Money From Thin Air - The Story of Craig McCaw

“against the big, the pretentious, the powerful. He wrote complex agree- ments containing understated language which gave his clients latent powers or maneuvering room—what he called "back doors"—the kind of language that gave McCaw Communications an escape or jujitsu leverage over other parties if problems developed.”

“While Elroy had been seemingly indifferent to or unaware of the risks of his highly leveraged transactions, Craig thought through every awful consequence. If he borrowed big, the lenders would require strict adherence to financial performance. He would have to reach so much profit, have so many customers, use the dollars to build so many assets. If the economy turned down, if a manager failed, if a town council proved stubborn about rates, he could get in trouble. Because his system would be built on the promise of ever larger cash flow, he worried about combinations of bad events wrecking his plans. McCaw mulled over every possible turn for the worse and consid- ered his options—his future chess moves. Competitors and business associates marveled at his guts, but it was never simple daring. McCaw saw fear of failure as another motivation to plan well and think hard. "There are the times when you really have to become good because you're scared to death and you know what can happen," McCaw says. "It's like walking on a tightrope. In the good times, you can only fall six inches. In the bad times, you can fall a hundred feet. So you know that, at those times, you can't fail."”

“Tom Hull remembered one dinner hejiad with Craig McCaw__that featureH~~tong and, for Hull, painful silences. Hull wondered what Mctlawwas thinking during those ^peljs^Why didn 't he fill the tlmeT with chitchat likej3ther people? How ahouLthatfpotball game?_Or even th^weather? Anything^hut the ckttejL_o£foxks_on plates. ^^Jithink Craig does that as a techmqul^J^ull says. "It gives him the upper hand to find out abouT'yoTITTioT'you about him. Through that "silence, he~pu^Tpressure on youto~tatk, and~1ielTgoingto learn some- thing about you."”

“There's the IBM person in a white shirt or a Ross Perot person who came from the military. We want people who are not absolutely conventional. Who cause trouble because they are willing to break some of the boundaries and challenge us or someone else, or chal- lenge an idea. You need a certain amount of brewing in the pot. [Otherwise,] the tendency for people is, well, let's all just get along. I don't want the organization to settle in to lattes and talking about what we did over the weekend.”

“Suddenly, McCaw knew he could grow as fast as he could hustle. The revelation was as powerful as hearing "there was life after death," McCaw said later. If bankers were offering life after death, McCaw became an apostle of that religion. He started a simple process: buy a system at its undervalued price; bring in professional management to improve service; raise rates and find more customers to goose cash flow; then get a new loan and use that new money to buy another system.”

“talented businessman. Where Elroy disregarded or overlooked risk, his son would focus on it as a problem to be analyzed and managed—and transformed, ultimately, into a road to success. Potential disaster would often shadow Craig McCaw, and many predicted he would go the way of Elroy. Yet if people misunderstood what he was doing, that was fine with Craig. It even became a part of his strategy: Let the other guy think I'm nuts. A shrewd manager of his own image, he would turn a seem- ing weakness—his quirky personality—into a strategic asset, with results no one could question.”

“McCaw runs his companies in a style that reflects his personality. "I want to be the Wizard of Oz," he once said, leaving others to interpret his words. Here's one reading: Dorothy's Wizard empowered those who sought his help, granting them courage (the Cowardly Lion), wisdom (the Scarecrow), compassion (the Tin Man)—clearly a role McCaw seeks to play with those who work for him.”

“Behind his back, some of McCaw's deputies grumble about his taking frequent yachting trips while they toil without vacations. They say he's the nomad, pondering the desires of average folk, while they remain at their desks, keeping a furious pace set by his companies. Iron- ically, McCaw is the first to say he could never survive in a typical busi- ness environment. He avoids meetings, dislikes paperwork, speaks in parables, and sometimes gives orders he never expects to be followed. If he worked at IBM, "they'd throw me out," he admits.”

“fact that one of his duties was to face down angry creditors. Elroy often managed debt by waiting till a creditor threatened to sue, then offering to pay fifty cents on the dollar. It worked—sometimes.”

“My mother was an interesting role model. She gave us a lot of bene- fit of that precise thinking that came from accounting. My father, on the other hand, was an extremely creative, almost wild-eyed visionary, and we saw the balance of the two. If anything came of that, it was that my mother added the anchor to my father's creativity. I learned fairly young that if you didn't do the precision part, the creative part would evaporate. You had to have the foun- dation under the creativity.”

“Craig never severed his business relations with his brothers; the family always owned things together. In a sense, business became another bond between the brothers and with their mother. The four sometimes squabbled, but there was a clannishness to them, perhaps because they had grown up in a rural setting, sometimes with only one another for company. One business associate likens the McCaws to the Japanese, presenting a single face to outsiders and rarely revealing their disagreements.”

“The McCaws truly functioned as a group. When Elroy was alive, he would gather the clan for formal board meetings to discuss family hold- ings. After his death, the family gathered to consider Twin City Cable- vision, whose status was uncertain given the claims against the estate. No one was afraid of staying in business, however; the fiasco of Elroy's estate did not convince the family that business was bad, only that some situations could go wrong. Far from being overwhelmed by fear of fail- ure, the McCaws shared an abiding belief that they knew how to start businesses. If some failed, they could start some more. Bruce McCaw”

“says it this way: "If you learn how to understand how to make some^ thing happen, you doift fear Tailuresolnuch, "Because you can make it happen again? Some people never understand how to_do it. 1*"”

“years before he died, Elroy had reorganized the cable company in Centralia. In this deal, Elroy created two classes of stock, a preferred class for himself and another that he "sold" to his sons. The dividends went to Elroy, but the sons got the company and could buy out the preferred stock. Elroy also set up a $50,000 trust fund for each son. He never bothered to tell Marion or the boys.”

“analyze how people succeed or fail. (Napoleon and Hitler launched majoxcampaigns without adequate con!ingeTicypiaTmTn|^ likesto point out. McCaw has never been one~To~start Plan A unless Plan B isih readiness.)”

“Despite his frivolous reputation, McCaw itched to get on with his life, to get going in business. He hated the parasitic idea of living off the family-owned company. He wanted to expand Twin City, to start making acquisitions, to be creative—like his father. So even before his graduation from Stanford, McCaw contacted Bill Daniels, a communi- cations broker who had worked with Elroy, and said he wanted to buy another cable company—something small and affordable that he could seize upon, make his own, and begin growing.”

“McCaw's empire building had begun, though no one at Stanford had any inkling of this side of his life. McCaw quietly ran his business by long-distance telephone, calling managers in Centralia and checking with Marion on estate litigation and creditor negotiations. His penchant for secrecy would ultimately become a tremendous business asset. "He put a helluva mask on," says Fred Morck. Jeff Ruhe was a close friend at Stanford but always knew that McCaw maintained a private zone. "He's a great listener," says Ruhe, who later became an executive with the ESPN sports network and is still a friend of McCaw's. "He doesn't give away much, but he takes in a lot."”

“"He was much more refined than I, much more mannered, very calm," says Hull. "You'd go in to talk to him and sometimes he wouldn't say anything for a while, and you'd have to say something because it was too uncomfortable. I don't know if that was a trick or something, but he was just a really mellow guy."”

“McCaw set about putting his stamp on the company. He told employees to treat each customer as the only one they had. He held morning staff meetings at which he rallied employees to a vision of growth and shared rewards. Work with me and everyone will make more money, he said. Despite his mother's aversion to spending money”

“Years later, Hull came to recognize McCaw's central motivation: to find people whose skills matched the jobs to be done. Throughout his career, McCaw showed a remarkable ability to pick people suited for the tasks ahead. "He recognizes people's strengths and weaknesses," Hull says.”

“With Twin City on a sound footing by 1975, McCaw hunted for opportunities, believing that he could run several cable systems with a common staff. He saw two ways to grow: He could buy an existing cable system or bid against others for an open franchise. He searched ads in trade publications, told cable brokers to look around, and asked employees to let him know what they heard about systems on the block. One day, he spotted an ad for a 700-customer system in Burney, Cali- fornia, near Shasta Lake not far from the Oregon border. The seller wanted $400 per subscriber, which McCaw thought was too high—but he still wanted to buy.”

“Curious about how he had lost, McCaw called and discovered that Rock was doing exactly what McCaw wanted to do. Rock had negoti- ated a deal that worked out to $300 a subscriber, a low sales price, as well as generous terms: Rock hadn't put up a nickel but had borrowed the entire amount. Moreover, Rock had structured the deal so he hadn't bought the company but only its assets, an approach with tremendous tax benefits. Under current tax rules, a buyer could record the assets at a low value, so the seller avoided a big capital gains tax. The savings to both meant the sale could go for a lower price.”

“"I want to grow," McCaw said. The nutty idea happened to be a scheme for using one cable system as leverage to finance the purchase of another. Perry saw it had nerve: a combination of tax write-offs and losses for years. It was a brilliant scheme, says Perry, because it kept the two systems under separate corporate structures but washed the gains of the first against the losses of the second. It was like using the equity from an old home to buy a new one, saving real estate taxes in the middle.”

“McCaw was in a hurry to grow, at a pace some rivals regarded as rushed, even reckless. But to go where he wanted, he needed people who could find ways around obstacles, who enjoyed defying conventional wisdom. He wanted people who would toil relentlessly in pursuit of a goal, without regard for public recognition or approval. His favorite models came from the classic caper movie Butch Cassidy and the Sundance Kid. No—not the handsome bank robbers, played by Robert Redford and Paul Newman, but their relentless pursuers, who toiled on, night and day, never giving up, never seeking approval. McCaw wanted frustrated rivals to marvel at the trail marks left by his people—to wonder, "Who are those guys?"”

“The impact of satellite programming on cable systems' revenues was enormous. Many customers were willing to pay twice what they had before. Cable operators had to split the added revenue with HBO and other providers, but the new revenue boosted cash flow—that is, income after expenses and before depreciation and taxes—the standard by which banks lent money.”

“Since banks loaned at a multiple of cash flow, every new dollar of cash flow expanded a cable company's borrowing power. At first the multiple was 4.5, so a bank would lend $450,000 on cash flow of $100,000 a year. The multiples grew, eventually reaching eight times cash flow. An operator could increase his cash flow, and thus his borrowing ability, by consolidating costs such as billing offices and maintenance crews and obtaining volume discounts from HBO, CNN, and other providers. A company with 500,000 customers paid CNN 7 c" a household per month, while a company with 2 million paid 5#, for example. In other words, the bigger you got, the bigger you could get. At McCaw, "we understood we had to grow or leave the business," says Perry.”

“Well-financed companies such as Atlanta-based Cox Communica- tions were buying cable systems, but few in the Northwest could match McCaw's pace. He was gutsy about buying, but also smart about creat-”

“found more productive uses tor his rime. He- created an organic thai functioned, as Wayne Ptarr) described it, like an efficient pred ry, n kept moving, kept buying. Ptn option of the future M Uulai operation tit the cable businet cdy: "Wt oiistantU in search oi money. There were so main opportunities and we were so acquisitive. We were like a shark—eat or die”

“At each field office, NKa aw essentially made two points: Keep customers, and hit the targets tor revenue growth. "This svstem's yours," Mc( aw told manager I arr\ Manthe\. who operated in What- com (, ounty, near the Canadian border. "You run it. This is what I d out of it. It you hit the targets. Ill By you and your wife to Iahoe." Manthev made the goals, and Mc( aw w as as good as his word; Manthev and his wife found champagne, flowers, and other gifts wait- i them at the hotel.”

“I have long believed you have to assess your optionsjn a very mili- tary way. YoTTTTavelodecide what the possTBilities are, and then you have to decide_whether you're going to use them. The people aToulia r~yoir^vill bring you options which are amoral or question- able or aggressive. For the benefit of the people around you, you have to know what the alternatives are, what the other person might do to you, and how to respond to it. You have to know what evil to put on the other person, as it were, to prevent them from doing it. You have to have your guard up. You have to think almost as a chess player. If they do that, what will I do[?] What could they do to me, and how do I defend against it?”

“The word went out: Anyone in the Northwest and Alaska with a cable system to sell should call the McCaws. Soon a predictable pattern emerged. The company would find a system, figure out how to boost cash flow, and buy it under the cheapest terms possible. Sometimes the seller agreed to finance the sale. Other times the company managed to borrow more than the sale price by persuading a lender that the”

“improved cash projections were reasonable. Credibility was key. Once McCaw said it would expand revenue, it had to make good on its projections or lose the confidence of lenders and risk future deals.”

“The McCaw motto was "Sign 'em quick, close 'em slow": Get effective control of the franchise fast, but delay the moment when you have to pay precious cash to complete the sale. The delay before closing could serve an important purpose; sometimes the company lacked money to pay for the purchase and had to scramble for cash.”

“Occasionally, the owner would see the first signs of the growing prof- itability of the system he was selling. In one deal, McCaw took control of a system sold at $21 million and negotiated a loan for $10 million more than the sale price because of the increased cash flow. The extra $10 million went toward—what else?—the next purchase.”

“ings," congratulated employees on their marriages and births. "We are earnestly striving to remain a closely knit, friendly company that makes itself a great place to work," the young McCaw wrote. "When we fail at this, I ask your forgiveness with the hope that we can correct the errors of our ways."”

“Those following McCaw's career were amazed at his skillful use of debt, his shrewd sense of timing, and his willingness to take huge risks. "They were having fun. I don't think they had fear of failure. So they were willing to push things to the max," says Gordon Rock, McCaw's friend in the cable business. Maybe that's how it looked to outsiders. But Craig McCaw felt otherwise. He had talked his brothers into pledging everything they owned to finance purchases by the company. They had agreed to receive few or no dividends so that company cash could be used to fuel rapid growth. Any one of them could have pulled out at any time, which would have broken the company. Wayne Perry, the rare outsider to attend family meetings, swears there was no family strife. The brothers trusted McCaw totally, he says; McCaw was their leader. But they recognized the downside. The disas- trous end of Elroy's deal-making career had taught them what happens when mistakes are made. Craig McCaw knew the truth. "We were always scared to death," he says.”

“time wasters. He once caused a flutter of talk when he issued a memo to employees—including members of his own family—insisting that there be a purpose and an agenda for every meeting with him. Pawley,”

“Pawley says. McCaw refused to be drawn into battles over small matters. "I don't need to know that," he'd say. "I'm the big-picture guy. You take care of it." He would usually leave the office around 6:30 P.M.,”

“Affiliated's investment eventually reached $85 million, and the payoff it yielded staggered the Jordan and Taylor families. Within seven years, the investment's value hit $2 billion—more than the value of the Globe itself. The investment illustrated another recurring theme of the McCaw saga: Big players that do business with McCaw habitually underestimate—often drastically—his cleverness and ambition. "At the time, they thought they were just making a peekaboo investment to buy part of the company and buy the rest later," McCaw later said. "[But] our intentions were to buy them." As it happens, he never did—but not because he couldn't afford it.”

“subscribers]. It was hard to overpay for cable because revenues were constantly going up. HBO was going up on the satellite, Ted Turner was adding content, and court decisions were going our way. So revenue was going up fifteen or twenty percent a year regularly. You could add a channel and raise [monthly] rates by a dollar and do it again the next year and raise rates again."”