Chương 578: Chapter 579: The Offer
[Chapter 579: The Offer]
Buffett had always been confident in the video rental industry. To that end, he had closely studied Blockbuster's data. From the mid-1980s onward, the profits generated by the video rental sector had rivaled box office revenues. With 3,000 locations, Blockbuster was undoubtedly the "Walmart" of video rentals.
The company's annual profits were hardly less than those of the seven major Hollywood studios. Moreover, this video rental giant boasted a substantial cash flow, which Buffett found particularly appealing. Despite the thriving nature of the video rental business, Buffett didn't believe there was a bubble in the industry. Consequently, Eric's dismissive comments about Blockbuster puzzled him. "Eric, don't you believe in the prospects of the video rental industry?"
The video rental and the soon-to-emerge DVD rental sectors would flourish for at least another decade. Eric, of course, saw promise in such an industry; he simply doubted the sustainability of Blockbuster's chain store business model, which he expected would be swiftly outdated in a few years.
"Mr. Buffett..."
Eric had just begun to speak when Buffett gently interrupted him, smiling warmly, "Eric, you can call me Warren. I don't want our conversation to feel like a formal business negotiation. What do you think?"
"Alright, Warren," Eric nodded with a smile. "If you've ever been to one of the Blockbuster rental stores, you'd know that finding specific videos is always a hassle. Plus, their various fees are very unreasonable. I believe that if a better video rental model were to emerge, it would be inevitable for Blockbuster to be eliminated."
Buffett showed no signs of a wealthy tycoon and continued to probe, "I assume you must have considered a certain better business model you mentioned?"
"Of course! For example, the Internet. We could establish a dedicated video rental website where customers can easily find detailed rental information for any movie simply by entering its title. We could even create a specialized mailing system to make renting videos more convenient."
Buffett wasn't particularly focused on the high-tech industry, which was evident from his investment portfolio predominantly featuring traditional industries. However, with the Clinton administration's strong push for a national information highway plan at the time, he had come across plenty of related information. Buffett keenly picked up on the most critical aspect of Eric's proposal: "Don't you think the number of Internet users is still a bit low?"
Eric hadn't been closely monitoring the increase of North American Internet users recently, but he quickly found a comparable example. "That's true, but those who can access the Internet tend to have considerable purchasing power. Moreover, over a decade ago, when personal computers first emerged, it seemed no one realized that this expensive device, which appeared not particularly useful at the time, would eventually sell millions of units annually. Over the past ten years, tens of millions of people in North America and around the world have acquired personal computers, often backed by solid economic means. With the growing richness of Internet content, I believe most people will choose to engage online."
While researching Eric's background, Buffett had also logged onto Yahoo and created his email account. Though many considered his personal style quite conservative, Buffett was someone who always remained learning and open to new things. He found that using an online email was indeed much faster than traditional mail, but due to various hardware and software limitations at the time, he couldn't envision a profitable future for these online services. Buffett was a profit-seeking investor who strictly adhered to the principle of ensuring returns from investments. If he put in tens of millions of dollars without any return, he couldn't find any reason to continue.
"Eric, before coming here, I checked out the Yahoo portal you invested in. I want to know: did you establish this site for investment or purely as a philanthropic endeavor?"
"Definitely for investment."
Eric sensed that Buffett had veered the topic off course; today's discussion was meant to be about Firefly acquiring a television network. However, he understood that Buffett was someone who was very inquisitive. Many of his materials showed that when Buffett took interest in a company, he tended to bombard its representatives with questions. But Eric felt no impatience. In fact, many business transactions were established through this kind of exchange, while the heated negotiations often happened only after a mutual interest had been established.
"So, regarding the Yahoo portal, when do you plan to start turning a profit, and how will that be achieved?"
"I haven't considered Yahoo being profitable in recent years; it's still in the market cultivation phase," Eric answered slowly. "Warren, imagine if Yahoo had over a hundred million users. How much would advertisers be willing to pay to advertise on Yahoo?"
A hundred million users!
Buffett slightly squinted. He didn't take Eric's statement as a fanciful dream. Just as they had seen a decade ago, no one anticipated that personal computers would sell millions of units annually now. If Internet users truly grew at a rate of hundreds of thousands or even millions per year, then a hundred million users wasn't an unimaginable figure.
Understanding the profit potential of advertising from newspaper media, Berkshire Hathaway owned several newspapers, but the largest among them, The Washington Post, only had an average daily circulation of a few million copies. Yet, this small circulation generated hundreds of millions in profits annually. Therefore, an internet media platform with a hundred million users would likely generate profits exceeding those of any traditional print media once it found suitable monetization strategies.
Although Buffett wasn't impulsive, he could clearly feel a genuine interest brewing within him. He took a moment to think, lifted his Coke to take a few sips, gently set the cup down, and looked at Eric. "Eric, the perspective you're describing is indeed very tempting, and I'm eager to see Yahoo develop as you envision. So, let's talk about the television network. I heard you recently chatted with Barry Diller?"
"Yes," Eric lamentedly replied, stating, "Unfortunately, he has no intention of joining Firefly."
Buffett remained unchanged in demeanor. "So, if I agreed to sell you ABC, how would you handle Tom? You know we're good friends; I need to consider my friend's interests."
"If we successfully acquire ABC, Firefly wouldn't make too many personnel adjustments at the network. The performance of ABC in recent years has proven Mr. Tom Murphy's management skills, so Firefly's primary focus in the next few years would be increasing investments in ABC's content. We all understand that a television network serves as a sales platform, and its programs are the 'products'. Any customer will gravitate more toward a store with higher quality products at the same price range."
Buffett clearly appeared satisfied with Eric's answer and began to inquire about other issues, probing various questions about potential concerns after the acquisition of the television network. The two continued to chat as if discussing something trivial, without addressing the most important issue: the acquisition price.
After over an hour, when they finished a large bottle of Coke, Buffett finally spoke. "Eric, overall, I find your various proposals after acquiring the television network quite satisfactory, so we can now discuss the acquisition price."
Buffett and Tom Murphy owned most of ABC's shares, meaning that as long as those two nodded in agreement, Firefly's acquisition of ABC would likely face little resistance.
However, Eric didn't feel at ease. He realized that if Buffett merely intended to divest ABC for cash, he wouldn't have spent so long conversing with him; he might have directly given a sale price.
Sure enough, Buffett continued, "Eric, while I am optimistic about this transaction, I don't plan to fully cash out my shares in ABC. Tom and I have discussed it, and we would only sell up to 30% of our ABC shares in cash; I would like the remaining 70% to be exchanged for equity in Firefly."
Eric had already anticipated Buffett's intentions. Deep down, he didn't prefer a cash-and-stock swap. However, the scenario now was very different from when they acquired Disney. At that time, Disney was struggling, and relatively small Firefly had completely swallowed Disney whole, and many investors had looked unfavorably upon the acquisition. Furthermore, Disney had not had a controlling majority shareholder like ABC, whose shares were spread out, making it easier for Firefly to pursue a cash acquisition.
But in the past two years, Firefly's performance had become remarkable. Although the financial report for that year was not yet released, a net profit exceeding one billion dollars was almost guaranteed. Currently, aside from larger entities in Hollywood like Time Warner, no other film company had been able to reach such annual profits. Consequently, investment firms globally had eagerly focused on Firefly, always anticipating news of an IPO. In this context, both ABC and CBS would undoubtedly seize the opportunity to invest in Firefly.
As for Buffett's proposition to trade 70% of ABC shares for a stake in Firefly, Eric didn't rush to negotiate but instead asked, "So, Warren, I want to know, how much of Firefly's shares are you looking to get in exchange for 70% of ABC?"
"49%," Buffett replied swiftly, having evidently considered the matter thoroughly. "Eric, we can calculate using ABC's current stock price. ABC is roughly valued at $10 billion. As for Firefly, I estimate it at $15 billion, and I know you wouldn't give up control of Firefly, so we're not asking for a majority share. You will still be the largest shareholder, and I won't interfere in Firefly's management. What do you think?"
What do I think? Of course, I think it's unacceptable.
While Firefly's business wasn't as expansive as Time Warner's, its annual profits were certainly comparable. Many might assume, based on Hollywood's typical development trajectory for film companies, that such profit margins were only temporary. However, Eric was confident that Firefly could maintain rapid growth over the long term. Even without a television network, its profits would continue to rise. After all, the films and television shows produced by the company were also commodities, and Eric possessed unparalleled skills in creating and selecting "quality products."
"Warren, that price is too high; I definitely won't agree to it," Eric stated plainly. "Firefly's net profit last year was close to a billion dollars, and this year it might even surpass Time Warner's. We know that Time Warner's market value is nearly $30 billion, yet Firefly is only valued at $15 billion. Don't you think that's too low?"
"Eric, I admit that Firefly's recent performance has been outstanding, but we also know that the movie industry's return on investment can be quite unstable. While everyone recognizes your talent in filmmaking, that doesn't guarantee future success. Just look at Spielberg. The entire 1980s was essentially Spielberg's era, yet as he entered the 1990s, he faced a failure with Hook. Moreover, we understand that a company's market value cannot be solely determined by profits from a few years. Time Warner owns film, television, publishing, and music industries, which gives it a high risk tolerance. Even if one segment suffers a significant loss in a given year, it won't affect Time Warner's overall revenues. In contrast, Firefly has a much narrower range of business, and side income heavily relies on box office performance."
*****
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