Can Liberty Media Get Its Groove Back?

John Malone's baby has been burned by bad investments

Dealmakers at John Malone's Liberty Media Corp. used to joke that a secretary working there was worth $2 billion. That's when the market valued Liberty and its skeleton staff of 40 at a robust $80 billion. No more. Since earlier this year, Liberty's stock has taken a beating, falling by 68% as its portfolio of more than 75 media and technology companies has lost favor with the market. To get to that $2 billion-per-employee level now, "we'd have to lay off a lot of people," says Liberty President and Chief Executive Officer Robert "Dob" Bennett. "And that isn't going to happen."

Worse yet, Liberty, long revered among stock analysts for its nearly infallible ability to pick winners, seems to have lost its way. Recent investments have gone sour, from Internet startup to business phone-service provider Teligent Inc. And in its biggest black eye, Liberty put $500 million into ICG Communications just seven months before ICG's Nov. 14 bankruptcy petition. That raised questions among Liberty's faithful as to whether the company had lost its magic, rushing to catch hot sectors instead of doing its traditional due diligence. "The issue is not that ICG cratered, but why was John there in the first place," says one long-time associate of Liberty Chairman Malone.

But a day later, on Nov. 15, Malone got some good news. AT&T announced that it intended to spin off Liberty. For most of the last year, since AT&T bought Malone's cable company Tele-Communications Inc. for $52 billion, Malone has been angling for just that kind of freedom. Being appended to AT&T and its large cable holdings, Liberty executives say, was crimping Malone's style as regulators weren't likely to allow him to buy TV stations or satellite businesses. Now, the spin-off is likely to recharge his dealmaking batteries.

He already has his finger in just about every media pie, from his 9% stake in Time Warner to a 21% stake in Barry Diller's USA Networks. These were amassed after trading small stakes in strategic companies, such as the 18% stake in News Corp., which began with Malone's holdings in regional sports channels and ownership of a tiny satellite uplink center.

But Liberty's more recent buys seem to have strayed from that successful formula. It rushed into a badly overcrowded telecommunications market and made investments in sectors that critics say it didn't understand, such as the $400 million bet on franchising company Cendant Corp., now whittled to just $115 million.

MARKET CONFUSION. For now, Liberty insists that it's on the right track. Bennett points to its record of picking winners and sees more gains in Liberty's portfolio. "We are long-term asset builders," says Bennett. "We see investing to build value, not to sell six months down the road." And the company still has its supporters on Wall Street. UBS Warburg analyst Christopher P. Dixon puts Liberty's asset value at more than $50 billion, nearly $5 a share above its recent price of $15 5/8. Also on Nov. 15, Liberty announced net income of $2.62 billion on gains from its assets, vs. a $213 million loss in the year-ago period. Its stock rose just 0.4%.

What's ailing Liberty? Even Malone confidants are no longer sure its keiretsu-style works today, in which Liberty buys stakes in disparate companies that it pushes to work together. For one thing, media companies, already heavily consolidated, have less need to partner with Liberty outfits. Liberty's falling stock price also reduces its currency to make deals. Moreover, smaller companies have easier access to capital than in the 1980s, when Liberty backed upstarts such as Ted Turner and BET Holdings Inc. founder Robert Johnson.

That doesn't mean Liberty has given up on wheeling and dealing. Bennett says Liberty is still on the lookout for companies it can take stakes in, especially after the spin-off expected in the second quarter of 2001. "We are still interested in content, last mile distribution, and technology companies," he told analysts on Nov. 15. "And we will revisit investments we had to pass over before" because of Liberty's ties to AT&T. Of course, before that happens, Liberty will need to figure out where the bottom is for what it holds now.

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