Buying Binge

By 1981, Craig McCaw's company had new offices in Bellevue and owned cable-TV systems throughout the Northwest and Alaska. Craig wanted to buy more, but banks were balking. The McCaw expansion was stalled. One executive compared it to the abrupt halt of Gen. Patton's tanks: charging across a front, capturing territory, only to run out of gas.

Then Ed Hopper, a cable consultant, found a financial gas station.

Affiliated Publications, owner of The Boston Globe newspaper, was rich with cash and looking for an investment in cable. Hopper persuaded the company to invest in McCaw Communications. It was an unlikely match. Affiliated was a formal, stuffy organization controlled for generations by the Jordans and Taylors, two old-line New England families. Compared to Affiliated's elegance and polish, the McCaw company was a ragtag group of tieless boys who didn't sleep much.

AFFILIATED AGREED to put $12 million into McCaw expansion and in return got 45 percent of McCaw. Affiliated's investment eventually reached $85 million. Within seven years, that investment was worth close to $2 billion, more than the value of the Globe itself.

The investment illustrated another fact. Big players would do business with McCaw executives and drastically underestimate the McCaw cleverness and ambition.

"At the time, they thought they were just making a peekaboo investment to buy part of the company and buy the rest later," Craig said recently. "Our intentions were to buy them." (He later changed his mind.)

Affiliated's money helped McCaw make its first big purchase, a cable-TV system in southern Oregon, which more than doubled the company's cable subscribers to 92,000.

John McCaw, Craig's younger brother, remembers that period as the most perilous in company history. The Oregon system was in shambles and badly needed cash for improvements. But to raise rates, the company needed the approval of 11 different county and city councils.

Persuading them was largely John's assignment; he was nicknamed the "relationship guy." Like a fighter pilot, he would lock on a target and schmooze until an agreement was reached. John got the rate increases.

The company had doubled in size, but Craig was ready for even bigger things. The United States government was about to give away billions of dollars worth of Craig's favorite commodity - huge chunks of air waves for a relatively unknown technology called cellular telephones.

The Federal Communications Commission in 1982 began taking applications from groups or individuals for slices of a large portion of radio spectrum dedicated to serve cellular in every major city in the nation. The amount of spectrum was the equivalent of eight TV licenses in each city.

FOR ANYONE who thought air waves were a valuable commodity, as Craig McCaw did, it was an incredible giveaway, like the land given to the railroads in the 19th century. The FCC said it would hold hearings for 305 markets and give a license to the companies that would best serve their communities. Round One would distribute licenses to the top 30 markets.

Cellular was just an oddity then. AT&T had spent millions developing the technology. A precursor of cellular service was tested in Chicago in 1948, but the technology needed lots of spectrum, or airwaves, and thus a system could not handle a large volume of calls at once. At first, that wasn't a big problem because few people could afford the going price then for a cellular phone, $3,600.

But like his father, Elroy, Craig was a believer in spectrum and new radio technology.

"It's got to be worth something, for god's sake," Hopper, the consultant, remembers Craig saying. "Look how much there is."

So Craig hired Hopper full time, gave him a modest budget, and told him to get cellular licenses. No deal could be closed, however, without prior approval by the FCC. The early plan was to limit the company to West of the Mississippi.

They had several reasons to believe cellular was a good bet.

-- Consumer costs would come down. Hopper had previously visited an electronics manufacturer who held up a costly cellular phone and a $69 citizens-band radio.

Want to know the difference between the two? Hopper was asked. The answer was a $25 microprocessor. Hopper was stunned. Clearly, one of the biggest obstacles to public acceptance of cellular technology was cost, and Hopper realized a cell phone eventually would cost less than $100.

-- The gadget sold itself. Craig for years had used a mobile phone, a bulky precursor to cellular phones. Both he and Hopper were convinced that once people tried cellular phones, assuming the price was reasonable, they wouldn't want to give them up.

-- Cellular operators only needed a few customers. A cellular system was not costly to operate. A study done by the accounting firm Ernst & Whinney (now Ernst & Young) showed that a system would break even if less than 1 percent of the people in a community signed up for service. That compared with more than 40 percent for a cable-TV system to break even.

The FCC said each market would get two cellular licenses: one for the local phone company and another to the winner of a comparative hearing.

Hopper figured the licenses to be given to non-Bell applicants in the first 30 markets alone were worth $16 billion.

One had to be a believer in cellular to agree with that estimate. Some doubted then that anyone could compete with the powerful Bell companies, which controlled access to the wire-line networks.

But the application process attracted a number of large media companies with cash for risky investments, some speculators who simply wanted licenses that they could resell, and a few, such as McCaw executives, who saw the potential that others took years to understand.

For the rest of the decade the company would work feverishly to win or buy as many cellular licenses as possible. It was a land rush on the cellular frontier, a race to get licenses before their value became widely known. Once the big companies saw the future, they would move in with their bigger bank accounts and possibly outbid McCaw. But that was years away, only after McCaw executives were ridiculed as foolish buyers.

ROUND ONE attracted 193 applications, roughly five non-Bell groups for each city. Thinking the process would be costly and would reward those with the most detailed plans, McCaw applied for only six and got every one, including Seattle. The company also wanted to apply for Boston, but the Affiliated board refused to approve an application that was ready to go. (The Boston license was later worth $798 million.)

When 350 applications came in for the second round and another 600 for the third round, the FCC ran out of space to store the paperwork. Staff members realized the planned process was unworkable. So the FCC announced it would halt the process. The second and third rounds would be a lottery, the agency said. This was a huge blow to McCaw, which had assumed that its reputation in cable and Affiliated's balance sheet would be a competitive advantage.

Some groups had anticipated that the FCC would not be able to handle the volume, so they filed 50 or more applications. McCaw had filed just five applications for the second tier of 30 cities and 15 for the third tier of 30 cities - a rare occasion when McCaw strategists erred.

John Stanton, a young Harvard MBA hired to help Hopper, got the job of repairing the damage. When one group representing about half of the applications merged their lottery positions, Stanton went out and organized most of the remaining applicants. It took months of intense effort to build a coalition. Some were speculators. Some were communication-industry pariahs. Some had problems with the Securities and Exchange Commission or the Internal Revenue Service.

They all gathered at a New York law firm for two weeks in September 1984, just days before the FCC lottery. The goal was to sell or trade positions in the lottery so each person had as many positions in a desired market as possible. By agreement, no one could pull out if he didn't like the result.

About 18 people representing hundreds of applications met, working from 10 a.m. till as late as 2 a.m. Chinese food or pizza came by 8 p.m. Cigarette and cigar smoke filled the room. People shouted across the room as they traded cities like pork bellies. "It was like the Wild West," Stanton recalled. The process was exhaustive, but went well until they got to Sacramento.

All 12 applications for Sacramento were represented in the room. The two groups that wanted the city, MCI and Graphics Scanning, had obtained all but one application, which was held by a cigar smoker named George, who was tipsy from drinks at lunch that day.

THE MCI GUY approached George and traded Albuquerque for Sacramento. A few minutes later George again traded his Sacramento with Graphics Scanning.

"A dozen people were standing around the room, mouths agape," recalls Stanton. "We'd been working at this thing for a day and a half, built on a year's worth of work, and here's this guy who's going to destroy the process because he's going to trade things he doesn't own.

"Someone finally explains this to (George), who's clearly feeling his liquor and he goes . . . (Stanton shouts in a slurred voice) `I'm short. I'm short. Who's long Sacramento? Who's long Sacramento? I've got some Flints here. I'll trade you some Flints. What do you want for a Sacramento?'

"He's yelling like he's in Chicago in the options market. He's shouting for 20 minutes."

Finally the mess was straightened out. The first trade stood, the second was canceled, and George wasn't allowed to do more trades without his lawyer initialing the deal.

Stanton had been up all night before the last day of trading. He had neglected to remove his contact lenses, which by then were so clogged with smoke that they were drying painfully onto his eyeballs. An attorney rushed Stanton to the hospital. Afterward, he returned with patches over both eyes, temporarily blind, and finished his work.

Stanton was pleased with the outcome. McCaw had collected 20 or 30 lottery positions on cities it wanted, and the FCC gave its approval to the traded applications. The company wound up with controlling interest in its No. 1 objective - Austin, Texas, which had perfect demographics for a cellular system - plus Oklahoma City, Wichita, Kan., and Tacoma.

Licenses in hand, the company now thirsted for even more cash. A license was only a piece of paper until money was spent to build the system. And there were more licenses to buy. Craig laughed when Hopper told him he was going to ask the E.W. Scripps Co. for $12 million. That was really shooting for the moon, they agreed. But Hopper got the whole amount in exchange for a percentage of the company.

STILL, THAT WASN'T ENOUGH. They needed even more, huge amounts, to buy more licenses fast, before prices rose. A new, large deal was in the works, but banks and new partners weren't the right approach.

There was a new way to raise money - issuing junk bonds, corporate IOUs at high interest rates. A legendary trader at Drexel Burnham Lambert named Michael Milken had created a $125 billion pool of junk bonds that helped tiny companies swallow bigger ones or small-time executives gain control of large corporations. Milken was a big player in cellular and cable-TV deals, having helped John Kluge's Metromedia Co. and William McGowan's MCI Communications.

Salomon Bros. and PaineWebber, two respected New York investment-banking firms, were desperate to enter this market. They offered to help McCaw raise $225 million. But the two firms couldn't do it. So in the summer of 1986, McCaw Vice Chairman Wayne Perry, Chief Financial Officer Rufus Lumry and Stanton flew down to meet Milken at his Beverly Hills office. Craig stayed home so he could kill the deal if he didn't like it.

Milken had several offices where he kept waiting clients, like a doctor keeps patients in examining rooms. The McCaw executives, who later described the scene, sat and waited. Suddenly, a bag of popcorn was brought in and Milken made his entrance.

Popping kernels into his mouth, Milken got to the point.

"You've got to show strength," was his first comment. "How much you looking for?"

"225."

"Then we'll have to show strength. We'll go for $275," Milken said.

Lumry was incredulous. "How in the world can you get this done when no one else can? When Salomon and PaineWebber can't get this done."

Milken smiled. "Your problem is, you went to veterinarians when you wanted brain surgery."

Milken vastly accelerated McCaw's buying. Within a few months, the company used Drexel-handled junk bonds to buy MCI's cellular and paging operations for $120 million. It was a fabulous deal for McCaw, which sold a majority of the paging operations for $75 million and kept the cellular operations, later valued at more than $1 billion. The day after the MCI deal closed, McCaw bought two more groups of licenses for $150 million.

OVER THREE YEARS, Milken raised almost $1.3 billion for the company. Milken fell under investigation by federal authorities during this period, but the McCaw people remained confident that they had been treated well. Even though Milken went to prison for violations of securities and tax laws, nobody at McCaw would speak ill of him. "He helped us, he believed in us, he cared about us," Craig said later. "As a customer of his, he did for us as much as any human being could."

Milken was proud of the McCaw company. McCaw executives became featured speakers at Milken's annual Drexel High Yield Bond Conference, better known as the Predators' Ball, famous for its elaborate presentations, clever videos, entertainment by stars like Frank Sinatra and, allegedly, furnished prostitutes.

McCaw people, however, were there to work and only work. They never saw evidence of prostitution. They skipped the parties.

"Drexel never involved us in any of this stuff. They knew you absolutely could not bribe McCaw," Perry said. "Craig set that tone for the company. "The joke in the investment community was the corporate drink at McCaw was Perrier."

Eventually, Craig himself flew down to meet Milken. Milken had a warning to deliver.

"You're exposed," Milken said. Craig was trying to grow two capital-intensive businesses at once while facing competitors with deeper pockets, Milken said. He couldn't do both cable and cellular. Milken warned Craig that his company was too deeply in debt. Craig had been aware of the issue but the message from Milken "hit Craig right between the eyes," Stanton said later.

BUT WHICH DIRECTION to choose?

Craig had an emotional attachment to the cable properties, which ranked as one of the nation's largest systems with more than 425,000 subscribers in 37 markets. But cable was a maturing industry; a dollar invested in cellular had a vastly superior rate of return. More important, McCaw was only a midsize player in cable but in cellular McCaw had the opportunity to become the leader of an industry of limitless potential.

Within a few months, the cable system was for sale. Many cable industry observers thought Craig was crazy to sell his cash cow.

An offer came quickly from Jack Kent Cooke, owner of the Washington Redskins football team. Cooke, who suffered from claustrophobia, hated to fly. But he was so anxious to deal with Craig first that he flew from the East in intervals, stopping so he could get out of the plane. He reached Seattle "and we had a deal with him in about 10 minutes," Craig said.

Price: $755 million.

Milken, naturally, was involved. He provided Cooke's financing, a small piece of the $18 billion he raised for deals in cable, cellular and entertainment.

Cooke was very pleased with the price he got.

"He thought he was taking advantage of us and he was, probably," Craig said later, "but we had better things to do with the money."

Craig was in a hurry.

-- Tomorrow: Going public, going to war reluctantly.