made the company famous. Jobs, on the other hand, took care of the business aspects, from securing funding to negotiating deals. Together, they formed a partnership that would change the world.
Jobs’ ability to recognize Wozniak’s genius and harness it for the company’s benefit was one of his greatest strengths. He understood that Wozniak’s designs were not just technically impressive—they were revolutionary. This realization helped Jobs see the potential for turning Wozniak’s creations into profitable products.
Shareholder Value
“Shareholder value is the result of you doing a great job.”
— Jack Welch
John Malone’s career is a masterclass in prioritizing shareholder returns above all else. Every decision he’s done as the CEO of TCI was made with the main core value of maximizing shareholders’ value. As a matter of fact, his tenure at TCI is “Contrary to the clichéd image of a rapacious business titan, I never sought to build a conglomerate, or family empire, and I can just as easily be a seller or a buyer. I believe in creating value while you own the assets you build or buy, and doing it in the most efficient way. All the stakes that I have owned in a wide array of cable channels, overseas cable systems, and other assets are less an empire than a mutual fund with a desirable portfolio of properties. I built this portfolio with one clear goal—the same one that I believe anyone who is an active member of the management of a public company should share: to maximize the value of the shares of the company over a medium term. Because that is why you were hired—to maximize shareholder returns.”
In order to increase shareholder value, Malone believed in focusing on one very important metric: cash flow. He understood earlier than most that measures such as net income could be misleading, especially for capital-intensive industries like cable television, where massive upfront investments were depreciated over the years.
“I started to rely on a single powerful metric, almost like blood pressure in a human, that I thought could instantly, accurately reflect the health of a cable operator: cash flow.”
— John Malone
But more importantly, what separates Malone’s success at TCI from other CEOs was his exceptional capital allocation skills with the cash flow generated from his company. As a matter of fact, he got early lessons on capital allocation through his experience at AT&T. There, he was able to work on projects that allowed him to make significant improvements not just in operations but also in terms of finance. Notably, he presented a mathematical model to the entire AT&T board of directors to justify loaning money in order to buy back its own shares.
Malone reiterates that “This buyback program proposed to reduce the total number of shares of AT& T stock on the market and available to the public since more shares would be owned by the company. That, in turn, would increase the company’s earnings per share, a key metric on Wall Street. The downside was that a higher debt load might result in a modestly lower credit rating for AT& T and increase its interest costs. We dismissed that worry, arguing any impact would be minimal because interest payments are tax-deductible. So AT&T essentially would boost earnings and fund the carrying costs of its stock buybacks with money that it otherwise would pay to the tax collector. This was a more efficient use of AT&T’s cash.”
“ AT&T was underleveraged, and undervalued, so I urged the board to shift its debt-equity ratio, borrowing billions of dollars to invest in buying back its own stock on the open market.”
— John Malone
Similarly, Malone often used tracking stocks and spin-offs in order to increase value of his companies. Here’s how Malone explains the utility of tracking stocks and spin-offs:
“I am often asked why we use tracking stocks and spin-offs, which, to the casual observer, might seem to complicate our value and create a shadow stock that trades below the price of the stock that inspired it. But we believe the tracking stocks actually provide more transparency and diversity for the investor, while giving Liberty enormous flexibility, tax advantages, and greater access to capital. A tracking stock tracks the performance of a specific business inside a company, as a way to highlight how that business is faring and trade up or down accordingly. Yet the specific assets of a business remain on the balance sheet of the parent company. Shareholders can choose which part of the company to invest in. It is typically a transitional structure while you are trying to grow an asset to a point where it can be spun out and stand on its own.”
— John Malone
This reminds me of the story of Henry Singleton at Teledyne who was considered as one of the greatest CEO ever due to his capital allocation skills. As a matter of fact, Buffett once said that “Henry Singleton has the best operating and capital deployment record in American business . . . if one took the 100 top business school graduates and made a composite of their triumphs, their record would not be as good as Singleton’s.”
Singleton’s capital allocation skills truly shined when by 1970, Singleton realised that direct acquisitions of private companies were no longer attractive in terms of return due to the inflated prices, the size of Teledyne and competitions. By consequence, he realised it would be much better to use Teledyne’s cash flow into purchasing public companies via the organisation of financial companies, by buying back Teledyne’s shares and by spinning offs subsidiaries.
Firstly, Singleton decided to purchase insurance companies into his Teledyne empire, yet, the main purpose of this was to use the “float” in order to purchase public companies. Because of the nature of the public market, Singleton was able to purchase profitable companies that were well-managed at valuation that was much more reasonable compared to the private market.
Singleton, in an interview with Forbes magazine in 1978, explains why he preferred purchasing part of companies’ stocks in the public market instead of an entire company on the private market:
“There are tremendous values in the stock market, but in buying stocks, not entire companies. Buying companies tends to raise the purchase price too high. Don’t be misled by the few shares trading at a low multiple of 6 or 7. If you try to acquire those companies the multiple is more like 12 or 14. And their management will say, ‘If you don’t pay it, someone else will.’ And they are right. Someone else does. So it’s no acquisitions for us while they are overpriced. I won’t pay 15 times earnings. That would mean I’d only be making a return of 6 or 7 percent. I can do that in T-bills. We don’t have to make any major acquisitions. We have other things we are busy doing.”
— Henry Singleton
Secondly, Henry Singleton was an early pioneer in repurchasing stocks in his own company in order to improve shareholder value. As a matter of fact, during the bear market of the early 1970s, Teledyne was suddenly trading at a P/E ratio if around 9 or 10 compared to the highs of P/E 30 to 70 in the 1960s. Knowing that his own company was trading at a bargain, Singleton went on to use Teledyne’s cash reserve to repurchase its own shares.
Stock buybacks is a great way to increase shareholder value as it reduces the number of shares and by consequence, increases the company’s earnings per share (”EPS”):
Unlike other large corporations who were paying cash dividends to their shareholders, Teledyne never paid any dividends for a large portion of its existence. The reason being that Singleton had a strong conviction that the cash was better employed in growing Teledyne’s business through acquisitions or through stock buybacks rather than returning the cash to shareholders.
It is fair to say that Singleton’s results are unmatched in terms of value creation to his shareholders; “An investor who invested in Teledyne stock in 1966 was rewarded with an annual return of 17.9 percent over 25 years, or a return of 53 times his invested capital. That compares to 6.7 times for the S&P 500, 9.0 times for General Electric, and 7.1 times for other comparable conglomerates.”
Understanding Risk
“Risk comes from not knowing what you’re doing.”
— Warren Buffett
Throughout his career, John Malone shined in terms of risk assessment. As a matter of fact, he learned a great lesson early on from his mentor, Monty Shapiro on how to evaluate risk while pursuing opportunities.
The key to this was to ask a simple question: What if not? He mentions that “One lesson I learned from Monty that would save me time and again in the future, even to this day, was to ask on every big deal, a simple three-word question: What if not? What if this doesn’t work? What if this venture or idea falls apart completely? I started seeing risk through a different lens: When you focus on the opportunity and genuinely deconstruct the hazards ahead, the fear of taking a leap begins to fade. Knowing with certainty that the risk won’t kill you is what liberates you to take it.“ As such, Malone understood that it is okay to take risk when the downside is limited.
“But in my constitution, if the financial numbers fail to support the big bet, it is time to make a smaller one instead. This cautious, but calculated mindset would define my dealmaking for the next thirty years or more.”
— John Malone
This reminds me of the concept of Dhandho Investing we have previously learned from Mohnish Pabrai, who believed in the concept that high returns do not necessitate high risks. Instead, he advocates for a mindset that seeks asymmetric bets, those with significant upside potential but minimal downside risk. This principle, encapsulated in the phrase “Heads, I win; tails, I don’t lose much”, is a cornerstone of the Dhandho framework and reflects his belief that disciplined investors can achieve extraordinary results by carefully selecting opportunities with favorable odds.
As a matter of fact, Pabrai explains that “We have all been taught that earning high rates of return requires taking on greater risks. Dhandho flips this concept around. Dhandho is all about the minimization of risk while maximizing the reward. The stereotypical Patel naturally approaches all business endeavors with this deeply ingrained riskless Dhandho framework—for him it’s like breathing. Dhandho is thus best described as endeavors that create wealth while taking virtually no risk.”
To demonstrate the power of Dhandho, he mentions the story of how Richard Branson built Virgin Atlantic with zero capital. In fact, although the airlines businesses is known to be capital-intensive and highly regulated, Branson was able to identify a service gap and exploited it with minimal initial capital outlay, leveraging creativity over cash. The potential upside was building a global brand; the downside was limited because so little equity was risked upfront.
“My take on Virgin Atlantic is simply this: if you can start a business that requires a $200 million 747 jumbo jet and a boatload of employees in a tightly regulated industry for virtually no capital, then virtually any business that you want to start can be gotten off the ground with minimal capital. All you need to do is replace capital with creative thinking and solutions. Branson found a service gap and went after it. By the time that gap narrowed and British Airways and his other competitors woke up, he had already built a strong brand. Even today, Virgin Atlantic offers a very unique product in a very tough industry. The Virgin Atlantic business model is pure Dhandho. Heads, I win; tails, I don’t lose much!”
— Mohnish Pabrai
Pabrai explains that the reason why the Dhandho approach works is due to the fact that investors often confuse risk with uncertainty. He mentions that “Low risk and high uncertainty is a wonderful combination. It leads to severely depressed prices for businesses—especially in the pari-mutuel system-based stock market. Dhandho entrepreneurs first focus on minimizing downside risk. Low-risk situations, by definition, have low downsides. The high uncertainty can be dealt with by conservatively handicapping the range of possible outcomes. You end with the classic Dhandho tagline: Heads, I win; tails, I don’t lose much!”
As a matter of fact, Pabrai loves comparing investing in the stock market to the pari-mutuel system. As such, he encourages investors to adopt a probabilistic mindset, akin to Charlie Munger’s approach to betting at the race track. Pabrai mentions that “If you went to a horse race track and you were offered 90 percent odds of a 20 times return and a 10 percent chance of losing your money, would you take that bet? Heck Yes! You’d make that bet all day long, and it would make sense to bet a very large portion of your net worth with those spectacular odds. This is not a risk-free bet, but it is a very low-risk, high-return bet. Heads, I win, tails, I don’t lose much!”
The lesson here is clear: investors should seek opportunities where the downside is limited, and the upside is substantial, and be willing to act decisively when such opportunities arise. This approach requires a deep understanding of probabilities and a willingness to wait for the right moment, much like a seasoned gambler at the pari-mutuel betting system.
Beyond the Book
Read "The Importance of Working With “A” Players" by Farnam Street
Read "Henry Singleton on Strategic Planning — Stay Flexible" by Farnam Street
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