Back in the Ring: Murdoch vs. Malone
By Ronald Grover
If this were a heavyweight boxing battle, Rupert Murdoch's Fox Sports Net would promote the match with its usual sizzle. But the Aussie Avenger vs. the Colorado Crusher is one match the mogul would likely rather not see. Those combatants would be News Corp.'s (NWS ) own Chairman Murdoch and Liberty Media's (L ) dealmaking dynamo, John Malone.
You needn't be a media insider to appreciate the head-banging going on as these two industry titans square off again -- this time over Malone's move to swap his large block of nonvoting News Corp. shares for a 17% voting stake in Murdoch's company. Indeed, these guys have a love-hate relationship. And while they've partnered in ventures in the past, in the latest match between these two masters you can hear echoes of past slugfests -- and one in which Murdoch ended up taking the 10-count.
As luck and timing would have it, just as Murdoch is said to be locked in talks over buying out Malone's threatening 17% voting stake in News Corp., one of those former deals is no doubt echoing through Murdoch's head. Over at News Corp.'s 44%-controlled technology company Gemstar TV Guide, CEO Jeff Shell announced on Dec. 10 that he was quitting after two years of trying to clean up a mess that Murdoch inherited when Malone talked the News Corp. chairman into taking Malone's stake in Gemstar off his hands.
By Murdoch's own assessment, Gemstar is perhaps the worst deal in his long and illustrious history -- and one that Malone came out of smelling pretty well. So, word to the wise, Rupert, think long and hard about any deal you do with Dr. J.
A little history: Malone and Murdoch are long-time adversaries and co-conspirators. Both are brilliant strategists who think outside the box and seem to revel in their reputations as rebels. In 1997, Murdoch enraged Malone when the Aussie tried to create a U.S. satellite service by merging his fledgling ASkyB service with Charlie Ergen's EchoStar and then held an investor conference in which one of Murdoch's lieutenants said the aim was to kill off cable TV. At the time, Malone was CEO of cable giant TeleCommunications Inc. and was a heavy customer for sports, news, and other programs from News Corp.
Still, just a few months later, after Murdoch abandoned the Echostar merger, he and Malone struck a deal (later rejected by federal regulators) for Murdoch to buy the assets of PrimeStar Partners, a satellite venture started by TCI, Time Warner (TWX ), and other cable operators. Then in 1999, Murdoch bought Liberty's 50% stake in their joint Fox/Liberty Sports Network for $1.425 billion worth of News Corp.'s nonvoting shares. That deal gave Murdoch one of the engines that has been driving his company's growth ever since.
But not long afterward, Murdoch was also routed in a head-to-head match with Malone. At the time, their two companies were the largest shareholders in Gemstar-TV Guide, which owns patents for various TV functions, including so-called electronic program guides -- those scrolling TV listings on cable- and satellite-TV systems. But in late 2000, News Corp. bought out Liberty's Media's 21% stake in a deal that Murdoch's own advisers had warned against.
Murdoch was won over by Malone, who had a masterstroke: He convinced Murdoch to roll up his stake in Gemstar with some other technology companies, take them public in something called Sky Global Networks, and then use the new company's stock to buy the DirecTV satellite service from General Motors' (GM ) Hughes Electronics subsidiary.
Sounded great. But the IPO never happened, as technology companies went south. GM walked (at least for a while). And News Corp. got left with a company that was soon spouting leaks. Accounting scandals, Securities & Exchange Commission investigations, and the forced resignation of Gemstar founder Henry Yuen left Murdoch holding a company with a dive-bombing stock. Eventually, News Corp. took $6 billion in write-downs for its Gemstar investment.
Malone, meanwhile, was holding News Corp. stock that Liberty reported as being worth $6.1 billion in its 2001 annual report and $7.6 billion in 2003. To be fair, News Corp. should have known more about the inner workings of a company in which it was a major investor for more than a year. Still, Malone seemed to know when to get out and leave Murdoch behind. News Corp. declined to comment for this story.
Little wonder then that Murdoch was less than thrilled when he learned -- by way of Australian investment bankers in the wee hours after election night in the U.S. -- that Malone had secretly swung a deal with the help of Merrill Lynch (MER ) to start swapping a big piece of his nonvoting shares for voting shares so that he could have more influence at News Corp. Sure, Malone quickly said he has no desires on Murdoch's company and that he thinks News Corp. had great managers. Still, Murdoch's company quickly adopted a shareholder-rights plan that would make it harder for Liberty to accumulate a larger stake.
Liberty has no comment on the ongoing discussions with Murdoch about selling its new voting shares back to Murdoch. But on other occasions, Malone has said Liberty has assets he might want to sell to News Corp. and others he may want to buy from Murdoch. One deal being talked about would swap a News Corp. asset -- maybe its 66% stake in the National Geographic Channel -- to Liberty, along with cash in a transaction designed to reduce Malone's tax hit that would be incurred by unloading some or all of his shares in News Corp.
And, figures Merill Lynch analyst Jessica Reif in a recent report, Malone may want to buy back select Gemstar assets on the cheap now that they've fallen in value. Whatever the outcome of this latest heavyweight bout, Murdoch intends to insist that Malone sign a stand-still agreement to keep Liberty from any more stock-buying shenanigans. And who could blame him?
Grover is BusinessWeek's Los Angeles bureau chief