In 1995, the Walt Disney Company announced its acquisition of broadcasting powerhouse Capital Cities/ABC Inc. for $19 billion. This deal changed the American media industry forever. It also made history for being the second-largest corporate takeover at the time.
Warren Buffett, who played a key role in the transaction, offered Berkshire Hathaway shareholders an interesting tidbit in his annual address that year:
“If Murph should elect to run another business, don't bother to study its value — just buy the stock. And don't later be as dumb as I was two years ago when I sold one-third of our holdings in Cap Cities for $635 million (versus the $1.27 billion those shares would bring in the Disney merger).” (emphasis added)
“Murph,” who Buffett so casually alludes to, was a man named Thomas Sawyer Murphy, the long-standing CEO of Capital Cities/ABC Inc. Buffett had solid reasons to place his faith (and dollars!) in Murphy. Shareholders who invested in Capital Cities when Murphy took it public in 1957 saw a 2,000x return when Disney acquired the company less than three decades later. At the time of the sale, Capital Cities was thrice as valuable as CBS, one of its biggest competitors.
So how did Murphy pull it off? How did he beat the market and his competitors by such a significant margin?
When Murphy joined Capital Cities as its first hire in 1954, the company was little more than a struggling TV station in Albany. It posed no threat whatsoever to the legacy networks, like CBS, NBC, and ABC, who dominated the broadcasting sector. The growing industry, however, was on the cusp of tremendous growth. Murphy had stumbled into what he would later call a “great business”:
“There are not many great businesses that come along in a lifetime. In 1954, television was just starting. People were losing a lot of money in the business, but it was about to explode. Because of the limited availability of licenses, there was limited competition, and so it exploded over the next thirty or forty years. I was very fortunate to be in broadcasting. The business is not capital intensive, nor is it labor intensive. There was a little government involvement but never any price controls. In the last forty or fifty years, broadcasting has been one of the great businesses of this nation.”
29-year-old Murphy had little to no experience in the broadcasting sector. He got the job after a chance encounter with his father’s friend, Frank Smith. Smith, who had just bought Capital Cities out of bankruptcy, was on the hunt for someone to manage the business. At the time, Murphy, fresh out of HBS (he graduated from the legendary class of 1949 — at a time when there was only 50,000 MBAs in the entire country!), was working as a product manager for consumer goods giant Lever Brothers. He jumped at the opportunity to run something for himself.
Murphy packed his bags and relocated to Albany to manage the company’s lone TV station. Right from the start, Smith allowed Murphy free rein in running the business’ day-to-day operations. Murphy’s first three years on the job were tough. Capital Cities made consistent losses, almost went bankrupt, and had to return to its original stakeholders for money twice. Then, in 1957, the company finally broke even. In The Outsiders, author Willian Thorndike describes the change:
“After a couple of years of operating losses, Mur ...
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