Capital Cities Communications
1. Origin of Relationship
Berkshire Hathaway first invested in Capital Cities Communications (often called "CapCities") in 1977, deploying $10.9 million into its common stock. Warren Buffett was deeply impressed by the operational and capital allocation skills of its CEO, Tom Murphy.
2. Major Milestones
| Year | Event |
|---|---|
| 1977 | Berkshire invests $10.9 million in CapCities common stock. |
| 1981 | Identified by Buffett as a "Category 1" business—exceptionally suited to thrive during inflation due to low capital needs and strong pricing power. |
| 1985 | Capital Cities acquires ABC in a $3.5 billion merger, with Berkshire providing $517.5 million in financing in exchange for a major equity stake. |
| 1996 | Capital Cities/ABC is acquired by The Walt Disney Company for $19 billion in cash and stock, yielding a multi-billion dollar gain for Berkshire. |
3. Strategic Importance
Capital Cities Communications played a foundational role in shaping Buffett’s views on media economics and capital allocation. Led by Tom Murphy, CapCities proved that media properties possessed incredible pricing power and low capital intensity. Furthermore, Buffett’s investment in CapCities illustrated his "unorthodox" view that non-control investments in outstanding companies with exceptional management can produce superior results to control. He famously noted that direct ownership would offer no advantage because Berkshire could not provide management equal to Tom Murphy.
🔗 Connections
- Manager / Partner: Tom Murphy, The Walt Disney Company
- Concepts: Capital Allocation, Look-Through Earnings, Pricing Power, Category 1 Businesses
- Sources: 1977 Letter, 1981 Letter, 1985 Letter, 1995 Letter, 1996 Letter