The Murdoch Archipelago

by Bruce Page

  The FCC would have to let Fox classify itself as a ‘mini-network’ if the stations were restricted to fifteen hours of network broadcasting per week at this level the financial-interest regulations didn’t have to be followed. This would do for a start, and once things were up and running the FCC would find it difficult to prevent the network time expanding beyond fifteen hours. Indeed, after it had been done the rules could surely be changed to provide retrospective legitimacy. Murdoch’s long-standing technique had been to accept explicit regulations in any form demanded and then undermine them by implicit practice, covertly if necessary. If it had failed at London Weekend Television, it had been a complete success at Times Newspapers and elsewhere. The central socio-political achievement of Newscorp has been to get this tireless form of backtracking ranked as commercial genius by financial analysts and bankers.

  But beyond this there was the biggest, most obvious point. The American media law said that anyone controlling more than 25 per cent of a television system had to be not just a resident (as in the Australian case) but a citizen of the United States. It was ‘not a problem’, Murdoch told Diller reassuringly. It was something he could ‘take care of’. Diller liked the deal (at this prospective stage, anyway). But he did not see how it could be pulled off given Murdoch’s nationality.

  Fairly soon the answer to that seemed obvious, as Murdoch ceased his official Australian existence by accepting the oath of allegiance – without a backward glance at his flowery rhetoric just a little earlier. It was somewhat less obvious that the deal required Murdoch to remain Australian in one highly important sense, even after the legalities. This was important to what Arthur Siskind, Murdoch’s principal lawyer, later called ‘an extraordinarily complicated and very unusual financing’. The Fox operation was not one News could have carried through if it been an American corporation. Success, when finally achieved, consisted of Michael Milken’s junk-financing capacity coupled to Australian conceptions of accounting. The regulatory preconditions for it, as Murdoch foresaw, were not so difficult.

  In July 1985 News announced that the Metromedia stations would become the basis of a new Fox national network. This was unsurprising news to the Reagan administration, and was welcome on both general and particular grounds. Generally, Mark Fowler, the FCC chairman, wanted to deregulate the media industries – a standard Republican position, as it tends to favour big money, which is a (arguably, the) Republican constituency. This could best be justified by saying that increased competition met regulation’s goals more efficiently than regulation, and a new, fourth network obviously was competition. Regulation shouldn’t stand in its way.

  The particular reason for welcoming the new network was that its moving spirit was Murdoch. Reagan and his colleagues thought highly of what Murdoch’s papers had done for them in the Presidential campaigns of 1980 and 1984, and believed that it qualified him admirably to run a national TV network. Probably they did not envisage the New York Post’s unsuccessful journalism crossing the species-barrier into television, and the vision anyway might not have troubled them. Their priority was correcting the leftist bias of the existing system (something not visible to foreigners, nor always to native eyes).

  Thomas Kiernan, when working in 1985 on what was meant to be Murdoch’s approved biography, formed the opinion that Murdoch’s hopes at one point extended to a complete, unprecedented waiver on the citizenship rule. The authorised project collapsed when Kiernan rejected Murdoch’s concept of editorial independence, and in the following year he published Citizen Murdoch entirely without approval. Murdoch, he wrote, had, ‘after all, grown accustomed to receiving special favours from the governments of Australia and Britain when faced with sticky regulatory hurdles. Why not the government of the United States, particularly in view of his six years of devoted service to the Reagan inner circle, which for all practical purposes, controlled the FCC?’

  Margaret Thatcher’s government indeed had boldly ignored the British newspaper law for Murdoch’s sake, but the Reagan people were not quite so steely, and thought the Democratic opposition would be galvanised if Murdoch had it so easy with US television. Still, one completely vital concession was made. Had the FCC obeyed its own rules, Murdoch’s application would not even have been considered. Three years earlier, Efren Palacios, who had applied to run a station in Texas, was told, ‘Although your application for citizenship is pending, you are not yet a citizen and, thus, you are statutorily barred from holding a broadcast license.’

  Perhaps even someone as sophisticated as Barry Diller did not quite see that Murdoch ran the kind of newspapers that politicians really found impressive – not ones where ‘support’ means a well-weighed editorial endorsement, and discreet slanting of a news story here and there. In the famous words of Congressman Jack Kemp, Murdoch’s New York Post in 1980 had ‘used the editorial page and every other page necessary to elect Ronald Reagan President’. This was a little ridiculous, like senior British politicians making the Sun an adjunct to the Cabinet secretariat, or Murdoch – further back – trying to establish how many seats News had won for Gough Whitlam. But, as innumerable veterans testify, much highlevel politics is about perceptions, illusions and morale-boosting – which newspapers can provide especially well, provided they perform their real tasks badly or not at all.

  Mark Fowler was the incoming chairman of the FCC in 1985, and when Murdoch sought approval for taking over the Metromedia licences Fowler found the head of Newscorp to be a man of ‘enormous vision’. Fowler’s objective was to neutralise regulation and over four years he stripped his Commission of about 70 per cent of the rules it had been applying to broadcasting. Murdoch also met James Quello, appointed by the Republicans as one of Fowler’s commissioners, and revealed his readiness to become an American citizen. Quello at once made clear that he was fully behind Murdoch’s campaign to become one of the major players in the world media game. Diller wondered whether there might be some problems for Newscorp’s television holdings in Australia now that Murdoch wasn’t going to stay Australian after all. Worry about that later, Murdoch said.

  To deal with the cross-ownership issue, the FCC suggested a two-year waive, which would allow Murdoch comfortable time to arrange sale of the papers. Murdoch accepted, though he had hoped for more – especially in the case of the Post. The Chicago Sun-Times was sold almost immediately for $145 million, which was doubtless satisfactory, as it had been bought for $90 million in 1983 (and, although it was profitable, the time to recreate it as an efficient political instrument had not been found). The Post Murdoch was anxious to hang on to in spite of its towering losses; it was those losses which enabled him to do so for a long time, as nobody cared to buy it, and forcing the closure of newspapers could never be a popular option for the FCC. Murdoch’s widely shared opinion was that the Post had made him into a force in US politics, which surely came under the head of ‘making the world a better place’.

  The FCC also considered, as was its duty, the question of whether News Corporation was able to finance the creation of Fox in a safe and proper manner. It ruled favourably, and without any very close inspection, which ten years later was to cause some anxious moments for many of those concerned. The financing in truth was a heroic task, and began on a stressful note. The deal worked out with Kluge was for Fox to pay $1.55 billion for six stations (Boston having indeed been sold elsewhere). Almost immediately, Marvin Davis decided to pull out altogether: he felt that as things were developing the space between Murdoch and Diller was too small for him (it would before very long prove too small for Diller). This immediately doubled the basic cost for News – and in addition Davis had to be bought out, for another $334 million.

  Not that the Fox project was the only big-ticket purchase being made at the time, because Murdoch had agreed to pay $350 million for the Ziff-Davis magazine group. Altogether Newscorp had to raise new debt of $2.7 billion to make things work. And there was good reason to think it was well worth doing: ten years later News controlled
, as a result of the outlay, businesses worth about $40 billion, a tenfold return after allowing for inflation.

  But the Fox deal and its auxiliary items were not remotely within the capacity of a US company of similar size and construction to News Corporation. In 1985 it had net assets of $166 million according to American accounting rules, and had bank covenants under which its total debt could not be greater than 110 per cent of that asset value. This meant it had a credit limit of about $180 million, entirely dwarfed by the scale of its Fox requirements.

  Here the saving circumstance was that News had an Australian identity altogether more persistent than that of its proprietor. It was of course registered in Adelaide, with its shares listed initially on the Adelaide exchange, and traded principally in Sydney. Its existence in New York the market where its share price really mattered – was by way of ADRs (American Depository Receipts), which are documents that banks create in the US to show they have traded particular shares to order on an overseas exchange. Murdoch’s personal equity in News, held through a variety of Australian private companies, has varied over the years between 50 and 30 per cent but it has always been sufficient to guarantee personal control.

  To many people News looks like a large American public company. For purposes of decision and control, it rather resembles a privately held Australian concern having a large but disseminated public shareholding. It is in truth the corporate persona of its proprietor, Rupert Murdoch, irrespective of his nationality. In its dealings with the Securities and Exchange Commission, News insists firmly on its foreign status, thus ensuring disclosure requirements minimal by comparison with its US equivalents.

  And in 1985 Australian nationality was its decisive resource, beginning with asset values. Murdoch and his finance director, Richard Sarazen, considered that the company’s newspaper titles were gaining value, and between 1984 and 1987 they put an additional $1.5 billion against them in the Australian balance sheet. The value of a newspaper title is of course a goodwill item and (as we have seen) this does not count as an asset in American accounting – which anyway does not allow a company to revalue assets upwards. Sarazen’s action raised Newscorp’s credit capacity by $1.6 billion.

  It was a huge advance, but it did not close the gap. To do that, Newscorp raised another $1.15 billion from Michael Milken and his intrepid investors at Drexel in Los Angeles. But of course this could not be done by issuing anything actually called ‘junk bonds’. Even with Milken’s reputation at its astronomic 1985 level, the FCC would have balked, and nor would the bankers stand for further additions to debt.

  In truth the money was a loan (and, as turned out later, a loan on very onerous terms). But it was reported in News Corporation’s accounts as an issue of preference shares. Under a bizarre feature of Australian accounting principles, anything labelled as preferred stock – even if it has all the real attributes of debt – can be treated as shareholders’ funds, or equity, and becomes an asset instead of a liability. So by increasing its debt, News acquired the capacity to borrow still more. This was Siskind’s ‘extraordinarily complicated’ financing.

  At this point, Australian paradoxes should be briefly recalled. By the mid1980s Australia’s economy had long outgrown its simple base in primary production and protected manufactures. It was diverse, it was generally buoyant, and it had a financial sector with powerful banks well able to syndicate big corporate loans – the Commonwealth Bank, Murdoch’s long-term supporter, being prominent among them. But by US standards it was barely regulated: the need to do so had only just become visible, and efforts to meet it were encumbered by interstate rivalry. Exploiting the situation just then were various financial bushrangers who (on their scale) were capable of making Mike Milken look demure (and mostly went to jail for much longer terms). Amid all this, modernising corporate law, tax systems and accounting rules seemed implausible; though the work is now under way it remains incomplete. In 1985 the national mood, never entranced by business, ran more to wry amusement than alarm.

  But what drove all this complexity? If the deal was intrinsically good business, could not Newscorp have raised genuine equity rather than junk? In theory yes, but it would no longer have been Newscorp, which is dependent for its value on Rupert Murdoch’s arbitrary rule. Admirers consider that this equips it with unique entrepreneurial brio, likely to be suppressed in the culture of an orthodox public company. But there is a good case for saying that arbitrary rule furnishes it with quite different essential attributes.

  First, there is its unique capacity to make political alliances, based on Murdoch’s ability to turn newspaper support on and off. There are many biased newspapers, but hardly any can modify their bias on command. Doing so means hiring journalists who either have no individual judgment, or will suppress it: the resulting work is usually mediocre, often bad, and sometimes disgraceful. Murdoch’s strength here is that he doesn’t know or doesn’t care about the difference, and it would be hard to be so cavalier except in an absolutist regime. And more important is the executive technique which exploits an alliance once made. Young radicals may think otherwise, but the number of business executives who can consistently undertake to do one thing and then pursue a quite different course is limited. Again, it is a behavioural pattern which orthodox companies can pursue only for a limited time – and a debacle like Enron proves, does not contest, the point.

  With the money on the way – at no risk to Newscorp’s command structure, risking only its financial stability – the actual mechanism for controlling the new television system could be set up. The Metromedia stations were put into Twentieth Holdings Corporation, which had a small quantity of voting stock. Barry Diller and Rupert Murdoch took up 75 per cent of it, shared equally between them. Twentieth was an American company, but its major capital was in the form of non-voting shares, 99 per cent owned by the Australian company News Corporation. So this was Australian ownership, but the control was in the hands of two American citizens. The FCC had no difficulty in approving the set-up.

  However, it was not quite as simple as that. News Corporation, under the articles of Twentieth Holdings, could at any time force Murdoch and Diller to sell to it all of their voting shares. So in the ultimate case the final power over the Fox network belonged to an Adelaide company which was controlled by an American citizen through a number of other Australian entities. Ten years later several FCC officials maintained that the Commission did not understand this subtlety – which meant that whoever exercised ultimate legal control over Fox had to do so from outside America. Essentially Fox’s reply was that if the officials had not grasped the point it was due to their own inattention. Whatever the rights and wrongs of this – which must be taken later in the story – it was another complex strand in the remarkable fabric of Fox.

  And not the last. Drexel Burnham Lambert had severe difficulty getting their investors lined up. Some other big deals had begun to turn nasty, and the notion of junk finance relabelled as preferred equity was a puzzle even to veterans of the Milken trail.

  Murdoch believed that his London newspapers would enable him to meet the immense interest bills created by the Fox deal, because he was setting up a plan capable of extracting another $150 million of annual profit from them. This was the celebrated move of all the papers away from their decrepit, union-dominated presses and into a new, purpose-built non-union plant with up-to-date electronic composition and lithographic presses. Desultory negotiations had been going on with the unions for several years, but without progress – a situation blamed by Murdoch’s managers on union cantankerousness and by the unions on Newscorp’s lack of interest. It is true that the two huge tabloids were so profitable intrinsically that the inefficiency of the plant was not, until 1985, a crucial issue.

  Now it was, but there was no time for negotiation or uncertainty – Murdoch had to have the extra revenue without delay. Therefore the plans for a sudden, unanswerable coup had to be laid in deep secrecy. Nobody could be told about the profitable future, and c
ertainly not Milken’s punters.

  However, Milken was able to point to the Fox deal, full of splendid possibilities, but rather further off. Eventually, the $1.15 billion was going to make News into a massively valuable company, and out of this, presumably, came the idea of tying the repayment system to the share price: after 1989, for every dollar that the share price rose above the March 1985 base, another 15 per cent would have to be repaid – and this did the trick. ‘This … must have seemed like a good idea at the time,’ wrote the Australian financial reporter Neil Chenoweth (who uncovered most of these details in Virtual Murdoch), ‘as long as News Corp didn’t do anything to make its share price spike up. It turned out to be a spectacularly effective way to tear up money.’

  The year 1985 ended with Murdoch getting acclimatised to his new status as a US citizen. But by this point everything depended on a relationship with the British Prime Minister.

  * There is no male sibling to support this moving passage.

  12

  MARGARET THATCHER’S HEROES, 1982–1989 If the journals were a novel, the heroine would be Margaret Thatcher … and the heroes would be Rupert Murdoch and Lord Weinstock.

  SARAH CURTIS, in her introduction to The Journals of Woodrow Wyatt, vol. I

  ‘We’ve got to get her out of this jam somehow. It’s looking very bad.’

  RUPERT MURDOCH, to Wyatt, 14 January 1986 Margaret Thatcher’s political administration and Rupert Murdoch’s business empire both went through defining crises in the New Year of 1986. The two events interacted, and with results which turned out in the end rather better for him than for her – casting interesting light on the relative advantages of media power and political power.