The Tycoon Report

Family Feud - Wall Street Style

Tuesday, January 23, 2007 | Dylan Jovine

IT'S TIME FOR THE  F-A-M-I-L-Y   F-E-U-D!

And I'm your host...DYLAN JOVINE!

Now it's time to meet our contestants!

You know our first contestant as the rich and crusty founder of New York's 2nd largest publicly traded cable company.

A man with so much narcissism dripping from him that Bill Clinton would have become emperor if he would have found a way to bottle it and drink it.

Ladies and gentlemen....meet our first contestant, Cablevision Chairman CHARLEY DOLAN!

(WILD APPLAUSE)

Our next contestant, ladies and gentlemen, has had the horrible indignity of having spent his entire life trying desperately to win his daddy's approval.

A quest so overshadowing and so disruptive that almost every decision he has ever made has been made with his father's image in mind.

No, ladies and gentlemen, I'm not talking about our beloved 43rd President of the United States. 

I'm talking about the President of Cablevision....JAMES DOLAN!

(WILD APPLAUSE)

Alas, if the Cablevision saga were only just a 30-minute game show instead of a life-long game of 3-card Monty.

But instead of hustling a vacationing couple on the streets of Times Square, the Dolans are trying to hustle literally billions of dollars directly from the pockets of Cablevision shareholders.

Let me explain:

The Dolan Family runs Cablevision, one of the "premier" cable companies in the country.

Located in New York, it has 3 million "affluent" customers who pay above-average prices for below average services.

Over the years, the Dolans have run the company like a personal fiefdom.

How is that possible, you ask?

Although they own only 2.5% of the Class A Stock (what most people own,) they happen to own over 60% of the Class B stock.

That's the "super voting" stock.

The stock that controls the board of directors.

And it's the board of directors that control the direction of the company.

But here in Cablevision-land, shareholders have not only been treated to a version of Family Feud that would put Freud, himself, in a catatonic state...

...they've been treated to corporate abuse so blatant and so without consequence that Henry the VIII, himself, would blush. 

To begin with, they've been able to make investments that affect the shareholders of the company - seemingly without consequence!

Investments that, over the years, have put the strong and consistent cash flow from the steady cable business into weak and inconsistent ventures like "The Wiz" retail stores.

Or "Voom", their recently tossed satellite service.

How have these bad decisions affected Cablevision shareholders during the past decade?

Believe it or not, you could have made just as much money buying the S & P 500 as you would have made buying Cablevision (for a lot less risk and a lot less compensation to the Dolan family.)

Or you would have made TWICE as much money buying Fallen Angel Stocks' recommendation Comcast (SYM: CMCSK) which has outperformed Cablevision by a 2-to-1 margin over the same period.

But finally, it seems that the Dolan family has gone too far and is about to pay the piper. 

Let me explain.

Veterans of the consumer telecom wars would probably agree that the past 10 years have been the hardest in history. 

Before the rise of the internet, it was just a life and death struggle between satellite companies and cable companies.

But the promise of the internet meant that cable companies could make billions of dollars in extra profits if they were able to upgrade their systems.

By upgrading their systems, they'd be able to sell customers video-on-demand, high speed internet and telephony services in ADDITION to their bread and butter cable business.

But selling telephone services isn't easy when you have Baby Bells like Verizon to compete against.

They weren't going to just walk away from billions of dollars in profits they've been getting each year from their bread and butter telephone business - it was going to be a fight to the death.

Ever since the year 2000, this fight has taken on extra intensity.  That's around the time the Baby Bells decided to begin investing billions of dollars to upgrade their networks so that they could offer TELEVISION services to their telephone customers.

So here's my rub with the Dolans:

For the past 5 - 10 years each company has bet billions of dollars of shareholders' money staking their claim on the households of the digital future.

And I'm not talking simple bets.  I'm talking about the type of bets that can make or break a company in an instant.

Cablevision was no different - they also spent billions of dollars upgrading their networks to offer customers all the goodies they could ever want.

But since the Dolans only own 2.5% of the entire company, most of that risky investment has been made by the shareholders who own the other 97.5% of the business.

In other words, their own personal risk has been minimal - especially when you factor in the millions of dollars they make in compensation each year.

For the past five years, everybody on Wall Street believed that the Baby Bells actually had a good chance of winning the war.

But recently, it has become apparent that the cable companies are signing up more and more people by the boatload.

And the telephone companies haven't even gotten their new services off the ground yet.

In other words, right now, the outlook for cable companies is better than it has been at any time in the past decade.

They're FINALLY finished upgrading their networks and now get to sit around as the cash begins to pile in!

But the Dolans - used to playing 3-card Monty with unsuspecting tourists - have been trying to buy out the rest of the shareholders and take the company private.

At the right price that wouldn't be a big deal.

But the Dolans have been trying to buy the company on the cheap.

Fortunately for Cablevision shareholders, the board has finally had enough and rejected both of their offers.

Although it's taken over 25 years, it seems that the board has finally gotten hold of its senses.  They realize that the risky part of this investment cycle is over - Cablevision doesn't have to spend billions more upgrading their networks anymore.

If the board would have let the Dolans have the company at the price they originally offered, it would have been the equivalent of racketeering.

That's because shareholders of Cablevision would have spent all the money and taken all of the risk, and right when the picture finally cleared up, the Dolans would have bought the company and taken all of the profits.

Now the real miracle would be if the Board could finally wake up and shake up the Knicks!

--By Dylan Jovine




Dylan Jovine
Chief Investment Officer
The Tycoon Report