John Malone is one of the best-performing CEOs of all time.
At his peak, he was buying one company a day.
Today he is the largest private landowner in the US with 2.2 million acres.
Most of this comes from:
- “Cable Cowboy: John Malone and the Rise of the Modern Cable Business” by Mark Robichaux
- “The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success” by William Thorndike
11 unconventional lessons from the master of empire-building:
Identify an Opportunity
- Cable was software before software.
- - Recurring revenue
- - Fast-growing
- - High margins
- He saw the opportunity and left a cushy job at McKinsey to pursue it.
- Then hammered the opportunity for years.
Simple Math Deals
- Malone looked for obvious deals.
- He bought when the purchase price was below five times cash flow after benefits from their usual playbook & synergies were considered.
- Malone could do this math on a napkin.
- No fancy modeling necessary.
- TCI focused on rural areas and smaller cities where there was less competition and city officials had lower expectations for their licenses.
- Many competitors were overbidding for cable licenses in large cities.
- TCI grew in the shadows.
Lever to the Teeth
- Debt magnified financial returns & interest payments could be written off for taxes.
- Malone focused on cash flows and was in a regulated industry so he knew exactly what he could afford.
- Little upfront equity was required to purchase new systems.
Bet on Up-And-Comers
- Malone realized early on the value of betting on young & talented entrepreneurs.
- He wrote Bob Johnson, the founder of BET, a $500,000 check during their first meeting.
- TCI owned a piece of BET, Turner Broadcasting, Discovery, Encore, QVC, and many others.
Find an Operating Partner
- Malone saw himself as being a capital allocator first, manager second.
- He delegated most of the day-to-day responsibilities to his COO.
- This freed Malone up to focus on more acquisitions.
- Cash Flow Focus
- Malone realized that maximizing earnings per share didn’t work w/ the pursuit of scale.
- Higher net income meant higher taxes.
- So Malone invented EBITDA. A proxy for cash flow and ignored earnings.
- Interest & depreciation kept his net income & taxes negligible.
Hire Good People & Pay Well
- Incentives & autonomy create a strong culture.
- TCI was known as a place for frugal, action-oriented cowboys.
- TCI’s employee stock purchase program made many millionaires down to his secretary.
- Not a single senior exec left in the first 16 years.
Avoid Taxes at All Costs
- Malone hated taxes. They offended his libertarian sensibilities
- He never paid dividends & rarely paid down debt.
- All extra cash flow was reinvested in more acquisitions to grow the company.
- Virtually all his sales were in equity to avoid taxes.
- The large amount of debt forced operational discipline.
- They were the last adopter of new technologies.
- With acquisitions, they would move their fancy offices from a downtown skyscraper to a tire warehouse.
- The company's office was spartan.
- With each new system he bought, the debt was secured by a TCI subsidiary, not by the parent company.
- If a cable system defaulted on a loan, only one subsidiary would be threatened.
- TCI was a ship with bulkheads. Built to withstand battle damage.