Capital Cities/ABC
Company Overview
Capital Cities/ABC was a major American media company formed when Capital Cities Communications acquired ABC in 1985 in a transaction that shocked the media world — a relatively small company buying a much larger one. The deal was structured with crucial $517.5 million of equity financing from Berkshire. Buffett called CEO Tom Murphy the best manager he had ever known.
Investment Story
1985: Berkshire's pivotal role. When Capital Cities announced its acquisition of ABC — then worth almost as much as Capital Cities itself — the transaction required equity capital that the company's balance sheet couldn't support alone. Murphy called Buffett, who agreed in 15 minutes to invest $517.5 million for approximately 18% of the combined company at $172.50 per share. Berkshire could not sell these shares for three years — a lockup provision that Buffett accepted without negotiation.
Murphy and Burke: the management template. Tom Murphy (Capital Cities CEO) and Dan Burke (ABC president) became Buffett's explicit standard for management excellence. Murphy was a brilliant acquirer — buying television stations, radio stations, and newspapers at prices that almost always looked too high and proved too low. Burke was an exceptional operator, running the acquired properties with cost discipline that consistently outperformed peers. Together they demonstrated the complete package: growth through acquisition and operational excellence.
1985–1995: Compounding under Murphy. Capital Cities/ABC generated exceptional returns through a combination of operating profit growth, balance sheet strengthening, and share repurchases. Murphy paid down the acquisition debt rapidly, then began repurchasing shares aggressively. Berkshire's position grew substantially in market value.
1995: Disney acquisition. Michael Eisner's Disney acquired Capital Cities/ABC for $19 billion — roughly $125 per share — in a combination of cash and Disney stock. Berkshire received Disney shares and ultimately sold most of them, realizing an enormous gain on the original 1985 investment.
Berkshire's lessons. From the 1985 investment to the 1995 Disney sale, Berkshire earned roughly 3x its investment in a decade — excellent returns. More importantly, the Murphy-Burke partnership provided Buffett with his clearest real-life case study of how great management at a leveraged acquisition creates shareholder value.
Buffett's Own Words
(000’s omitted) 220,000 Capital Cities Communications, Inc. ..... $ 10,909 $ 13,228 1,986,953 Government Employees Insurance Company Convertible Preferred ........ 19,417 33,033 1,294,308 Government Employees Insurance Company Common Stock ................. 4,116 10,516 592,650 The Interpublic Group of Companies, Inc. 4,531 17,187 324,580 Kaiser Aluminum& Chemical Corporation ... 11,218 9,981 1,305,800 Kaiser Indu
Teledyne, Erwin Zaban at National Service Industries, and especially Tom Murphy at Capital Cities Communications (a real managerial “twofer”, whose acquisition efforts have been properly focused in Category 1 and whose operating talents also make him a leader of Category 2). From both direct and vicarious experience, we recognize the difficulty and rarity of these executives’ achievements. (So do they; these champs have made very few deals in recent years, and often have found repurchase of their own shares to be t
Corp.; Walter Wriston, then CEO of Citicorp; Frank Cary, then CEO of IBM; Tom Murphy, then CEO of General Motors; and, most recently, Paul Volcker. (They are in good company.) The Blumkin blood did not run thin. Louie, Mrs. B’s son, and his three boys, Ron, Irv, and Steve, all contribute in full measure to NFM’s amazing success. The younger generation has attended the best business school of them all - that conducted by Mrs. B and Louie - and their training is evident in their performance. Last year N
Capital Cities Communications, Inc. at $172.50 per share. Our purchase is contingent upon the acquisition of American Broadcasting Companies, Inc. by Capital Cities, and will close when that transaction closes. At the earliest, that will be very late in 1985. Our admiration for the management of Capital Cities, led by Tom Murphy and Dan Burke, has been expressed several times in previous annual reports. Quite simply, they are tops in both ability and integrity We will have more to say about this 2022/4/7 14:43
*Later sections of this report discuss (a) our purchase of a major position in Capital Cities/ABC, (b) our acquisition of Scott & Fetzer, (c) our entry into a large, extended term participation in the insurance business of Fireman’s Fund, and (d) our sale of our stock in General Foods. Our gain in net worth during the year was $613.6 million, or 48.2%. It is fitting that the visit of Halley’s Comet coincided with this percentage gain: neither will be seen again in my lifetime. Our gain in per-share book value *
Investment Lessons
Great managers at leveraged acquisitions create explosive value. Capital Cities' acquisition of ABC appeared insanely leveraged at closing — the company took on debt that exceeded its existing equity multiple times over. Murphy and Burke immediately attacked this debt through cost discipline at ABC and free cash flow from existing Capital Cities properties, retiring it in half the expected timeline. The leverage that looked dangerous was actually manageable in the hands of exceptional operators whose operating cash generation exceeded financial projections.
Repurchase as the ultimate capital allocation complement. After retiring acquisition debt, Murphy used Capital Cities' free cash flow for aggressive share repurchases — reducing share count and increasing per-share intrinsic value annually. This combination (pay down debt, then repurchase shares at disciplined prices) is the optimal capital allocation sequence for leveraged buyout survivors. Murphy executed it perfectly.
Strategic financing is a legitimate competitive advantage. Berkshire's $517.5 million equity infusion allowed Capital Cities to close an acquisition it couldn't otherwise fund. This 'friendly capital' — at Berkshire's required return, without interference — gave Capital Cities a structural advantage in negotiating with ABC. Strategic capital (permanent, non-interfering, aligned) is genuinely more valuable than commodity capital in critical acquisition situations.