Comcast’s conundrum
How long can a family run a company with other people’s money?
Breathes there a family CEO with soul so dead/Who never to himself hath said,/“Could I have landed this job on my own?”
Consider, for example, Brian Roberts, 42-year-old chairman of Comcast Corp., America’s third-largest cable TV operator. Brian’s entrepreneurial father, Ralph, now 81, got out of the belt-and-suspenders business and into cable TV in 1963, when Brian was just a tot. Over the following decades Ralph shrewdly built Comcast from a single cable franchise serving 1,200 homes in Tupelo, Miss., into a nationwide system with 8.5 million subscribers today. When Comcast went public in 1972, Ralph astutely created a special stock class that gives the Roberts family 87% of Comcast’s shareholder votes even though the family owns just 2.4% of the equity. When Brian expressed an interest in succeeding his dad, Ralph put him on a fast track to the top: After a nine-year apprenticeship, Brian became president of Comcast at age 30, then chairman and controlling shareholder at 38.
(One demonstration of Ralph Roberts’ acumen was the graceful manner in which he engineered Brian’s succession without offending Ralph’s four other children or his in-laws. In 1986, for example, Ralph acquired a pair of alternative weekly newspapers in Philadelphia, Comcast’s home base. The purchase brought Comcast little in the way of business synergy but a great deal in terms of family harmony: By installing his son-in-law—then also working at Comcast—as chief of the two papers, Ralph eliminated any possibility of rivalry or jealousy between the son-in-law and Brian.)
No knowledgeable observer suggests Brian Roberts isn’t qualified to run Comcast. On the contrary, it’s impossible to think of anyone better suited to the job. Comcast has grown exponentially since Brian took over, thanks to his ability to forge alliances with such major media players as Bill Gates and Barry Diller.
On the other hand, no one has suggested that Brian would have his job today if his name weren’t Roberts. And that subconscious awareness may be more of a factor in Comcast’s recent strategic moves than most observers have supposed.
Brian stunned the cable industry in July with an unsolicited offer to acquire AT&T’s Broadband division, the nation’s largest cable operator, for Comcast stock valued at $44.5 billion. The offer was stunning because until that moment AT&T was one of America’s best-known brand names, while Comcast was a largely unknown family firm. When Brian touted Comcast’s 43% operating margins, as compared with AT&T Broadband’s 23%, public opinion swung to the opposite extreme: Suddenly AT&T was a tired, floundering giant while Comcast was a team of nimble and hungry young foxes.
The truth is, as usual, more complicated. Comcast’s high margins derive partly from effective management but also partly from its place on the upgrade cycle at a given moment. AT&T is currently spending billions to upgrade its cable systems, while Comcast defers its upgrading and instead borrows billions to acquire additional systems. So Comcast’s numbers may look healthier at this moment, but who can say how they’ll look tomorrow?
Cable TV is a hot-potato game in which expanding companies shield themselves from taxes by taking on high debt loads and by incurring high depreciation and amortization expenses. To maintain its profit margins as its debt and depreciation cycles wind down, Comcast must incur new tax-deductible expenses. Otherwise Comcast runs the risk of suffering a drop in the value of its stock— the primary tool of its expansion.
Of course, the Robertses could sell Comcast and come out well ahead of the game. (The value of Comcast stock has risen ninefold in the past ten years.) But then they’d lose the family enterprise that has given meaning to their lives for 38 years. And Brian Roberts would most likely be out of a job. Like many another family CEO, Brian’s talents are uniquely well suited to the job he happens to hold at this moment—but only to that particular job.
AT&T’s board initially rejected Comcast’s offer, partly because the price seemed too low and partly because some major AT&T shareholders balked at turning control over to the Roberts family. The Roberts clan offered to reduce their voting control of the newly merged company from 87% to somewhere between 45% and 49%, but the effect would be the same as before: The Roberts family would run the new entity despite their minuscule financial stake in it. As money manager Andy Kessler bluntly remarked in the Wall Street Journal, “The deal stinks for everyone but Brian Roberts.”
The fate of the offer was unresolved as this issue went to press. But whatever the outcome, a few points seem indisputable. First, the father-son team of Ralph and Brian Roberts has brought great value to Comcast shareholders, at least so far. Second, consciously or unconsciously, the driving force behind their offer for AT&T Broadband is not the marketplace but the Roberts family’s need to hang on to Comcast.
Third, every good idea can be stretched too far. Two-class stock arrangements have long been touted as a good way to assure family members and stockholders alike that the founding family will retain control after a company goes public. At the New York Times Co., for example, the Sulzberger family’s Class B stock gives them two-thirds of the vote with just 18% of the equity. At Estée Lauder, the Lauder family owns 58% of the stock but casts 90% of the votes. At the Washington Post Co., the Graham family owns about 60%, but their Class A stock assures them of seven of the ten seats on the board. At Dow Jones, the Bancroft family owns 38.5% of the stock but controls 65% of the votes. At Ford Motor Co., the Ford family owns 3.9% of the equity but controls 40% of the vote. But the Robertses’ ratio—87% voting control with barely 2% of the equity—suggests a family that’s unwilling to pay for the prerogatives of ownership.
The good news about family business is that the managers run the company as if their lives depend on it. The bad news is: Their lives do depend on it. Which isn’t always an economically sound way to run a business, especially when the managers don’t really own it.
On second thought…
Last time we checked in with coal baron E.B. Leisenring Jr., the rich legacy of his family dynasty seemed to be choking the life from his family company (“One family’s burden,” FB, Autumn 2000). Leisenring, 75, is a fifth-generation descendant of a family that spent 160 years developing mines, railroads and canals in Pennsylvania, Virginia, Colorado and Montana. At the peak of the 1970s energy crisis, Leisenring was offered a hefty price for his family’s Westmoreland Coal Co. by several suitors, including Standard Oil of Indiana. But Ted Leisenring insisted on remaining independent, explaining years later, “When you have five generations of coal in your blood, it’s very hard to shift gears.“
As recently as last year, that decision looked like a major blunder. When the ’70s oil crisis ended, so did the upsurge in coal demand that had justified Westmoreland’s expensive foray into Western mining. In 1996, six years after Leisenring retired, Westmoreland sought Chapter 11 protection in federal bankrupcty court.
So how is Westmoreland faring today? “Miraculous,” Leisenring reports. Thanks to California’s energy crisis, Westmoreland—now headquartered in Colorado Springs, Colo.—is out of bankruptcy and booming again, using its operating loss carry-forwards as a tax shelter. After reporting a small profit for 2000, its stock price, once down in the $2 to $3 range, was up around $14 to $15 this past summer.
What’s the moral of this story? I can think of two.
- In business, unlike literature, there are no final chapters.
- Sometimes a family is right to bet on its instincts and its legacy, even in the face of all rational evidence to the contrary.
Ford’s division of laborWhen last we checked Ford Motor Co., its chairman (and the founder’s great-grandson) William Clay Ford Jr. was said to be increasingly frustrated at being excluded from company decisions by president and CEO Jacques Nasser. Even if William Ford were a mere dilettante (which he isn’t), I wrote last spring, “Ford Motor’s professionals are guilty of tunnel vision if their goal is to marginalize the Ford family. Without that family, Ford Motor would be just another auto manufacturer.” The challenge for Ford, I suggested, is “how to encourage the family’s presence without undermining the company’s professional bureaucracy.”
One response to that challenge came this past July when Ford Motor created a two-man “Office of the Chairman and CEO,” consisting of Nasser and William Ford. The move, urged by Ford Motor’s outside directors, requires the two men to meet regularly with other senior managers to review policy and strategy. It also defines more clearly William Ford’s previously undefined role: Among other things, he will focus on improving Ford Motor’s relationships with its dealers, suppliers and employees, all of which have been strained for the past two years. This deployment of a named family heir for public relations matters should free Nasser to focus on the company’s technical issues: the declining quality of Ford’s vehicles, its slipping factory productivity and its deteriorating finances.
This strikes me as an astute division of their strengths—assuming the two men can get along. I repeat what I said last spring: This situation bears watching by any family firm that aspires to reach Ford’s size in the future.