The second fortune is even better than the first

Like his father, Craig McCaw created a business empire out of thin air, using leverage “like a wild man” to make him and his brothers rich.

By O. Casey Corr

One late morning in 1969, while his mother was away on vacation, 19-year-old Craig McCaw walked into his father's bedroom and found Elroy McCaw dead from a massive stroke.

The eccentric who owned several radio and TV stations, including the famed WINS-AM in New York, investments in 64 companies, and money in 25 bank accounts, was gone — and so was the force that kept his business empire afloat.

His death in Seattle triggered dozens of claims and lawsuits by creditors. When the claims reached a total of $12 million, the bank handling the estate pulled out, saying the estate was insolvent. Elroy's widow, Marion, argued that the business was just short of cash. But the family mansion, yacht, and other assets had to be sold to pay creditors. For the McCaws, it was devastating.

Eighteen years later, within a week of the anniversary of Elroy McCaw's death, the McCaws were celebrating the spectacular success of their new family company. Now called McCaw Cellular Communications, the company went public, and, with stockholdings worth more than $1 billion, Elroy's four sons — Bruce, Craig, John, and Keith — joined the world's richest. (Bruce, the oldest, is in the insurance business. John, the third brother, left McCaw Cellular after working in management for 20 years; he is part of an investor group that owns the Seattle Mariners baseball team. Keith, the youngest, held various jobs in the company for 10 years but also left. Bruce and John remain directors of McCaw along with Craig.)

The second McCaw fortune was, like the first, created out of thin air. The elder McCaw bought and sold radio and TV stations whose value depended on licenses for use of air waves; Craig McCaw, the second oldest brother, who became CEO of the company, bought up licenses in the exploding cellular telephone market.

With more than two million customers, McCaw Cellular became the only company with anything close to a nationwide cellular network. Last August AT&T announced it was buying the Kirkland, Washington, company for $12.6 billion, a move that would give Craig McCaw, 44, a seat on AT&T's board and make him the company's largest shareholder. (The sale is not yet final; Bell South Corp., the biggest of the regional telephone companies, has filed suit to block it.)

Building a cellular empire has been a near-obsession for Craig McCaw, the family leader and a shy, decidedly unorthodox executive who is something of an enigma even to those who work closely with him. Craig seems to have all of the riverboat gambler's instincts of his father, who took him on business trips as a boy from age 8. But he claims to be "risk-averse" and perhaps has learned from his mother to be more calculating in his moves and pay greater attention to detail than did the impulsive Elroy.

Marion McCaw, who had been her husband's bookkeeper, is a skilled business manager. At the University of Washington, where she was one of the first women to earn an accounting degree, a professor told her that she would make a fine CPA but that the profession would never welcome a woman. So after graduation, she developed a small housing project south of Seattle in 1939, handling all the permits, financing, and contract negotiations.

The mother is well-tailored, methodical, and smart. While Craig was building his fledgling company, she shared office space with him, sorting through heaps of paperwork generated by the estate creditors. As a board member of Craig's company, she always called for careful record-keeping and caution in taking on debt. She sent memos to Craig and others: "Did you consider this?," or, "What if such-and-such happens?"

While Marion McCaw struggled with estate problems, Craig took a remnant of Elroy McCaw's empire — a tiny, troubled cable company in Centralia, Washington — and used leverage like a wild man. A very smart wild man, who made each move like a chess master and always had a parallel strategy if a deal turned sour.

Right after Elroy's death, according to interviews with family members, Craig met with his brothers and laid out a plan to borrow against that cable company and buy others. In the early days he pushed his brothers to pledge everything they owned as collateral for purchases of companies most people thought were worthless or nearly so. With his brother John, who helped with the acquisitions, Craig worked seven days a week for years, scorned tradition, endured ridicule from competitors, hired young executives who believed in his vision, and found other people's money to buy, first, more cable-TV systems and, later, cellular licenses.

By skillfully managing costs and by raising charges and boosting revenues, the McCaws were able to demonstrate they could increase cash flow in their cable systems. On the basis of the performance of their current holdings, and as cable grew in popularity, they were able borrow even more to buy new systems. The company thirsted for cash and piled up staggering debt, leveraged on promises of ever-growing cash flow.

Cellular was so new that lenders had no way of assessing the value of licenses. The McCaws taught them how, showing that the value could be estimated from projections of market penetration, expected growth, and expected cash flow. They also demonstrated that AT&T, inventor of the technology, had vastly underestimated its market potential.

The lenders learned. The company spent. Along the way, company officials made some crazy deals, in crazy ways, with some odd characters.

McCaw executives were shown off at Michael Milken's Predators' Balls and garnered hundreds of millions in financing from junk bond dealers. Normally attired in slacks and sweaters, the McCaw team donned suits and ties and successfully courted support from the brahmin family who owned The Boston Globe. They schmooz ed with small-town council members in Oregon who controlled cable rates and licenses.

They also bought from communications conglomerates whose executives often thought they were taking advantage of the young McCaw dealmakers. And they bought from countless small-time speculators who had acquired licenses to narrow radio bands in a tiny geographic area through FCC lotteries: a drunk in a Fairbanks bar, dentists, a beauty salon owner, an ambulance driver, a deep-sea diver in Oregon. They paid $700,000 to a guy nicknamed "the Fat Man" who showed porno movies in his office. They paid $3 million to an Oregon man who lived deep in the woods in a mobile home.

One couple in Arkansas, Bill and Hillary Clinton, sold their piece of a partnership in a cellular license to the McCaws. They collected $48,000 for their $2,000 stake, acquired five years earlier. Another couple who operated a beauty school in Santa Rosa, California, saw a television show on speculative investments hosted by Mike Douglas. They invested $15,000 on a chance of getting a cellular license and wound up with control of the license for Yakima, Washington. McCaw bought them out for $1 million.

The young McCaw executives did deals fast. They flew directly to owners, presented a one-page sale agreement, and asked, "What will it take to get you to sign right now?" Often the paper would be signed that day, and often sellers would go away gleeful that they had gotten more than they expected.

Some deals seemed to take place outside the rules — or at least, the rules were so new and ambiguous that they weren't clarified until the deals were made. Craig McCaw had been warned the company was trying to buy cellular licenses that hadn't been formally awarded to the sellers, an apparent violation of FCC rules.

"We can't do that," an executive warned. "The rules don't allow it."

"I don't care," Craig McCaw re plied. "Figure out a way to do it."

They bought the licenses, kept buying, and eventually got government approval. Meanwhile, as other investors realized the enormous profit potential in cellular phone technology, the boom in licenses was under way. The value of some cellular properties soared 9,800 percent over what McCaw had paid for them.

While Craig McCaw has acquired some of his mother's penchant for financial orderliness, most people would hesitate to call him "risk-averse." Clearly, the visionary and the shrewd riverboat gambler predominate in his nature and account for the company's phenomenal success. Without both, the family holdings today might consist of only the small cable-TV system that survived Elroy's estate.

 

O. Casey Corr is on leave from The Seattle Times, writing a book on King Broadcasting Co., a Seattle-based company owned until 1991 by the Bullitt family.