Virtual Murdoch by Neil Chenoweth

Neil Chenoweth is one of the better Murdoch biographers out there. In part, that’s because he’s an excellent business journalist. Rather than trying to create a picture of a character, he hones in on the deals that have made Murdoch: mergers, acquisitions, and the like.

His book on a particular News Corp subsidiary, Murdoch’s Pirates, was at times overly complex and slightly baffling (to be fair, it’s a difficult topic). Virtual Murdoch is a similarly complex piece, in that it tracks Murdoch’s career from its very start until publication at the turn of the millennium. Perhaps because Murdoch as central character gives it something to hang from, the book feels a little more tightly knitted than Murdoch’s Pirates; it follows each stage of the deals and gambles (and Chenoweth very much presents them as gambles) that Murdoch has undertaken throughout his career.

In on instance, he outlines the leveraging the Murdoch was able to use to acquire an asset without losing equity control:

In 1985, under the US accounting standards News Corp had net assets of $166 million, which suggested Murdoch could only borrow about $175 million. He was raising new debt of $2.7 billion, fifteen times more than the banks’ lending limit allowed him. It was enough to induce cardiac failure in even his most hardened bankers. The only way that Murdoch could borrow more money was to increase his net assets, or shareholders’ equity. The easiest way to do this was to raise capital by issuing stock, as Turner eventually did with the cable companies. But it cost Turner control of his company. Murdoch was never going to allow that to happen.

Murdoch had two ways of getting around this bothersome lending restriction. First, his finance director Richard Sarazen argued that News Corps’ newspapers were worth far more than the modest values assigned to them in the group’s balance sheet. And to prove this point, he kept revaluing them … Between 1984 and 1987, Sarazen wrote up the mastheads of the group’s newspapers by $1.5 billion …

The revaluations solved half the debt-raising problem. Arthur Siskind and the legal team at Squadron Ellenoff solved the other half of the problem. Murdoch needed to raise $1.15 billion in junk money from Michael Milken to buy Metromedia. It was, as Siskind later told American Lawyer, ‘an extraordinarily complicated and very unusual financing’. Siskind’s twist was that instead of treating the loans as junk bonds, News would call it preferred stock. While in essence this would be a $1.15 billion loan, it would appear on the News Corp balance sheet as a stock issue. Because it was called a stock issue, it would be treated like an asset.

Later, Chenoweth summarises quite neatly a set of causally linked crises that he’s described:

Murdoch had never been able to afford his great move in 1985-86 to buy Twentieth Century Fox, the Metromedia television stations and to launch the Fox network. To pay for it, he moved his British newspapers to Wapping and triggered a year of violent industrial confrontation. The Wapping success produced a new debt problem that he tried to solve by taking over the Australian newspaper industry. When that plan went wrong he had been forced into a deal that left a crippling debt in a family company. Then, in the deals after Black Monday 1987, Murdoch flipped the problem back to News Corp. Cruden’s loan problem was now once again News Corporation’s lurking debt crisis.

Then documents some fascinating patterns in corporate accounts:

David DeVoe celebrated News Corp’s escape from the debt crisis with the accounting equivalent of a barrel roll. Sarazen had produced his party trick once in the News Corp accounts each year. DeVoe did it three times in the same set of accounts. Profit before abnormal items came in at $A391.391 million. Minority interests of $A70.070 million were subtracted to give a profit of $A321.321. The odds against three numbers repeating themselves like this were more than 100 million to one.

There’s a lot more in the book that’s worth reading, if you’re interested in media economics and finance. It is of course hard to know how seriously to take Chenoweth’s Kremlinology, given that he relies very much on secondary sources; but it’s an interesting read, and has experience at the AFR that gives him some credibility.

Oh, and if you’re interested in reading about the infamous ‘poison pill’, this is one of the better explainers I’ve found.

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Articles

A few random things:

  • James Fallows writing in 2003, in an interesting reflection on whether Rupert Murdoch pursues expansion of a media empire for political or economic reasons:

… some aspects of News Corp’s programming, positions, and alliances serve conservative political ends, and others do not. But all are consistent with the use of political influence for corporate advantage. In the books I read and interviews I conducted, I found only one illustration of Murdoch’s using his money and power for blatantly political ends: his funding of The Weekly Standard. The rest of the time he makes his political points when convenient as an adjunct to making money.

Despite the overwhelming opportunity Amazon and Netflix provide, a duopoly is not a democracy. The biases of the people who curate the experiences on these services could dictate the shape of small-scale moviemaking for decades to come.

  • Myths over Miami is a harrowing piece about the stories children believe when everything around them is unjust.

Movies

Hidden figures was a lot of fun, and a great watch. It tells the story of black women, working at NASA in an era when both categories suffered discrimination. It shows how they struggled on multiple fronts, and celebrates some incredible successes, particularly note worthy given the context.

I have no idea if it’s historically accurate – apparently some of the characters are composites, though.

I don’t have much expertise in this area; but it certainly felt to me that the movie dealt well in explicitly showing the racism its protagonists faced. There was no simple finish line; there were victories, but they were still pushing up hill. And it doesn’t resort to cute metaphors, or symbolism – instead it shows a woman forced to drink from a separate coffee urn because of the colour of her skin, and forced to walk three times the distance because she isn’t allowed to use a nearby toilet.

Well worth it.

Demain, or Tomorrow 

Demain is a fascinating piece. There have been a lot of movies and stories about the environmental crisis we’re facing, and what climate change means. The focus of Demain is slightly different; it knows that the problem is already well publicized, and it’s interested in where the solutions are.

I think it does a good job of pushing beyond the environmental to the social and economic, in a few dimensions. It doesn’t give a single answer, which can feel a little fuzzy, but that’s probably a strength, more than anything else.

I learnt that the local currency movement exists, which is something I’d had no idea about – it’s intriguing.

The film does well in being aware of the camera – it shows us the camera, before it shows us the shots; somehow that helps to make it feel more authentic. It also has a great soundtrack, which makes it doubly worth while.

Did we see the housing market crash coming?

I’ve written before about my (rough) estimates of where the housing market is headed (here and here). John Hewson recently wrote a paragraph that would fit perfectly into a retrospective on how we should have known there was a housing bubble:

Housing prices have risen by more 250 per cent in real terms since the mid-1990s, with the median house price in Sydney now well above $1 million. Household debt is more than 200 per cent of disposable income, and greater than 120 per cent of GDP. Total taxes, charges, levies, and fees, from all three levels of government, can account for as much as 30 per cent of the cost of a house.

He later mentions that there might be a bubble:

However, our whole system is at risk of a significant drop in house prices as, indeed, was the US/global financial system in the run up to the global financial crisis, where the mountain of debt was built on a US sub-prime housing loan, which was simply a punt on house prices not falling.

Our banks are, today, heavily exposed, having become essentially building societies that also issue credit cards. These exposures are over and above their considerable climate exposures – not just to mortgages on coastal properties, and to fossil fuels, but more broadly.

The risks being run actually dwarf those of the GFC. If it goes bad, the government will be called on to intervene.

For the sake of making concrete predictions – probably by end 2018:

  • There’ll be some kind of a trigger. Possibly a further tightening of capital controls in China, possibly an interest rate hike, or maybe enough articles about a housing bubble will finally get written. Or perhaps a set of budget measures that restricts negative gearing.
  • House prices will fall. More than five per cent.
  • At least one, possibly more of the major banks will need some kind of financial support when the wholesale funding dries up. Look for the RBA’s CLF to be used, or AOMF purchase of RMBS.

Just a guess. But I reckon a good one.

Articles I’ve been reading

In no particular order:

  • George Monbiot on celebrity is an interesting read, and I found it somewhat thought provoking.
  • Ta-Nehisi Coates is always worth reading. Most recently, in My President was Black at (where else) The Atlantic. I’ve been reading Democracy for Realists (more on that to come) which includes a short discussion of how religious identity was a factor in JFK’s election. There are obviously important differences, and I’m not equating the two, but there are some interesting parallels.