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The 1980s was the era of corporate raiders, fed by junk bonds and egged-on by investment bankers, buying up companies, playing financial games and then selling, often causing great disruption to the operating businesses and their previously loyal managers.
ABC was being eyed by these marauders, and the man who had built this company into the most respected TV empire, Leonard Goldenson, was concerned for its future. He was 80-years old and thought that the circling vultures would rip apart all that he had created. He looked inside the company for a successor, but didn’t find anyone ready to take the leading role.
Tom Murphy, encouraged by the loosening of the rules on ownership of TV stations by the media regulator, approached Goldenson in January 1985. The FCC had recently increased the number of VHF television stations that could be owned by one firm from five to twelve. There was already a strong relationship between the two companies because Capital Cities’ stations broadcast ABCs output “We were the biggest ABC affiliate that was not owned by ABC.”
Goldenson had known and admired Murphy for many years and was open to discussing the idea of a business combination. Murphy recalls, “I went to him and I said, “Leonard, I’d like to see if we can make a deal together.” I thought he’d throw me out of the thirty-ninth floor, but he didn’t. As a matter of fact, we very quickly made a deal.”
But Goldenson immediately foresaw a problem: those nuisance corporate raiders with their high borrowing and short-term mindset; they could swoop down at any time, buy up a large proportion of the shares, if not bid for the entire combined company, and ruin the long-term performance by destroying the strategic and cultural strength Murphy and his team would try to build after the merger.
While Goldenson trusted Murphy to keep the business together and make it thrive he did say “Tom, you’ll need a 400-pound gorilla to prevent someone from coming in and trying to take both of us over.”
Murphy added, “He said that because I didn’t have any one huge stockholder at that stage. As a result, I got mixed up with my pal Warren Buffett. I had known Warren for fifteen years. When I called him up, he was the director at the Washington Post. I told Warren, “I think I have a deal with Leonard Goldenson and I would like your advice.””
Buffett, the king maker
Berkshire already owned over $46m of ABC shares and Buffett had taken a keen interest in both companies. He instantly recognised the logic of the deal with its numerous sources of potential synergy and value of Murphy and Burke’s cost-cutting brilliance. He had also figured that for the managers to feel safe, and get on with running the business for long term shareholder wealth creation, they would need a large shareholder who would commit to not selling regardless of tempting short-term gains offered by Wall Street financial players.
Murphy recollects, “[Buffett] came up the next day, and we discussed it. I told Warren that I really wanted to make a deal with him if he wanted to make a deal with me. He thought about it and said, ‘OK, I think that’s a good idea. I’d like to do that.’ Then he said, ‘I’ll put $500 million in.’
The deal was $3.5 billion, and Warren offered $500 million [actually $517.5m]. I suspect Warren thought I was being rash. ABC was so m
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