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Capital Cities/ABC: A Leveraged Buyout

Capital Cities had an auspicious beginning. It was founded by in 1954 by the adventurer, Lowell Thomas, and his business manager. In 1955, they acquired their first property, a radio station in Albany. Smith, in the meantime, set about recruiting a new generation of managers, starting with one Tom Murphy, the son of one of his golfing buddies, who was made manager of the Albany station.

The company, Capital Cities, was named after its first two stations in the capital cities of Albany, New York, and Raleigh, North Carolina.  When they acquired a second station, Murphy recruited his business school friend, Dan Burke, to run the Albany operation while he concentrated on corporate development. Although Cap Cities was much smaller than the networks, even three decades later, by the late 1980s, Murphy and Burke had made names for themselves as the best managers in the media business.

Sensing a management crisis when ABC's Leonard Goldenson was about to retire, Murphy and Burke offered to buy ABC in what would amount ot a reverse merger. Goldenson was not uninterested, but he challenged them to raise the money. This as been cited as case of the minnow swallowing the whale. But this isn't quite true. It WAS true that ABC's revenues were more than three times' Cap Cities.  More important, the two companies were about equal in profitability, roughly $200 million apiece, because Cap Cities' profitability was three times higher. And the ratio of ABC's net worth to Cap Cities' was about 3 to 2: until Warren Buffett's $500 million-plus infusion brought Cap Cities to parity.

Capital Cities had an enviable track record, growing its market caap roughly ten times every ten years (26% annualized) between 1955 and 1985. Thanks to two deals with ABC in 1985, and Disney in1995, it maintained that pace during the last ten "big cap" years of its existence.