Cap Cities’ Style Is Lean, Profitable : Combines Decentralization With Rigid Profit Standards
Tom Murphy’s style has changed little since he joined Capital Cities Communications Inc. 30 years ago to run the company’s maiden TV station in Albany, N.Y., a property just a station-break away from bankruptcy housed in a century-old, wood-frame building.
Though things needed some serious fixing up around WROW-TV, Murphy, a 29-year-old Harvard MBA, took the trouble to paint only the two sides of the building visible from the road.
Three decades, six more television stations, 12 radio stations, 54 cable systems, 10 daily newspapers and 36 trade publications later, Thomas S. Murphy still doesn’t waste a lot of paint.
The chairman of Cap Cities--which Monday announced that it was acquiring American Broadcasting Cos. in a neat and friendly $3.5-billion merger--manages a communications empire that last year drew revenue of $940 million from a corporate headquarters employing about 36 people. The company has no public relations department, no corporate personnel office, no mergers-and-acquisitions staff and no vice presidents of strategic planning.
Not coincidentally, New York-based Cap Cities also boasts among the highest profit margins in the communications industry--more than 15%. In broadcasting particularly, Cap Cities last year kept as pretax operating profit 52 cents of every dollar in sales. The industry average is closer to 35 cents of every sales dollar.
“They are famous for being lean, cost-conscious and above all successful,” said John Morton, a securities analyst with the Washington brokerage firm of Lynch, Jones & Ryan. “If ABC has a bloated bureaucracy, I suspect it won’t stay that way under Cap Cities.”
Murphy and Cap Cities President Daniel B. Burke can manage to keep their company so lean, analysts said, because they grant executives in the field so much freedom--as long as subsidiaries meet Cap Cities’ rigid standards of profitability.
Burke and Murphy, for instance, boast that executives hired from other companies at first often send copious memoranda detailing how the distant subsidiaries are operating--until the new recruits finally realize that the memos are being thrown away unread.
The company is so decentralized, Cap Cities executives like to explain, that Kansas City Star Publisher James Hale once donated $1 million of the Star’s money to a Kansas City museum without bothering to tell Murphy. When Murphy finally heard, there was no complaint.
Decentralized and lean, Cap Cities to some can also seem ruthless. After buying the Oakland Press in Pontiac, Mich., for instance, Cap Cities found itself having problems with the family that had sold it the paper--and so it forced the family out.
With its emphasis on productivity and thrift, Cap Cities also has earned a reputation in some circles as a union buster. It provoked a Newspaper Guild strike in Pontiac and a bitter, sometimes violent, strike in Wilkes Barre, Pa., now in its sixth year.
The company is so modest in its corporate style that few outside the industry know Cap Cities’ name, yet its two top executives were listed by Business Week magazine this year as the third- and fourth-highest paid executives in America. Murphy draws a handsome $6.1 million a year, according to the latest published report, and Burke $4.3 million.
Cap Cities was founded in 1954 when Tennessee businessman Frank Smith, a business partner of legendary broadcaster Lowell Thomas, bought the TV station in Albany and a companion radio station. Smith’s first hire was Murphy, the son of one of his cronies, Brooklyn politician Charles Murphy.
Smith purchased a second TV station in 1957 and offered the company’s stock to the public. He continued buying television stations--in Providence, R.I.; Buffalo, N.Y., and Huntington, W.Va.--and by 1965 Cap Cities was listed on the New York Stock Exchange.
Murphy took charge upon Smith’s death in 1966 and, two years later, Cap Cities entered the publishing business with the purchase of Fairchild Publications Inc., then publisher of Women’s Wear Daily and seven other trade publications.
Through the 1970s, Murphy continued acquiring broadcasting outlets, newspapers and trade publications--earning a reputation for picking up properties at bargain prices. Many of the deals were made through Murphy’s network of friends, such as the 1977 purchase of the evening Kansas City Star and morning Times. Murphy swooped in before the papers were even for sale after hearing about the Star’s vulnerability from an old Harvard classmate at E. F. Hutton & Co.
Though some in the industry at first thought the $125-million purchase price high, Murphy quickly sold off the company’s paper mills for $30 million, taking the company out of a complicated business in which it had no expertise and bringing down the cost substantially.
Cuts Out Needless Fat
“They have tended to stay out of complicated businesses and concentrated on relatively easy ones. That also helps them remain decentralized,” Morton said.
With each acquisition, the typical formula is that Cap Cities sees value in a company and tries to realize it by cutting out needless fat. Typically, analysts said, Cap Cities will cut and slash what it considers needless administrative costs and staff, though it is usually generous with its news budgets.
“It is a decentralized yet tight management,” said Victoria Butcher, a securities analyst with F. Eberstadt & Co. “They give their people a lot of rope, but they keep a very, very close eye on the bottom line.”
Such practices may prove difficult with ABC, some television executives speculated Monday. The network already has worked hard to trim unnecessary costs at its stations, but its profit margins are still about half of what Cap Cities is accustomed to.
Also, several television production executives said, Hollywood’s best creative and production talent may be put off if Cap Cities tries to impose a bargain-basement mentality on network television production.
Cap Cities’ methods have proven troublesome before. In Wilkes Barre, for instance, the company acquired a newspaper with a pro-labor contract in a heavily union town and set about to undo 30 years of labor negotiations.
When it appeared that talks for a new contract would fail, Cap Cities erected a chain link fence around the newspaper office in downtown Wilkes Barre, started hauling mattresses and refrigerators into the building and hired an all-black security guard force to protect the building in an almost all-white town--all before any strike was called.
When the strike hit, the 70,000 circulation paper suspended publication for a week. When it resumed seven days later, it had a circulation of 4,000.
Despite such incidents, Cap Cities management has a reputation on Wall Street of appearing almost shy in an industry of people rarely so described.
“The management of Capital Cities is unlike anyone else in the industry,” Morton said. “They don’t seem hard charging. They are supremely self-confident and relaxed. One might say almost laid back.
“They take this kind of aw-shucks attitude, but they keep piling one strong move after another.”
CAPITAL CITIES COMMUNICATIONS This fast-growing company has seven television stations, including four affiliates of the ABC network, and 12 radio stations. Its publishing empire includes the Kansas City Star and Women’s Wear Daily. In cable TV, the company operates 50 systems in 16 states.
Year Ended Dec. 31: 1984 1983 Revenues $939.7 $762.3 million million Net Income 142.8 114.7 million million
Shares outstanding: 13 million Monday’s Closing Price (NYSE): $183.50 CAPITAL CITIES BROADCAST HOLDINGS
Television WFTS Tampa, Fla. WPVI Philadelphia WTHN New Haven, Conn. WKBW Buffalo, N.Y. WTVD Durham, N.C. KTRK Houston KFSN Fresno Radio WKHX-FM Marietta, Ga. WKBW-AM Buffalo, N.Y. WPAT-AM/FM Paterson, N.J. WPRO-AM/FM Providence, R.I. WJR-AM Detroit KZLA-AM/FM Los Angeles WHYT-FM Detroit WBAP-AM Fort Worth KSCS-FM Fort Worth
AMERICAN BROADCASTING COMPANY ABC operates a national television network with more than 200 affiliates, five TV stations, 12 radio stations, and seven radio networks with more than 1,700 affiliates. It also publishes magazines and books, produces movies, provides programming for cable TV, and owns stakes in several cable networks.
Year Ended Dec. 31: 1984 1983 Revenues $3.7 billion $2.95 billion Net income 195 million 159.8 million
Shares Outstanding: 29.1 million Monday’s Closing Price (NYSE): $105.375 ABC’S BROADCASTING PROPERTIES
Television WABC New York KABC Los Angeles KGO San Francisco WXYZ Detroit WLS Chicago Radio WABC-AM New York WPLJ-FM New York KABC-AM Los Angeles KLOS-FM Los Angeles KGO-AM San Francisco WXYZ-AM Detroit WRIF-FM Detroit WLS-AM/FM Chicago KSRR-FM Houston WMAL-AM Washington WROX-FM Washington