TIME: Almanac 1995

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<text id=93TT0087> <title> Oct. 25, 1993: Wired! </title> <history> TIME--The Weekly Newsmagazine--1993 Oct. 25, 1993 All The Rage:Angry Young Rockers </history> <article> <source>Time Magazine</source> <hdr> BUSINESS, Page 50 Wired! </hdr> <body> Bell Atlantic's bid for cable giant TCI is the biggest media deal in history; it's also a peek at the future By JOHN GREENWALD--Reported by John F. Dickerson and Thomas McCarroll/New York, and Jeffrey Ressner/Los Angeles The largest communications deal in American history might never have come to pass last week if Bell Atlantic chairman Raymond Smith and Tele-Communications Inc. president and chief executive officer John Malone had not got stuck on a boat off the coast of Maine. The merger talks were going nowhere that August afternoon when the two men decided to head back to shore, only to find that the anchor of Malone's 70-ft. sailboat had snagged an underwater power line. While divers spent two hours cutting the boat free, Smith and Malone had little choice but to continue trying to unsnarl the deal. "We were lucky we weren't electrocuted," says Smith, who carries a blue poker chip in his pocket to remind him to pay attention to blue-chip opportunities. "But it gave us a chance to keep negotiating and to come up with some good ideas." Those notions led to a breathtaking combination that calls for Philadelphia-based Bell Atlantic to acquire Englewood, Colorado-based TCI, the world's largest operator of cable-television systems, in a stock transaction valued at $21.4 billion. (Bell Atlantic said the figure included $11.8 billion of stock that it plans to issue and the assumption of $9.6 million of TCI debt.) That would make the deal second in size only to the $25 billion purchase of RJR Nabisco by buyout barons Kohlberg Kravis Roberts in 1988. The new giant would boast 28 million cable and phone customers across the U.S. and combined revenues of more than $16 billion, making it by far the largest of the seven Baby Bell companies that were spun off from AT&T in 1984. Most important, the merger would hasten the arrival of what has been called the "electronic superhighway," a widely heralded (and sometimes wildly hyped) system that will soon deliver to American homes everything from video games and movies on demand to vast video shopping malls. By adding high-speed switches to the cable wires that serve TCI's 10.7 million customers, Bell Atlantic would enable the subscribers to choose from hundreds of channels with the click of a remote-control button--and be billed for the time they spend before the TV exactly as if they were making telephone calls. Bell Atlantic could also provide phone service--even video phone service--over TCI's ubiquitous cable wires, and thereby invade the territories of other Baby Bells from coast to coast. "What we're seeing is the total redefinition of the communications industry," says Ken McGee, who studies such trends for the Gartner Group consulting firm. The deal triggered a speculative frenzy on Wall Street, where every phone company suddenly seemed to be on the make and every cable operator looked sweetly enticing. The big gainers among cable stocks included Cablevision Systems, which jumped 9 1/4 to 63 5/8 in a single day, and Comcast Class A shares, which rose 6 3/8 to 39 5/8. The two industries had already begun to mate: faced with the crumbling of their local telephone monopolies, the cash-rich Baby Bells had been making love, not war, with their cable-TV rivals. Just last week Atlanta-based Bell South agreed to pay $250 million for a 22.5% stake in Prime Management, a Las Vegas cable company. In May, U.S. West put up $2.5 billion for a 25% share of Time Warner Entertainment, a unit of Time Warner that owns, among other things, cable outlets in 36 states. Southwestern Bell spent $650 million in February for just two suburban cable systems in Washington. The Bell Atlantic-TCI deal dwarfed the bidding war between Barry Diller's QVC shopping network and MTV-owner Viacom for Paramount Communications, which had held Hollywood and Wall Street spellbound in recent weeks. It also thickened the plot, since TCI-controlled Liberty Media has been a chief backer of Diller's, whose nearly $10 billion bid for Paramount tops Viacom's by about $2 billion. While Malone stressed his continued support for Diller, he described the Paramount brawl as "very peripheral" to TCI's main concerns. Asserting that "we wish Barry well," Malone called Diller "the only person on earth who can make Paramount worth what is being bid for it." The proposed Bell Atlantic-TCI marriage will face months of scrutiny from armies of Washington regulators, Justice Department attorneys and state and local agencies. The key question: whether the nuptials would violate antitrust standards. While the deliberations will probably last until the middle of next year, the deal came under immediate fire from Howard Metzenbaum, the Ohio Democrat who chairs the antitrust panel of the Senate Judiciary Committee. Metzenbaum vowed to hold hearings and denounced the proposed combination as a "megamonster" that could overcharge consumers. Perhaps the biggest question of all last week was why the tough-as-nails Malone, 52, long regarded as the undisputed king of cable, would agree to sell TCI and assume the lesser role of vice chairman--to Smith's chairman and chief executive officer--in the new company. Malone had loomed as the potential big winner of the Paramount fight, the master strategist who would run lucrative Paramount movies and TV shows on his cable systems and thereby tighten his grip on the industry. While that could still happen, the image of Malone as anyone's No. 2 seemed strange. He will certainly be well rewarded for selling out to Bell Atlantic. His TCI and Liberty holdings would be worth about $1 billion in the merged company's stock, making the taciturn Connecticut Yankee one of the richest men in the country. With Smith as the front man, the deal distances Malone from some of his fiercest critics. He had become increasingly fed up with politicians and competitors who accused him of building his empire through ruthless, anticompetitive practices. (As a Senator, Vice President Al Gore was quoted comparing Malone to Darth Vader.) But Malone's chief reason for merging may have been the simple realization that Bell Atlantic has the financial clout to help him build his cherished superhighway. For all of TCI's vaunted size, a fellow cable operator noted before the deal, "John's still not half as big as any of the regional Bell companies." So deep are Bell Atlantic's pockets that it announced a $1.04 billion investment in Grupo Iusacell, a Mexican cellular-phone company, the day before unveiling its plans to buy TCI. Yet the deal raised serious doubts about whether the imperious Malone could peacefully coexist with the studious Smith. "The U.S. Army wasn't big enough for Generals Patton and Bradley," notes Ronald Altman, who watches the communications industry for the firm Furman Selz. "The question is, will Bell Atlantic be big enough for both Smith and Malone?" Others speculated that Malone would soon be running the company. But Smith, 55, hardly seemed worried. "John has expressed his interest in a very forthright way," Smith told TIME. "He is interested in pursuing programming and multimedia opportunities. He will be free to roam and find new deals. Our method at Bell Atlantic is to decentralize operations, and John, as vice chairman, will have those kinds of responsibilities." Still others believe Malone will soon move on. "It's inconceivable to me that John Malone is going to report to someone else," says a competitor who knows him. "John's the smartest man I've ever met, and he had too many things going on to let Ray Smith run things. I think it says that John is ready to try something different." The two men are an odd couple by any standard. While they share a passionate vision of the superhighway, their personalities and backgrounds are a study in contrasts. Smith, an amateur actor and the divorced father of four, has played supporting roles in Pittsburgh productions of such dramas as A Doll's House and Death of a Salesman. He is also a writer who saw his play, The Fetal Pig, a comedy about a mid-life crisis, staged in Philadelphia in 1987. "I like to put on football games and write," says Smith, who holds an M.B.A. from the University of Pittsburgh and is fond of quoting Chaucer in Middle English. "I find it a good release.'' Malone, on the other hand, is painfully shy and often appears uncomfortable in public. Although he lives in the Denver area, he is little known there outside business circles, and he forbids interviewers to ask about his wife Leslie or their two children. A benevolent boss and a passionate sailor, Malone once painstakingly restored a turn-of-the century commuter boat that had ferried robber barons along the Hudson River. Among the few personal touches in his office are a working model of an 1854 America's Cup racer and a replica of his own yacht, the Leslie Ann. Employees call him "Doctor" for the Ph.D. in operations research that he earned at Johns Hopkins. "Malone has three priorities in life," says Bill Daniels, an investment banker who specializes in cable-TV properties. "His family, his business and his sailboat. That's it." Malone's brilliance and belligerence have become the stuff of legend. In 1991, for example, Malone was outbid by a rival in his attempt to acquire the Learning Channel. His response: TCI began dropping the Learning Channel from its local cable systems. The tactic killed his rival's deal, and TCI's 49%-owned Discovery Channel later purchased the Learning Channel at a steep discount. Malone is also known to cook up complex deals that can take cadres of lawyers and accountants a week to disentangle in order to sell and buy back assets. Just last week TCI said it would reacquire Liberty Media and its cable networks, including the Family Channel and Black Entertainment Television, which Malone spun off in 1991 to avoid antitrust scrutiny. While Smith and Malone worked in different industries, they shared a common vision of the interactive future. The two men began meeting three years ago at telecommunications conferences, at a time when cable firms and telephone companies were thought to be rivals in the race to build the information highway. "We discovered that there was no debate," Smith says. "We really saw the future in the same way. And we both came to the conclusion about a year ago that we needed strategic partners." Malone and Smith opened serious merger talks last summer after Smith decided that TCI would make an ideal match for his company. "We kept it to a small number of people," Smith says, "although we kept Salomon Brothers as a backup. We did all the negotiations ourselves. No outsiders." Maintaining the secret became easier once the Paramount bidding war broke out in September and grabbed the attention of Wall Street and the media. Like Malone, Smith views the Paramount fight as a side issue. He envisions the new Bell Atlantic more as a toll taker on the electronic highway than as a provider of entertainment and information. "What we're looking for are arrangements with programmers to use our platform," says Smith. His "platform" is basically the highway itself, which will generate revenues for Bell Atlantic in the form of subscriber fees. Thus Paramount, a classic provider of such programming, is really not critical to this new venture, and Smith says Bell Atlantic has no intention of entering the fray. For their part, Barry Diller's allies contend that they don't need the backing of Bell Atlantic to prevail in the Paramount battle. Diller is about to add an additional $500 million or more to his war chest from Cox Enterprises; he already has $2 billion of bank financing on top of a combined $1 billion commitment from Liberty Media and Comcast cable, Liberty's major partner in QVC. Some experts say Bell Atlantic would be making a major strategic mistake if it let Paramount get away. In a world with 500 or more channels competing for viewers' attention, they say, the winners will be those companies that can offer the most attractive programming. The Walt Disney Co. embraces that view; instead of racing to build its own superhighway, Disney is spending about $1 billion this year--66% more than last year--to turn out films and TV shows it thinks people will want to watch. Declares a rival media-industry executive: "The single most important thing you need is content designed for the consumer marketplace, and they [Bell Atlantic and TCI] don't have it." Whether the new Bell Atlantic actually comes into being depends on regulators in Washington. To help win approval of the deal, TCI plans to spin off cable systems that it owns in Bell Atlantic's territory, even though the Baby Bell won a federal-court ruling in Virginia last summer that allows it to send movies over its telephone lines there. (The Justice Department said last week that it will appeal the decision.) Meanwhile, the Clinton Administration's policy toward megamergers remains uncertain. James Quello, the Bush-appointed acting chairman of the Federal Communications Commission, greeted the proposed consolidation as "the most momentous deal of the decade." Quello is scheduled to be replaced by Reed Hundt, a Washington lawyer and childhood friend of Al Gore's. And the Vice President, a proselytizer for the information-highway idea, gave the merger a tepid endorsement last week. For now, the long-term success of the deal--and its influence on the electronic superhighway--rests largely with Malone and Smith. When Malone told a news conference last week that "I'm going fishing," Smith shot back, "Not a chance." After negotiating the deal on a stranded boat, Smith knows that both men must now keep their feet planted firmly on the ground. </body> </article> </text>