Malone's Quest Tops Big Merger Week

Over the last week, the dominant story in the financial world has been the announcent of large merger and acquisition transactions, along with rumors of others. Semiconductor provider Broadcom (NASDAQ:BRCM) accepted a $37 billion offer by Avago (NASDAQ:AVGO). Health care provider Humana (NYSE:HUM) announced it was looking to be acquired, and the persistent drumbeat that Altera (NASDAQ:ALTR) is going to be purchased by Intel (NASDAQ:INTC) for $15 billion also made news. Still, the eight hundred pound gorilla in the room was the completion of Time Warner Cable (NYSE:TWC) being bought by Charter Communications (NASDAQ:CHTR), which is one third the size of it's target. Charter also is buying Brighthouse to combine all three entities. If the various regulatory agencies sign off on the agreement, Charter will rival Comcast (NASDAQ:CMCSA) as the largest provider of cable and broadband services in North America. Of course, that is always the fly in the ointment, especially when the largest shareholder is a familiar favorite, one who I am sure you are sick of hearing about, and that would be none other than John Malone.

Having been a shareholder of Mr. Malone's various companies for nearly 20 years, along with many of my clients, it gives me a tremendous source of satisfaction to see Charter potentially be the ultimate acquirer of Time Warner Cable. When you are a passive owner of equities, I think it is important to trust the individuals who are making the strategic and operating decisions of your companies. You should like their backgrounds, history, and achievements, as well as buying into the vision and direction of the entity they are leading. Fortunately, many of the enterprises we own are led by exceptional people, like Howard Schultz of Starbucks (NASDAQ:SBUX), Bob Dudley of BP (LONDON:BP), and Barry Diller of IAC/InterActiveCorp (NASDAQ:IACI). Still, Malone is the one business leader who could legitimately draw comparisons with Warren Buffett for the incredible creation of value for his shareholders. In this light, it is instructive to look at how he handled the entire Charter situation to see what can be learned.

First, a little history is in order. In 1994, when Malone led TCI Cable, it was the largest provider of cable in the US. TCI announced a merger with Bell Atlantic, led by Ray Smith. Bell Atlantic was the largest telecom company in the country. Other large media moguls like Sumner Redstone of Viacom vehemently lobbied regulators against the transaction, and ultimately, the outcry was large enough to cause Malone and Smith to void the potential merger. In 1998, Malone sold TCI to AT&T (NYSE:T) for $48 billion. The sale of TCI remains, even to this day, what Malone still regards as the biggest mistake of his career. He has spent nearly twenty years trying to figure out how to erase the error. On any number of fronts, you could say he was successful. He wound up being the largest shareholder of Direct TV, until the government made him divest the stake. He created what is now the largest cable company in the world with Liberty Global (NASDAQ:LBTYA), an entity with nearly 30 million subscribers. It, however, is dominant outside North America, mainly in Europe. All of this brings us to Charter, which Malone bought a nearly 25 percent stake of in 2013. At that point, it did not take a rocket scientist to know what he was interested in doing. He spent the next year trying to convince the leaders at Time Warner Cable to merge or be acquired. They resisted for a long time, but ultimately, Malone forced their hand, and in January of 2014, Time Warner Cable accepted a $160 offer from Comcast.

You also have to know the history of Malone and the CEO of Comcast (NASDAQ:CMCSA), Brian Roberts, as well. They have been partners for many years on many large transactions which have shaped the cable industry. On a few occasions, however, one could say Roberts certainly did Mr. Malone no favors. When Comcast decided to ultimately buy Time Warner, it was one of those times. During the few weeks leading up to Comcast's announcement in 2014, it was widely thought Charter would participate in the transaction in some way, but that proved incorrect. What makes Malone great however, is his flexibility. He cobbles together the scrap of the Comcast deal by agreeing to buy whatever Comcast is forced to divest, along with swapping systems which are more logistically attractive to both Charter and Comcast. So, if the Comcast deal would have went through, Charter would have wound up the second largest cable company. All throughout 2014, Charter and Malone believe Comcast has prevailed, but one never knows how things play out. At one point during an investor conference, the key question was asked to senor Malone, 'Will Charter resume it's pursuit of Time Warner Cable if the deal does not pass the regulators?' His now famous answer, which in time,may go down in the lores of business history, 'Hell yes.' Indeed.

Malone certainly knew from his Bell Atlantic experience there was a good chance the Comcast purchase of Time Warner would not pass regulatory concerns. Their combined market share of 57% of all high speed broadband connections in the United States was especially problematic. Comcast's track record of poor customer certainly did not help their cause either. Ultimately, it went down hard, which opened the door for the ever diligent Mr. Malone.

It certainly did not take long to continue the quest of landing Time Warner (NYSE:TWX). He changed tactics, though. Instead, he called the CEO of Time Warner Cable, Rob Marcus, and said a friendly deal was his objective. They also set up the financing to pay a large component in cash. Ultimately, the prize was affirmed last week at $195 a share. There are plenty of skeptics, however, about the price paid. Others believe cable is a dying industry, especially with over the top viewing on Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) prime, and maybe Apple (NASDAQ:AAPL) TV. Wall Street critics also think there is a good chance the government will deny the transaction on the grounds it will merely just create another Comcast, which currently has 30% of the broadband high speed connections. The Charter deal would put it slightly below the Comcast figure. Charter will sell the fact they believe the deal will help customer service improve, and it will create jobs in the United States. As a Liberty shareholder, we will have to wait a while to see what happens with the regulatory approvals. I suspect the government will do Charter no favors, not with all the water under the bridge. Still, you have to admire a guy who waits nearly twenty years to rebuild what was lost. Hell, yes.

The rest of the news was relatively sparse as both Tiffany & Co (NYSE:TIF) and Michael Kors (NYSE:KORS) reported financial results. The famous blue box raised the dividend and investors cheered the results, while Kors was seen as, ahem, out of style. The stock got pummeled, losing over 10% in a day. Fashion is notoriously fickle, but if you can find the right concepts, oh, what margins.

Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.