As a key finance and operating executive in the telecommunications and media industries, Leo Hindery Jr. has worked for some of the most prominent CEOs in the country, including John Malone and Michael Armstrong. In fact, Hindery is as responsible as any kingpin for the consolidation that has taken place in media and telecom. No small thanks to the deals he helped execute, the two businesses are now often considered one.
But convergence has raised serious political and economic issues. Congress is now debating whether to reverse the Federal Communications Commission's recent decision to allow further concentration of broadcast, radio, and print media ownership. Meanwhile, deregulation — which Hindery ardently championed in the 1990s — has encouraged overbuilding of fiber-optic networks and other infrastructure meant to carry content that shows no sign of materializing. One of the prime contributors to the capacity glut was Global Crossing Ltd., where Hindery served as CEO for seven months, in 2000.
Hindery lays much of the blame for the glut at the feet of lawmakers and the FCC for failing to anticipate such an outcome. But he also points a finger at management — for making rash deals without a strategic vision, and executing the deals badly.
Nowhere was the latter more apparent than in AT&T's 2000 acquisition of MediaOne, a cable TV operator in key markets such as Atlanta, Boston, and Los Angeles. As CEO of AT&T Broadband, the company's cable business (which has since been sold to Comcast), Hindery had much to do with that deal. And he has much to say about it today, both in his recent book about notable deal makers, The Biggest Game of All (Free Press, 2003), and in an interview he gave in May to Ronald Fink, deputy editor of CFO, at Hindery's office in Manhattan's Chrysler Building.
Hindery's views of that transaction, and on the overall climate for telecom and media, help put into perspective certain challenges facing finance executives today in any industry. Indeed, the same short-term thinking that plagues many media and telecom combinations has diminished the viability of all sorts of companies. In Hindery's view, the fundamental problem lies in a compensation system that encourages deal making for its own sake. But he says tactical mistakes have also fouled up many transactions.
Today, at 55, Hindery remains active in the deal-making game, as chairman and CEO of the Yankees Entertainment & Sports (YES) Network. He recently completed long negotiations with Cablevision to carry Yankee games in the New York City area, demonstrating his ability to work with arguably the toughest CEO of them all — George Steinbrenner.
What do you think of the FCC's decision to lift existing limits on further consolidation in the media industry?
In this environment, you need more regulation than we have today, not less. When we had hundreds of cable companies and programming was scattered all over the country and markets were shared among multiple companies, nobody could really get too out of control. But now you have a world where, from a cable perspective, each of the core markets in the United States is wholly owned by a single operator. Five years ago there were nine operators in the Bay Area; today there's one.
Wasn't deregulation supposed to benefit consumers?
If consolidation were about fostering new programming and technology that wouldn't get developed otherwise, if it were about bringing lower prices to consumers thanks to economies of scale — hey, that's good. I was an advocate of consolidation a long time ago, and I still am. But I also passionately believe that the consolidation was not supposed to be about discrimination. Cable rates rise; some of it's justified, some of it's not. And while I think we have a nice system in place, I wouldn't let it get much more consolidated than it is today, and I would begin to immediately put in place behavioral rules that prevent abuse of programmers or consumers.
You'd have a concept called parity, which means programming is treated the same regardless of who owns it. There's no discrimination by the distributor; he or she doesn't favor the stuff they own to the exclusion of stuff they don't own.
Then there is content neutrality. Distributors should not be allowed to set up rules that penalize one type of content that they may not own versus rewarding content of the type they do own. And cable operators should not be allowed to pass through unreasonable rate increases. You can't raise rates 10 percent, as happened many times this year, if inflation is 2, 3, or 4 percent. It's not right.
Finally, you should not be allowed to abuse this almost monopoly or duopoly position that you've been given. You shouldn't make me buy your data at an unfair price because it's bundled with the video.
Putting those rules into effect sounds like a formidable task.
It is, and it takes a lot of courage. Right now, this FCC doesn't have that courage. Some [members] do, but the commission as a whole is so laissez-faire that it is closing its eyes to abuses that exist in cable-rate practices, in bundling practices, in the treatment of independent programmers.
Why weren't these problems anticipated by the 1996 Telecommunications Act or dealt with through subsequent legislation?
Congress doesn't regulate industries very well. We've let the industries consolidate; I'm not trying to argue against that. I encouraged it, and I did a number of deals that caused it to happen. But I also testified to Congress repeatedly that if it let these industries consolidate, it should not be on the backs of consumers, it should be to the benefit of consumers. It should not be on the backs of independent programmers, it should be to their benefit. You've got a scenario right now where cable companies own 50 percent of the programming available on the dial each night. That's too much.
What went wrong?
There was a belief [in Congress] that so much competition would come into the market despite the consolidation that nobody would be allowed to misbehave. I told Congress, "I think you're wrong." And they said, "Let's see what happens. If you're right, we'll fix it." Well, Congress doesn't fix things very quickly.
In telecom, there is still dramatic overcapacity. What will it take to soak that up?
It's more complex than that. If it had just been overcapacity, you could have held your breath and waited for demand to catch up. But the overcapacity was occurring in a technology-driven industry. One company I'm familiar with took about three years and $12 billion to build its fiber-optic network. What crushed it was that in the intervening three years, kids up at MIT got smarter and smarter, and potential rivals were suddenly able to replicate, in just nine months' time, that same network for only $2 billion.
The other thing that's different is when I used to lay copper wire, if I laid too much, it didn't rust; it stayed capable [and] I just let it lay fallow. The fiber-optic world requires tremendous amounts of maintenance capital. And when you've built a lot more fiber than you need, you've got to maintain it while you wait for customers.
So more competition in media won't help telecom.
I am more concerned about media than I am about telecom. They're not going to come together especially, though some people think of them in aggregate terms. You're not going to see Southwestern Bell compete against News Corp. — not in my lifetime anyhow.
Is that why AT&T's vision of merging telephone service and cable TV didn't work?
[Former AT&T CEO] Mike Armstrong never knew what business he was getting into with MediaOne. AT&T was about one thing only: phone. They could never buy enough cable to solve their national long-distance problem. They had to become the friend of the cable industry. Everybody in the business had to let them be their phone pal.
So AT&T could provide local phone service and get around the Baby Bells.
But Armstrong wouldn't do the subsequent deals — what I call the partnerships — with other cable companies, where in return for some commercial arrangement, AT&T would have done the phone for Time Warner, it would have done the phone for Cox, it would have done the phone for Cablevision. But AT&T was arrogant and said, "Look, I might do that, but I'll do it my way."
In your book, you call that a deal breaker as far as the cable companies were concerned, and in hindsight, a huge missed opportunity.
Mike Armstrong had an OK vision; it was his execution, along with his hubris, that was pitiful. Every one of the deals would have made the AT&T/TCI/MediaOne deal a home run. And he decided to do it some other way.
You wrote that Bernie Ebbers [former WorldCom CEO] got caught in the web of his own deal making. What did you mean?
To be successful, you have to have the right strategy. You have to do the deals well, and then you have to run the business well. I don't think Bernie had a strategy. I sure as hell don't think he ran [WorldCom] very well. He did deals by the bucket-load.
How do you see the overcapacity problem being resolved?
You're seeing an incredible malaise in the national economy, because there's almost no part of the economy that isn't suffering from overcapacity. Hotels, airlines, telecom, and commercial real estate come most immediately to mind. And because all of those were financed with debt, you have a situation that's reminiscent of Japan. It's one thing for someone to build something that nobody wants. But if they build it by borrowing money from someone else, the financial system, as we find in Japan, just can't recover. [We] put a trillion dollars into telecom in roughly five years, something on the order of 50 to 60 percent of which [we] shouldn't have done.
Debt-financed overcapacity crushes national economies, and that's why we haven't regained employment, that's why we haven't seen the investment cycle kick back up.
What will it take for that to happen?
If you're going to go into deficit spending, as we have under this Administration, the [tax cut's] beneficiaries ought to be the men, women, and children who are most likely to spend it. You should give it to steelworkers and office workers and transportation workers, not to rich guys.
A Deal Maker's Dos & Don'ts
Having been involved in some 250 deals during a 30-year career, Leo Hindery has come up with the following 10 "commandments" for finance executives pursuing mergers and acquisitions of their own. His advice is described at greater length in The Biggest Game of All: The Inside Strategies, Tactics and Temperaments That Make Great Dealmakers Great (Free Press, 2003), a book that Hindery co-wrote with Leslie Cauley.
- Do more homework than the other guy. You'll always do better if you're better informed.
- Look before you leap. Some deal makers get so jazzed up about the idea of doing a deal that they overlook, or badly underestimate, each other's differences. It's a huge mistake, because differences in corporate culture can just murder you.
- Deals should be done as fast as possible, but no faster. Speed is critical to successful deal making. So is the element of surprise, especially when you're dealing with big publicly traded companies whose stock prices can get whipsawed by news of a deal. But sometimes you can move so fast that you trip yourself up.
- Remember that you are only as good as the women and men around you. In the middle of a big deal it's easy to get seduced and think that it's all about you. But it's not. Because no matter how good you are, or how good you think you are, you do not know more than the men and women sitting around you know in the aggregate.
- Learn how to walk away. One of the hardest things in business is to walk away from a deal that you really want. But sometimes it's the only way to get what you want, or even more important, what you need.
- Have adversaries, if need be, but don't have enemies. Part of the art of the deal is anticipating the responses of your adversaries. That's pretty hard to do if your opposition is determined to do everything within their mortal power to see you to the Gates of Hell.
- Read the fine print. People routinely take things for granted that they shouldn't. The problem in deal making is that assumptions can really do you in if you're not careful, or at least a little lucky.
- Don't keep score on things that don't matter. In the heat of a deal, people sometimes ask for concessions just because they can. Resist this urge, which will only distract you from the bigger picture and eat up precious time.
- Hang in there. Albert Einstein once said, "It's not that I'm so smart; it's just that I stay with problems longer." Perseverance counts for a lot.
- Learn to keep your mouth shut. Sometimes things just fall into your lap. It doesn't happen all that often among experienced deal makers, but when it does, you should just thank your lucky stars and keep your mouth shut. There will be plenty of time for war stories after the deal is done.