Money From Thin Air

THE FAMILY that controls McCaw Cellular Communications is as wealthy as they are secretive. In a five-part series beginning today, they and their friends and employees reveal for the first time how one of the nation's biggest fortunes was made. ----------------------------

They were raised apart from the rest of us. They lived in The Highlands in the old Boeing mansion, a stately Spanish-style house on five wooded acres that includes eight fireplaces.

They sometimes put on coat and tie for dinners and once hosted a formal dance in the ballroom. They ate cakes made by their own cook and prowled the grounds in go-carts, motorcycles and old cars. Their mother spent $7,000 a month on household costs that covered prep-school tuition, servants, clothing, club memberships, trips to Europe, cars and flying lessons for the boys: Bruce, Craig, John and Keith McCaw.

Then one cool, cloudy day in August 1969, while his mother, Marion, was traveling abroad, 19-year-old Craig walked into his father's bedroom and found Elroy McCaw dead from a massive stroke.

The eccentric who owned several radio and TV stations, investments in 54 companies, money in 25 bank accounts, a Lear jet and a yacht was gone - and so was the force that kept his business empire afloat.

His death triggered dozens of claims and lawsuits from creditors. When claims reached $12 million, the bank handling the estate pulled out, saying the estate was insolvent. Marion argued

that the business was just short on cash, but the family mansion, yacht and other assets were sold to pay creditors. For the McCaws, it was devastating.

Eighteen years later, within a week of the anniversary of Elroy McCaw's death, the family company, McCaw Cellular Communications, went public and Elroy's four sons joined the ranks of the nation's richest, with stock holdings worth more than $1 billion.

Not even Scarlett O'Hara could have imagined a family story that went so dramatically from triumph to tragedy to triumph.

The second McCaw fortune was not built out of timber, steel or anything tangible like an airplane, but literally out of thin air - specifically, air waves. The same air waves that Elroy had used for radio and TV were seized by Craig McCaw for cellular telephones.

Having gained popularity faster than television, VCRs, personal computers fax machines or any other electronic consumer item, the cellular phone is now used by more than 11 million people and is gaining 9,500 new customers a day.

McCaw Cellular occupies an enviable position in this exploding industry. McCaw, with 2 million customers, is the only company with anything close to a nationwide cellular network.

A planned alliance with AT&T is expected to expand McCaw's leadership as the cellular phone evolves into a go-anywhere "communications appliance" that fetches and sorts messages, turns voice into text, recognizes spoken commands, reads handwriting, prioritizes messages and calls, and even plays movies.

Today, Bruce, Craig, John and Keith McCaw are multi-multimillionaires who live storybook lives. They own private jets, opulent homes here and elsewhere, big yachts, fancy cars and other exotic knicknacks. Servants and professional staff look after their financial affairs. Except for Craig, no McCaw holds a full-time job.

The McCaws can be found hosting parties in their Sun Valley mansions, skiing on slopes reachable only by helicopter, jetting to Australia for a month of vacation, sipping a cocktail at pristine Bliss Landing in British Columbia, landing a copter on a 150-foot yacht in the Mediterranean, hunting for boar by moonlight in South Africa.

If there's no snow one morning in Sun Valley, a McCaw and his friends might hop into a jet and zoom down to Palm Springs for an afternoon round of golf.

How did they do it?

How did they go from an insolvent estate to the Forbes list?

How did they make $1 billion dollars?

BUILDING A CELLULAR empire has been a near-obsession for Craig McCaw, the family leader and a shy, decidedly unorthodox executive who is something of an enigma even to those who work closely with him.

About a year ago, for example, he gathered company executives and posed a question:

"What business are we in?"

They looked at each other, dumbstruck. At a place called McCaw Cellular Communications, wasn't the answer obvious? Craig wouldn't say. He started calling in more executives until 12 or 14 were wrestling with the question.

He never gave the answer. One executive came away certain Craig thought it was more than voice communications, but could only guess at the specifics.

The episode captures Craig McCaw in action: the sharp look to his face - the bushy jet-black mustache, the nostrils constantly flared as if sensing for danger, the dark eyes ready for abrupt, rapid movements; but also his control and calm, the head tilted back, the soft voice measuring his words, the hands making delicate gestures.

The contradictions pile upon one another: He's a fierce competitor with no ego. A dyslexic who sees things others miss. A visionary who communicates clumsily. A fitness nut who looks frail. A wallflower bold enough to wager billions on risky business deals. A person who avoids people, yet has powerful insights into personal motivations. A man who is worth half a billion dollars, owns planes and yachts, yet wears a cheap digital watch. A strategist who plots his steps but tries to be spontaneous. A man with the subdued persona of a seminarian who shoots Nerf balls at visitors to his office.

To some, a genius. To others, mainly unwitting rivals later left in his wake or outsmarted in a deal, a crazy fool.

He likes to keep people guessing. His favorite image for himself and his company are the anonymous pursuers whose relentless skill and hustle finally force Butch Cassidy and the Sundance Kid to ask, "Who are those guys?"

He rarely lunches outside his office. "I'm extremely boring," he says.

Ask company President James Barksdale what Craig does with his time and Barksdale says, "I'd like to know what his daily schedule is."

Craig took a remnant of Elroy McCaw's empire - a tiny, troubled cable company in Centralia - and used leverage like a wild man, a very smart wild man who made each move like a chess master and always had a parallel strategy if a a deal turned sour.

After Elroy McCaw's death, Craig met with his brothers and laid out a plan to borrow against that cable company and buy others.

In the early days, he pushed his brothers to pledge everything they owned as collateral for purchases of companies most people thought were worthless or nearly so.

Skillfully managing costs and boosting revenue, the cable companies skyrocketed in value, further boosting collateral for more borrowing. The gains later in cellular were even better. The value of some cellular properties soared 9,800 percent over what McCaw had paid for them.

With his brother John, who helped with acquisitions, Craig hired young executives who believed in his vision, worked seven days a week for years, scorned tradition, dressed casually, endured ridicule from competitors, and found other people's money to buy more properties, first cable-TV systems and later cellular licenses.

The company thirsted for cash and piled up staggering debt, leveraged on promises of ever-growing cash flow.

Cellular was so new that the company virtually had to invent a concept for financing systems and then teach it to lenders. The lenders learned. The company spent.

Along the way company officials made some crazy deals, in crazy ways with some odd characters.

LOOKING FOR MONEY, they went to Michael Milken, the popcorn addict at Drexel Burnham Lambert who almost single-handily created a multibillion-dollar investment pool out of high-yield, high-risk debt called junk bonds.

Milken, who boasted that he was a "brain surgeon" compared to "veterinarian" competitors, would showcase McCaw officials at his Predators' Balls, the famed gathering of junk-bond buyers and sellers that hatched some of the biggest deals of the '80s.

The McCaw executives put on ties and courted the Boston Brahmins who owned The Boston Globe. They schmoozed with small-town councilmen in Oregon who controlled cable rates and licenses.

They bought from communications conglomerates whose executives often thought they were taking advantage of the boys from Kirkland. And they bought from countless small-time speculators in the cellular frontier: a drunk in a Fairbanks bar, dentists, a beauty-salon owner, an ambulance driver, a deep-sea diver in Oregon. They paid $700,000 to a guy nicknamed The Fat Man who played porno movies in his office. They paid $3 million to an Oregon man who lived deep in the woods in a mobile home.

One couple in Arkansas, Bill and Hillary Rodham Clinton, collected $48,000 from the sale of their piece of a partnership in a cellular license. Their $2,000 stake made five years earlier represented the couple's most successful investment.

Another couple who operated a beauty school in Santa Rosa, Calif., saw a television show on speculative investments hosted by Mike Douglas. They invested $15,000 on a chance of getting a cellular license and wound up with control of Yakima's license. McCaw bought them out for $1 million.

The Kirkland boys did deals fast. They flew directly to owners of cellular licenses, presented a one-page sale agreement and asked, "What will it take to get you to sign right now?"

The papers would be signed, the seller gleeful for getting more than expected, and the McCaw official would be flying home, while competitors were writing memos to headquarters about their purchase plans.

Some deals took place outside of the rules, or at least what people thought were the rules.

At a company retreat, Craig McCaw had been warned the company was trying to buy cellular licenses that hadn't been formally awarded to sellers, an apparent violation of Federal Communications Commission rules.

"We can't do that. The rules don't allow that," an executive warned.

"I don't care," McCaw replied. "Figure out a way to do it."

They bought the licenses, kept buying and eventually got government approval.

Craig believed the smartest strategy often might be to pursue something that seemed crazy or impossible to others. If he had followed the conservative path, he probably would have remained in Centralia, running the small cable-TV system that had survived Elroy's estate.

But doing the sensible thing was not Craig - or Elroy's - style.

Craig would be uneasy about too many comparisons to his father. Elroy did deals on the backs of envelopes. Didn't keep track of details. Didn't hire enough good people. Kept too much in his head. Tried to do too much himself. Craig vowed to avoid those mistakes.

But understanding Elroy is key to understanding how McCaw Cellular was built and how that billion-dollar fortune was made.

Elroy was a 1980s-style entrepreneur, complete with excesses. Forming a vision, taking huge risks, using borrowed money and cash flow to build the pyramid, doing deals just to avoid boredom, dreaming of a national communications network, dealing with government regulators, using planes for fun and profit, avoiding personal publicity, maintaining a mystery about himself - that started with Elroy McCaw.

Elroy mastered Thin Air. He knew a license to the air waves was an opportunity to make big money. Years later, around the McCaw company, there was a joke about Craig: "Craig never met a frequency he didn't like."


The son of a civil engineer who worked in Eastern Washington and Idaho, J. Elroy McCaw moved to Centralia where he founded KELA radio.

Elroy was 5-foot-9 and weighed about 170 pounds. He wore glasses that framed a pair of piercing, dark eyes.

"He was not an impressive-appearing fellow. He looked like a bank teller," recalls Les Keiter, now a semi-retired TV sportscaster in Honolulu who worked at KELA and other stations owned by Elroy.

One afternoon, the Rotary sponsored a picnic. A local hardware-store owner, William Oliver, introduced Elroy to his daughter, Marion. She recalls thinking of Elroy as pleasant-looking but "clothes were not important to him."

Marion was an interesting match for Elroy. Her father had advised her that a woman should have business experience, at least to understand the life of her husband.

An accounting major at the University of Washington, Marion was told she would make a fine certified public accountant but the profession would never allow a woman into the ranks.

After graduation, she made a stab at real-estate development and built in 1939 a 40-acre subdivision near Olympia, handling all the permits, financing and contract negotiations. She was tailored, methodical and smart.

For the rest of their marriage, she would try to convince Elroy that deals had to be more than a handshake and people's recollection of the terms.

"I was always a great believer in paper. Elroy was not," she would say later.

Elroy had an FCC engineer's license to personally operate KELA, which helped on those occasions when the union threatened to shut down operations. Elroy liked Hawaiian music.

On Sunday nights he went in, read some of the news and closed down the station. Nobody seems to recall anything remarkable about his announcing style, which was described only as casual. Even so, Keiter was in awe.

"When you were in conversation with him, he'd always be five jumps ahead of you," says Keiter.

"So many times he wouldn't say good-bye. He walked out on the conversation. Some thought he was rude. He wasn't. His thought process was in another area," Keiter says.

World War II disrupted Elroy's expansion plans, but it served to enhance the air of mystery about him. He served in the old Army Air Corps in intelligence, working mainly with radio systems.

Exactly what he did remains murky even to family and close friends.

One story has him making a secret journey to Russia to install a weather station to assist British pilots. Many suspected that Elroy for many years stayed active in intelligence work as an operative for the CIA.

After the war, McCaw steadily acquired ownership or pieces of radio stations from Hawaii to Texas. He spent little of his own money. Les Smith, longtime owner of Seattle's KJR-AM and friend of Elroy, says Elroy was one of broadcasting's first leverage artists.

"Elroy had every banker. He had zillions of bankers," says Smith.

On business trips, he'd often travel without a razor, a hat or even a change of clothes. He'd show up at a friend's hotel room, asking if he could sleep on the couch. He rarely carried cash. He constantly bummed cigarettes or cigars from friends. When the dinner check came, Elroy never picked up the tab.

ELROY WOULD HAVE completely understood Craig McCaw's interest in the liberating effect of cellular phones.

Talk was Elroy's currency. He spent it freely. He was always on the phone, about to make a call, or handling multiple calls at once. The pace amazed friends.

Keiter remembers Elroy's calls from Seattle to friends and employees on the East Coast. At any hour.

"Elroy, do you know it's 3 in the morning?" an awakened Keiter would ask from New York.

"Not here," he replied.

Sometimes he'd would call people and then fall asleep three minutes later.

"I'd yell, `ELROY!" and he'd wake up," recalls Jim Adduci, a friend in Washington, D.C.

Elroy treated any situation as an opportunity. He figured he could talk his way into anything, whether it was a presidential inaugural ball, a national political convention or a banker's vault.

Joe Clark, an old family friend, thought of Elroy as a kind of Mr. Magoo, the near-sighted cartoon character who cheerfully walked into anything. "He'd walk right past a secretary. People would never stop him because he had that air that he was supposed to be there."

One time Elroy agreed to buy a Lear jet from Clark's airplane dealership. Elroy said he'd get the money right away and called downtown to his banker.

Clark remembers the scene vividly. At 11:45, Elroy walked into Peoples' Bank, cigar in mouth.

"Howya doing, Ken?" he said to a vice president. "I've just got a minute. I need $100,000."

"I don't think we can do that," replied the banker, saying a committee would need to review the request.

"Wanna bet?" replied Elroy. "I keep a substantial amount of funds on deposit in your bank. Check it out and I'll be back at 1 p.m."

Elroy got his money and his plane.

His most profitable deal cost him almost nothing.

In 1953, already owning interests in eight radio stations, Elroy and a minority partner bought money-losing WINS-AM from Crosley Broadcasting Corp. for $450,000.

His down payment was believed to be just $60,000. The price - a fourth of what Crosley had paid for the station seven years earlier - reflected the gloomy outlook for the radio industry, which was losing advertising dollars to television.

Elroy flew from Seattle to New York every other week.

He found a tightwad's solution to Manhattan housing costs - he converted a portion of WINS premises into his rent-free apartment. Then he started slashing the station's operating costs.

According to Rick Sklar, former WINS program director, in his book, "Rocking America:"

"He locked out the studio orchestra. He ordered the light bulbs changed to 60 watts. To save paper costs, he switched the United Press teletype machines from costly multicopy carbon paper rolls to the free single-paper rolls that came with the service, and he issued a directive to single-space the program logs. . . . If, through natural selection, a new humanoid species were to evolve that could instinctively survive without any money of its own, Elroy McCaw would have been the progenitor."

Elroy squabbled with unions and drew some picket lines, including one picketer named Walter Cronkite.

During negotiations, Elroy tried to win sympathy by arriving in crutches, wrote Sklar. Desperate to raise ratings, which would bring advertising dollars, he tried a new musical format called rock 'n' roll.

The station hired two of New York's legendary announcers, Alan Freed and Murray "Murray the K" Kaufman.

The station staged numerous goofy stunts to attract attention. Disc jockeys interviewed talking gorillas and camped inside the subway. Ratings soared and money started pouring in.

Elroy sold the station in 1969 to Westinghouse Broadcasting Co. for $10 million, then the largest sale in broadcast history. Ever the prankster, Elroy thought it was fun to have Craig, then 12, go alone and deposit the $10 million check.

Elroy then exercised an option on WINS property at 7 Central Park West and sold it to a skyscraper developer for nearly as much money.

ABOUT THE TIME he bought WINS, Elroy found another bargain just north of Seattle in unicorporated King County - a seven-bedroom, seven-bathroom, 20,000-square-foot mansion, a guarded enclave for the wealthy just north of Seattle in The Highlands.

When Elroy decided to buy the house, it had been vacant for more than a decade, had been donated to Children's Hospital and was in severe disrepair. The driveway was swallowed by overgrown shrubs.

"Don't tell anybody," Elroy told Les Smith after buying the house. "Marion doesn't even know."

"What the hell do you need that big a house for?" Smith recalls asking Elroy.

"I'll work it out," Elroy replied.

Marion didn't want the house. It was just too big. Friends of the boys, however, loved it.

Matt Griffin, former chief executive of Egghead Software, says the mansion was unbelievable:

"The only time I've seen anything like it was on `The Beverly Hillbillies,' " Griffin said.

Even kids from comfortable homes were impressed.

"Exploring the house for a kid like me was a major event," says Lawrence Minard, managing editor of Forbes magazine whose grandfather had founded a successful car dealership.

Taking their cue from Elroy's sense of humor, the boys played pranks on visitors to the house. Departing dinner guests would start their cars, only to hear a loud bang, followed by puffs of white smoke.

There were constant chess games with Elroy. Craig, who didn't socialize much outside the home, particularly enjoyed those matches.

Chess was a way to get inside Elroy's mind, sense his way of grasping complex relationships and thinking ahead. Craig had a mental link with father. Elroy would hide a pawn in his hand and Craig almost always made the right choice.

Elroy would take the boys, their friends and Marion's nephews for cruises on the family yacht, the 63-foot "Sumarlee."

The boys and their friends learned bridge on trips down Hood Canal or up to British Columbia. At sea, he was as eccentric as he was on land.

"Elroy was a bit of a loose skipper," recalls Oliver. "He'd always managed to go aground on a sand bar. His favorite saying was, `Don't worry boys. we've got plenty of water.' A few minutes later, we'd run aground."

Elroy wasn't content with the WINS success. He kept looking for the next killing. He tried to buy the ABC radio network, but ABC wasn't selling.

He bought control of a large moving company, invested in a 200-acre industrial park in Kent and later in a Canadian steel manufacturer that went bankrupt.

He unsuccessfully tried to turn a small TV station in Tacoma, KTVW-Channel 13, into a 24-hour national financial news network. KTVW never made a dime.

Marion knew as well as anybody that Elroy was spreading himself too thinly.

As supervisor of his bookkeeping, she urged him to slow down and be more careful about putting details of transactions in writing. He wouldn't.

"There were times," she said later, "when I think he paid a lot of attention to what I had to say, but when he was caught up and interested and intrigued with something, he was just inclined to go ahead with it."

In August 1969, Marion and Elroy were due to travel to France for a barge trip.

At the last minute, he said he wasn't going; he wanted to spend more time with the boys. Marion left with a woman friend in Elroy's place.

He died early on a Saturday morning. Elroy's death hit the children hard. Keith, years later, didn't want to talk about it, saying it was too painful.

Craig, who felt closest of the boys to his father, said Elroy's death brought a disaster to the McCaws.

"A lot of bad things happened to my family," he said later.

Homer Bergren, one of Elroy's business associates, went down to the King County Courthouse.

He picked through the listing of Elroy's assets and investments, thinking there might be something he could buy. Bergren was shocked.

There wasn't anything worth having, he concluded.

"He was flat-ass broke," says Bergren.

Creditors came calling.