Warren Buffett’s Investment in Capital Cities/ABC: A Masterclass in Media Investing

• Initial Investment in Capital Cities: 1977 ($10.9 million)

• Major Investment Year: 1985

• Total Investment: $517 million

• Stake Acquired: Three million shares of new equity in the merged entity

• Transaction: Capital Cities acquired ABC in a $3.5 billion merger, and Buffett provided funding to help secure the deal.

• CEO: Tom Murphy, whom Buffett considered one of the best executives in the U.S.

• Capital Cities’ Business Model:

  • Broadcasting: TV & radio stations

  • Publishing: Newspapers & niche magazines

  • Cable TV: Early cable investments, including ESPN

• Outcome: In 1996, Disney acquired Capital Cities/ABC for $19 billion, making it one of Buffett’s most successful exits​.

Buffett’s Early Involvement in Capital Cities (1977)

Buffett’s relationship with Capital Cities began in 1977, when he invested $10.9 million at 10x after-tax earnings, praising the company’s strong fundamentals and superior management under CEO Tom Murphy.

Buffett was drawn to Murphy’s disciplined capital allocation, efficiency, and ability to run a lean operation, which had helped Capital Cities achieve industry-leading profit margins.

By the mid-1980s, Capital Cities was already one of the best-run media companies in the U.S., but in 1985, an even bigger opportunity arose—one that would change the media landscape forever​.

The Landmark Deal: Capital Cities Acquires ABC (1985)

1) Why ABC Wanted to Merge with Capital Cities

By 1985, ABC was under threat from corporate raiders—investors looking to buy and dismantle undervalued companies.

ABC executives, fearing a hostile takeover, approached Tom Murphy of Capital Cities to discuss a friendly merger.

At the time, ABC was one of the three major television networks (alongside CBS and NBC). Though powerful, ABC’s profit margins were weaker than Capital Cities’ due to high operating costs.

Murphy saw a huge opportunity—by combining ABC’s scale with Capital Cities’ disciplined management, he believed he could create one of the most powerful media companies in history.

2) Buffett’s Role: The White Knight Investor

Murphy knew that to complete the ABC acquisition, he needed a major financial backer to help fend off corporate raiders.

Buffett, already a major Capital Cities shareholder, was Murphy’s first choice.

Buffett personally invested $517 million for three million shares in the new Capital Cities/ABC entity, becoming one of the largest shareholders in the newly merged company.

This investment not only secured the merger but also positioned Buffett for one of his most profitable media investments​.

Why Buffett Invested in Capital Cities/ABC

Buffett saw several competitive advantages in the Capital Cities/ABC merger:

1) A Media Empire with Unmatched Scale

The merger created one of the most powerful media conglomerates in the world, combining:

• Eight top-tier TV stations, covering 24.4% of the U.S. market (just below the FCC’s legal limit of 25%).

• 17 radio stations, including seven in the top 10 U.S. metro markets.

• ABC’s dominant television network, which reached 99% of U.S. households.

Buffett knew that large-scale media companies had enormous competitive advantages, including pricing power over advertisers and exclusive content access​.

2) Tom Murphy’s Superior Management

Buffett trusted Tom Murphy’s leadership more than anything.

Murphy had compounded Capital Cities’ intrinsic value at 23% annually since 1958—an extraordinary track record.

Buffett later called Murphy:

With Murphy leading the combined company, Buffett knew profitability would skyrocket​.

3) A High-Quality Business at a Reasonable Price

Buffett paid $172.5 per share for his stake in the merged company, valuing Capital Cities/ABC at:

• EV/EBITA: 8.3x

• P/E Ratio: 14.4x

While not a deep-value purchase, Buffett believed the company’s quality, growth potential, and efficiency improvements under Murphy justified the price.

4) The Early Rise of Cable Television (ESPN)

One of Capital Cities’ hidden assets was its early stake in cable television, including ownership of ESPN.

At the time, cable was still emerging, but Buffett and Murphy saw that it had massive growth potential, particularly as more households adopted pay-TV services.

Over the next decade, ESPN became one of the most valuable cable networks in the world, further boosting Capital Cities/ABC’s profitability.

The Success of Capital Cities/ABC Under Buffett and Murphy

After the merger, Tom Murphy immediately applied Capital Cities’ cost-cutting discipline to ABC, leading to:

• Higher profit margins

• Better operational efficiency

• Increased advertising revenue

Within a few years, Capital Cities/ABC was significantly more profitable than ABC had ever been as a standalone company.

The Big Exit: Disney Acquires Capital Cities/ABC (1996)

In 1996, Disney acquired Capital Cities/ABC for $19 billion, making it one of the largest media deals of the decade.

For Buffett, this meant:

• A massive gain on his original $517 million investment.

• One of his most successful exits in media.

• Further proof that betting on strong management and high-quality businesses pays off.

Buffett later remarked that his Capital Cities/ABC investment was one of the best decisions of his career​.

Lessons from Buffett’s Capital Cities/ABC Investment

1) Invest in High-Quality Management Teams

Buffett’s investment was as much about Tom Murphy as it was about the media business.

Murphy’s ability to cut costs, improve margins, and grow revenues made the merger highly successful.

2) Scale Matters in Media and Advertising

The Capital Cities/ABC merger created an unmatched advertising powerhouse, giving it pricing power and market dominance.

Buffett understood that media companies with a large audience have built-in competitive advantages.

3) The Right Price for a Great Business is Worth Paying

Buffett paid 14.4x earnings for Capital Cities/ABC, which was not cheap, but he was buying into a world-class media empire.

His long-term perspective allowed him to reap massive rewards when Disney acquired the company a decade later.

4) Invest in Emerging Trends Early (Cable TV & ESPN)

At the time, ESPN was not the media giant it is today, but Buffett and Murphy saw the potential for cable television to become a dominant force.

Conclusion: A Perfect Media Investment

Buffett’s Capital Cities/ABC investment was a textbook example of investing in:

• A high-quality business with strong leadership

• A scalable and defensible media empire

• A company positioned for long-term growth (especially in cable TV)

By trusting Tom Murphy and recognizing the media industry’s shift, Buffett turned a $517 million investment into one of Berkshire Hathaway’s best exits.

Key Takeaway: Bet on exceptional management, and hold great businesses for the long term.

The information is provided for educational purposes only and does not constitute financial advice or recommendation and should not be considered as such. Do your own research.