Investment Company Act of 1940 concerns:
forbes.com
Caught in the Act
Mark Lacter, Forbes Magazine, 06.11.01
Soon to break free from AT&T, John Malone's Liberty Media Group is ready to do deals again. Not so fast.
John Malone crafted his Liberty Media Group by buying a bit of most everything, ending up with shares in giants like News Corp. and AOL Time Warner, cable channels such as Discovery and pipsqueaks like MacNeil/Lehrer Productions. Mostly he keeps the stakes well below 50%, letting him reap the benefits of ownership without the hassles of running a company.
But as Malone prepares to split off Liberty from AT&T next month, that very structure threatens to topple his control of the company. Regulators must decide: Is Liberty a real operating company, as Malone insists--or is it a mutual fund?
It's a seemingly innocuous question, but if they chose the latter, the company would fall under the Investment Company Act of 1940. For Malone, the effects could be catastrophic. Liberty would have to ditch the supervoting stock structure that gives him absolute control. Malone could also find it hard to hold board seats in the companies he partly owns, which is a big deal if, as expected, he winds up as a News Corp. director. He's now on the UnitedGlobalCom and Cendant boards.
Taking Liberties
Much of the total value of Liberty depends on stakes in a few media giants.
Even worse, Liberty's new status as an investment fund would crimp Malone's freewheeling style. He would undergo far more regulatory scrutiny, and it would be far messier for him to practice his financial alchemy. "No holding company wants to be subject to the Investment Company Act," stresses Thomas Lemke, a former SEC attorney with Morgan, Lewis & Bockius.
Liberty's most recent prospectus warns that if the company is labeled an investment arm and thereby deemed to be in violation of the antiquated regulations, all of its contracts could be voided and any deals it struck when it was breaking the rules could be rescinded.
Liberty disclosed in March that it runs "the risk" of "inadvertently becoming an investment company." It could apply for a waiver from the rules, but a spokesman won't comment on whether it will do so. Nor is it at all clear the company would prevail--because Liberty, in fact, is pretty much a portfolio of passive investments.
It has $2 billion in cash, more than $43 billion in stock market value and ownership stakes in 50 companies worth $65 billion. Yet the entire payroll amounts to fewer than 40 people. Its actual reported revenue is only $1.5 billion. For regulators to decide that Liberty is more than a mere passive portfolio would require generosity--and John Malone has rarely received anything like that from regulators anywhere.
Under the Investment Act, imposed six decades ago when the Feds fretted that investment companies had undue influence over the businesses they backed, a company falls under the restrictions if its minority stakes represent 40% or more of total assets, excluding cash and government securities.
For now, Liberty appears to be over the 40% mark, although its filing says only that a "significant portion" of Liberty's $65 billion investments consists of minority stakes. Its portfolio of companies includes 17 that are public, with Liberty's share of their market value at $29 billion. And most of Liberty's investments cover minority positions that do not require an active role--a passive investment that would fall into the 40% bucket.
Still, Malone may yet find a way around the problem. Liberty has been his muse for more than a decade--at TCI he formed it, spun it off, bought it back, spun it off a second time and is taking it back again--and he isn't about to give up control without a fight. With many of his stocks in trouble, such as Priceline and ICG Communications, Malone may be able to fly under the 40% mark--but then, what happens if the companies rebound? In the meantime, his shareholders can only hope that Malone is as good at manipulating the SEC as he is at engineering his investments. |
