Shortly before this Florida meeting, word got out that Shearson was working with us. We heard that the story was leaked on purpose. I soon realized that the bankers who turned us down were not staying away from this deal for financial reasons. Instead, they feared the strength of CBS’s news division, and particularly the clout of the show
60 Minutes
. The takeover business was controversial then and none of these guys wanted to back a hostile bid for CBS only to find Mike Wallace and a camera crew knocking on their door to do an investigative piece on
their
company. It was eye-opening for me to see the powerful influence the networks had.
Eventually, E. F. Hutton agreed to work with us and we began an intense period of mapping out a deal. This was no simple matter—we had to not only work out the mechanics of our debt offer but also sort through the complicated regulatory issues our acquisition would face. In addition to the usual issues related to the FCC approving station license transfers, in many markets CBS owned television and radio. The FCC allowed them to maintain this cross-ownership even after the laws were established that outlawed the practice. While CBS had been given this grandfather clause, if and when the company ever changed ownership, the buyer would have to sell either the radio or the television stations in these markets to come into compliance.
In addition to a financial adviser, we needed extensive legal help, and when word got out that we were working with E. F. Hutton and moving forward with a bid, CBS hired numerous New York law firms that specialized in takeovers, making it practically impossible for those firms to work with us. Ultimately, we were able to hire a firm in Los Angeles named Latham & Watkins and they did a good job.
It was complicated but stimulating, and by the middle of April 1985, we were prepared to announce our bid. Our offer valued CBS shares at more than $175. As recently as February, CBS stock had been trading around $75 per share but after Capital Cities bought ABC at a premium, CBS’s price topped $100. In sum, we were offering CBS shareholders the opportunity to sell their CBS stock to Turner Broadcasting in exchange for high-yield bonds. While CBS shares had provided them with dividends of around $3, our notes would have paid close to $22 annually. We would pay these notes off using the company’s operating profits and also through the sale of the CBS record division, which was worth about a billion dollars, and the book publishing division (Simon & Schuster), which was worth about $500 million.
It was an intriguing deal that had a lot going for it, but one thing it didn’t have was cash. Prior to my proposal getting off the ground, Ivan Boesky, a prominent arbitrageur at that time, purchased 8.7 percent of CBS’s stock for $240 million. I tried to enlist him in our cause but it was too late—with all the speculation swirling around CBS he stood to make a handsome profit just by sitting on his shares. I also spoke with Bill Simon, a well-respected and wealthy former secretary of the treasury, and Bill McGowan, the chairman of MCI. Simon was an on-air contributor to CNN at the time and MCI had been one of our most supportive advertisers. I was hoping that they would make a major investment in the deal, but after some promising conversations, they both passed.
After working with Fairness in Media, hiring E. F. Hutton, and all the speculation around which network would sell next and to whom, by the time I came to New York to announce our formal offer, the press attention was tremendous. I stayed at the Waldorf Towers (I liked it there because they were one of the first hotels to get cable and I could watch CNN and the SuperStation), and so many reporters were hanging out in the lobby that I used the service elevator to sneak in and out. Eventually though, they figured out which floor I was on and I remember looking out through the peephole of my door one morning and seeing that there were reporters camped out in the hall outside my room. When I made the twelve-block walk from our lawyers’ offices to the Park Lane Hotel where our press conference was set up, I was surrounded the entire way by a pack of reporters. When I walked into the hotel ballroom, so many flashbulbs went off you would have thought it was a Hollywood premiere.
The press coverage was tremendous. It was a crazy and chaotic time and I enjoyed it. Throughout the buildup to the deal, some of my own executives tried to talk me out of all this activity, saying it was too costly and that it wouldn’t work. Deep down, I knew our bid was a long shot but so was just about everything else in my career. Between legal and banking fees, the whole venture would cost us about $20 million, but the way I saw it, we were getting at least that much value back in publicity. And in the process, we were tying one of our major competitors in knots trying to fend us off.
CBS, of course, did everything they could to kill our deal. Their initial comments were the ones we expected—they had no interest in selling the company, our bid was too low, and there was no cash in it. But when we refused to go away, they stepped up their efforts, including personal attacks against me. To make a case that I was unfit to run a broadcast network, they found various groups to talk about comments I had made in the past that they claimed were disparaging of various ethnic or religious groups. They even hired a private investigator to follow me. I admit that I was different from the executives running CBS, but there was nothing in my private life that they could hold against me. Besides, given the low quality of so much of their own programming, they were in no position to be making judgments about other people’s character.
CBS also tried making appeals in Washington. Tom Wyman was a friend of Missouri senator Tom Eagleton from their college days together at Amherst and he was able to convince him to try to help him out. Unfortunately for CBS, I also knew a lot of senators and when Wyman and I went to Washington to testify at hearings I had a sympathetic audience and more than held my own. CBS also tried to work with the legislature in the state of New York to have them introduce new laws banning hostile takeovers. Fortunately, I had met Governor Mario Cuomo through CNN and was able to discuss the matter with him. He told me that given all the investment banking activity in New York, he was not inclined to change the laws but said, “If you buy CBS and move the company to Atlanta, I’m going to look pretty foolish!” I made it clear to him that I had no intention of taking the company out of Manhattan and that sealed his support.
The months following our April announcement continued to be tumultuous. Every time CBS made a move or a claim against us, we would try to counter. At one point, they were reported to have worked with General Electric on a “friendly” merger but that fell through. (Incidentally, GE would go on to buy RCA and thereby own the NBC network the following year.) As the pressure continued into July, CBS wound up having to resort to what is known as a poison pill to keep our proposal from getting to their shareholders: they agreed to take on significant debt and to spend almost $1 billion to buy back up to 21 percent of their company’s stock, valuing their shares about $150. This deal would take CBS debts to levels that our proposal couldn’t support. The final nail in the coffin was that these new securities that they would sell to CBS shareholders included covenants that put a ceiling on the amount of leverage the company could take on.
While we made some counterclaims and talked about the possibility of fighting on, everyone now knew that we no longer had a reasonable shot at getting CBS. But what they didn’t know was that I had spent the past few weeks discussing an entirely different merger. MGM/UA owner Kirk Kerkorian had been following my efforts to purchase CBS and decided to give me a call. He said that he was considering selling MGM and wondered if I was interested. I was. After putting so much effort into our hostile bid for CBS, it was refreshing to deal with a willing seller. I quickly concluded that having a movie studio in the hand was better than a network in the bush.
After months of battling it out in New York, I bought an airline ticket to Los Angeles and headed west, to Hollywood.
MGM
I
n the early 1980s, about the same time that I began my exploratory meetings with the executives at the broadcast networks, I also considered combining Turner Broadcasting with one of the movie studios. As a small, independent programmer I was concerned that our access to quality entertainment product would be vulnerable. Like the networks, the SuperStation relied on Hollywood suppliers for most of our series and I could easily foresee a time when the studios, under pressure from the broadcast networks, would either hike our license fees so high that we would no longer have a profitable business or start cable networks of their own and compete with us using their own programming. If we could merge with a preexisting studio, we’d at least guarantee a steady supply of product from our partner.
My most promising discussions along these lines were with Kirk Kerkorian, who owned control of MGM/UA. Kirk was based in Los Angeles, and he was curious enough about my company to fly to Atlanta for our initial meeting. I liked him. He was an astute, clever businessman who seemed to have the Midas touch when it came to investing and trading in industries ranging from airlines to entertainment to hotels (he was one of the most visionary and successful developers of Las Vegas). Kirk understood how Turner Broadcasting would benefit from a guaranteed supply of entertainment programming and I showed him the benefits we could provide to MGM. Our combined company could create an instant advantage over our competitors by using unsold advertising inventory on our cable networks to promote MGM’s new releases and home videos. Since so many people who watched the SuperStation were movie fans, it would be a particularly effective promotional platform for new MGM releases. His 50 percent stake in MGM/UA was of roughly equal value to my 80 percent of Turner Broadcasting, so I proposed that we form a 50/50 partnership and run the new company together.
I thought our initial meetings went great, but in later years Kerkorian confided that he wasn’t sure what to make of me. He thought I seemed a little young (I was in my early forties, and he was in his late sixties) and others had apparently warned him that I might be a little brash and unpredictable. These concerns led him to politely pass on doing a deal at that time. It wasn’t until the subsequent months—when he observed my handling of our run at CBS—that he decided that I might be someone with whom he could do business.
In late July 1985, just as CBS was formulating its poison pill provisions, Kerkorian called to tell me he had changed his mind about doing a deal with me. He said he wanted to stay in the movie business on a smaller scale and intended to keep United Artists, but all of his other assets, including MGM, were on the table. He had retained Drexel Burnham to prepare to sell the company at auction with a target date of August 6. The asking price would be $1.5 billion—nearly double what these assets were trading for on the open market—but if we submitted an offer before then, we could stop the auction and keep the deal private. We had just two weeks to make a deal and the price was high, but I decided to go for it.
I hadn’t given up on CBS at this point, but I knew that it was going to be an uphill and expensive battle against a company that was determined to fight me off. Now I had the willing seller of a studio on the line. And MGM wasn’t just any studio. In addition to ongoing production capacity, they also owned the largest movie library in the world, home to some of the greatest films ever made, including classic musicals like
Meet Me in St. Louis
and
Singin’ in the Rain,
epics like
Doctor Zhivago,
family titles like
The Wizard of Oz,
and my all-time personal favorite,
Gone With the Wind
. In addition to the historical output of MGM and United Artists, Kerkorian also owned the RKO library (which included
Citizen Kane
and the original
King Kong
) and all the Warner Brothers films released before 1948, including
Casablanca
and
The Maltese Falcon
. Taken together, the library controlled by MGM/UA accounted for about 35 percent of all the feature films ever made, and even though most of MGM’s movies were pretty old, no other single studio had more than about 10 or 12 percent.
On top of their feature film collection, they also owned about a thousand theatrical cartoons, including MGM’s
Tom and Jerry
series and Warner’s pre-1948
Looney Tunes
(such as
Bugs Bunny
and
Porky Pig
). They even controlled the rights to the TV special
How the Grinch Stole Christmas.
Other buyers might have looked at this library and placed a value based only on syndication and sales of home videos, a new and growing category but one that was driven by newer releases. But these assets were worth far more to me. The SuperStation had a huge appetite for movies and cartoons and MGM’s collection would give us critical mass. I also believed that if I controlled enough programming I could launch a second entertainment channel and charge subscription fees (the SuperStation’s revenues came solely from advertising, as FCC rules still did not allow us to redistribute the WTBS signal, let alone charge a fee for it). Different from MGM’s other likely buyers—the other studios—Turner Broadcasting generated profits and created asset value by building networks. For us, this was truly a one-of-a-kind opportunity.
There was one other reason that I saw more value in this deal than did the other potential acquirers. Years before, I had met with a couple of entrepreneurs who were seeking investors. These two had developed a technology called “colorization” that could add color to old black and white films and television shows. I thought it was a great idea. By this time, everyone had color TVs and programming in color was simply better. I passed on investing at that time, explaining that while we ran a lot of black and white programming, we didn’t own any of it. Instead, I suggested they speak to people at MGM and the other studios with old libraries. But I followed their progress in the trades in subsequent months and figured that if we ever controlled a library like MGM’s, we could create value by colorizing the old black and white movies.