[Chapter 591: It Wasn't Meant to Be Mine]
In Omaha, the capital of Nebraska, Warren Buffett stood by the window of his gray, middle-class home on Farnam Street. He had just hung up from a phone call from New York and was gazing out with a hint of annoyance.
It was Saturday, and although he wasn't working at Berkshire Hathaway, Buffett maintained his work mentality.
Outside, a striking Cadillac came to a halt on the street. A well-dressed family of four stepped out, pointing toward Buffett's residence and excitedly snapping photos. Buffett often felt a bit smug when he caught sight of such scenes. He had even joked to friends that he was one of those rare individuals alive in America who had people pausing to take pictures in front of his home.
However, today was different. Looking at the scene before him, Buffett felt no sense of pride. His mind drifted back to the events of recent days, and his brow furrowed once again.
Since the beginning of January, when Firefly Films unexpectedly released its annual financial report, Buffett had sensed the company's intentions. Companies varied in their fiscal reporting schedules; some reported at the year's end, others after tax season, and some waited until the fall following a busy season. ABC typically released its financials after completing its spring lineup. Yet, in an effort to counter attack, ABC had preemptively unveiled its 1993 performance figures.
Despite the ABC camp's efforts to highlight its remarkable 23% market share and emphasize the unpredictable profitability of film studios, most investors and the general public only grasped the shallow fact that Firefly had profits over twice that of ABC, which garnered significant media attention and inflated Firefly's status.
Since Firefly had announced its move into TV production, Buffett had diligently studied its operations. He discovered that Eric Williams had initially soared up the box office charts through offbeat comedies and horror films. Though these films showcased his remarkable talent for filmmaking, they relied on low budgets and couldn't guarantee sustained success -- especially as competing studios ramped up their investments in similar films. If Firefly didn't capitulate to larger studios, its competitive edge would erode quickly, risking its swift descent into obscurity like many fleeting independent film companies.
But things did not unfold as he had anticipated.
Three years prior, Firefly had abandoned its low-budget, high-reward strategy. Instead, it began to lean heavily on Pixar and Digital Domain, establishing a reliable stream of income through 3D animated films and special effects productions. Successes like Terminator 2, Twister, and Toy Story solidified Firefly's foundation in Hollywood and ultimately led to its acquisition of the venerable Disney, making it one of the seven major film studios.
Buffett admired a theory called the "toll bridge." Simply put, if you owned the "bridge" from point A to B, you could reap stable and considerable profits. His investments in The Washington Post, Coca-Cola, and ABC were all, to some extent, influenced by this toll bridge concept.
While researching Firefly, Buffett realized that Pixar and Digital Domain held a similar toll bridge effect. Williams had invested tens of millions of dollars into these companies long before the releases of Toy Story and Terminator 2. Such bold investments, rarely seen in Hollywood where board oversight typically hampered large decisions, allowed Firefly to create two unique toll bridges. For the past three years, Firefly had enjoyed massive profits from its monopolistic toll bridges.
The appeal for CG special effects films and 3D animation from North America and beyond showed that as long as Firefly maintained a technological edge with Pixar and Digital Domain, the toll bridge effect would remain effective for many years to come.
In contrast, ABC, despite securing significant profits of $520 million last year, faced serious troubles. Ten years prior, the American television market was tightly controlled by ABC, CBS, and NBC, which easily maintained 30% market shares even during challenging times. But with the rapid rise of national cable channels in the 1980s and the establishment of the Fox network by Murdoch in North America, the big three saw their fortunes decline sharply.
In light of this, Buffett understood that the toll bridge effect for ABC was fading away. So, when Firefly tossed out an olive branch to ABC, Buffett quickly became intrigued by the business deal.
However, Firefly proved to be far more challenging than he had anticipated.
Buffett never considered himself overly greedy. Hence, during their first meeting, he made what he believed to be a fair merger offer. To his surprise, the young mogul rejected it outright, presenting a cash acquisition proposal that made Buffett realize Williams didn't seem particularly concerned about the expenditure amount; he just sought to minimize the dilution of his own company's stock. The formal negotiations that followed proved this point.
Once Buffett sensed that ABC's toll bridge effect was diminishing, he contemplated selling off Berkshire Hathaway's shares in ABC. Before Firefly made its acquisition proposal, he had already divested some of his stock. Yet, despite Firefly's insistence during negotiations, Buffett's stubborn nature didn't allow for much compromise, leading to unsuccessful attempts at private discussions.
Buffett was a rational person, and since he saw merit in the deal, he wasn't about to back down easily. He recognized that Firefly wouldn't quickly change its acquisition target either. After Firefly publicly announced its buyout intentions, Buffett propelled discussions between the management teams forward.
Especially in the past week, he recognized that the situation had begun to spiral out of control.
The last time he felt like this was four years prior when Salomon Brothers faced a crisis, and shortly thereafter, the Wall Street king of the 80s collapsed. During Salomon's investigation, Buffett had taken over the company, which led many to blame him for its downfall.
...
While contemplating how to manage the unfolding situation, Buffett noticed a black car driving into the driveway. His investment partner and vice-chairman of Berkshire Hathaway, Charlie Munger, stepped out.
Munger waved when he saw Buffett through the window.
Upon entering Buffett's office, Munger embraced him and remarked, "Things seem to be looking pretty grim lately. I thought I should come over in person."
Buffett managed a relaxed smile, asking his girlfriend, Astrid Munks, to prep some Cokes for them while he handed Munger some information he had repeatedly reviewed. "You can look it over."
Munger had his own career and, as a fellow Berkshire Hathaway shareholder, wasn't paying as close attention to the ABC acquisition as Buffett was.
It wasn't until four days ago when media buzz surfaced about the negotiations between Firefly and ABC nearing collapse, that Munger began to take notice, especially when the Los Angeles Times confirmed that the two parties had halted discussions.
The following workdays saw ABC's stock plummet from a high of $52, driven by this negative news. In just three days, it dropped by 9.6%, returning to January levels. Meanwhile, the other major networks -- NBC, CBS, and Fox -- saw stock rises exceeding 5% from unverified rumors.
Sifting through the information, Munger raised his head and said, "Based on the current situation, if we don't agree to this deal, other shareholders might call for an extraordinary meeting to vote?"
Buffett retrieved a letter from his desk, his tone serious. "It's not a possibility, it's a certainty. David West, the president of State Street Global Advisors, texted me that they're planning to do just that."
Munger took a glance at the letter and cursed in frustration, "What a bunch of fools! Don't they know what side they're on?"
Buffett dismissed his friend's outburst with a sigh. "If ABC was the only public network in the U.S., they would certainly stick with us. Unfortunately, Firefly has more options than just ABC. If ABC wasn't performing significantly better than the other two, they might have cut their losses by now. That's why David West and company are so eager -- everyone can see that network business is shrinking, and they're reluctant to forfeit this cash-out opportunity, especially since they could nab a stake in Firefly, a company that could generate a billion-dollar profit -- a club that barely exceeds fifty companies in the entire country."
Munger detected a hint of disappointment in Buffett's tone and countered, "But we're doing just fine ourselves, aren't we?"
The wave of envious feelings from witnessing the meteoric rise of a newcomer only lingered in Buffett's mind for a few seconds. Hearing Munger's words, Buffett quickly regained his characteristic confidence, responding, "Absolutely, we're doing just fine."
"Alright, partner," Munger pat on Buffett's shoulder. "Let's discuss how to handle this. Any solid ideas?"
"Well, I had one," Buffett confidently pulled out a sheet of paper from the pile on his desk and handed it to Munger.
Munger glanced down, noting it was a newspaper clipping of upcoming movie release schedules, with some titles marked.
"Saving Private Ryan, The Lion King, True Lies," Munger read the names before asking, "These three films are Firefly's summer blockbusters. What's the problem?"
Buffett nodded, "Absolutely. Saving Private Ryan is a war film, The Lion King is traditional hand-drawn animation, and True Lies is just a standard big-budget action flick -- a very costly one at that, hitting a hundred million."
Munger wasn't particularly savvy about films, but he knew Buffett was more informed, so he nodded patiently, listening intently.
After a brief pause to allow his friend time to think, Buffett continued, "I called Robert Daly at Warner to discuss this. Hollywood hasn't produced a big-budget war film like Saving Private Ryan in years due to the high risks involved. And, Firefly's strategy for The Lion King differs significantly from the conventional release, where 2D animation typically enjoys a long run at year's end. Even with low competition during summer, the schedule may compress its theatrical run. Lastly, with True Lies, two action films of the same genre failed last summer, one of which starred Arnold Schwarzenegger, the lead in True Lies. Hollywood is cautious about these large-scale action projects right now."
Munger recalled what he had read earlier. "So, you're saying Firefly gave up its usual CG special effects and 3D animations this year, likely setting itself up for a stumble with these three films?"
Buffett nodded. "Therefore, I believe if we can extend the negotiations into the summer, and if Firefly's summer films fail, it will shatter the miracle of their unblemished investment success. Then we can regain the upper hand."
Munger agreed with a nod but quickly raised his hands in a gesture of resignation. "But the reality is, Firefly isn't going to give ABC that much time, right?"
Buffett offered a faint, bitter smile. "Yes, and given Firefly's recent aggressive moves, I suspect that if the deal doesn't close this month, they just might pull out altogether."
"You started selling off ABC shares at the beginning of last year, and I imagine you'd be eager to close this deal, wouldn't you?"
Buffett nodded honestly, admitting, "Yes."
Munger pressed on, "How much do you think Eric Williams would be willing to go on his asking price? I believe you could guess that number."
Buffett, a whiz at data analysis, replied. "The contentious point lies in the share swap. I think he'll part with a maximum of 25%. If only David West had held off a bit, my proposal for 30% this Monday might have worked, maybe just giving a point or two."
"What if we did this," Munger suggested, tapping the table, "you reach out to Tom; the three of us take a trip to L.A. It could be fun and maybe we'll catch some Oscar buzz."
Buffett shook his head gently. "I doubt that would yield any concessions from that young guy; he's got the upper hand now."
"I believe that just showing up in person would compel that young man to give a few concessions if his wits were sharp enough."
Buffett understood his friend's intent. He, Munger, and Tom Murphy had built their brands over decades in the business world, amassing countless tangible and intangible resources. As long as they were willing to barter, they could secure genuine benefits.
"But those benefits won't come without strings attached. We might reap early gains now, but eventually, we'll have to pay. I don't believe Eric Williams would let us get something for nothing."
Munger, sensing the shift in Buffett's tone, picked up the phone and prepared to arrange a private jet. He chimed, "You know, I'm increasingly intrigued by that young man. And that cliffside villa he's built in Malibu -- It's hard to find a more exceptional location for a private estate. If Eric Williams were to sell, he'd get $200 million for it."
Though Buffett typically had no special cravings for material wealth, he did not hide his genuine thoughts. "That villa is indeed impressive. While its actual worth may not hit $200 million, I'm certain Williams wouldn't sell it for that. He doesn't need the money."
Munger made a quick phone call, summarizing a few points before hanging up. "Ha! I nearly forgot this -- your title as the wealthiest man just got reclaimed after a year, and I bet you feel a bit down about it!"
Buffett enjoyed the limelight, so of course, he felt some disappointment. Nevertheless, he maintained professionalism, commenting, "It wasn't meant to be mine. He concealed the numbers last year; I could see that."
*****
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