In August 1985, Michael Jackson paid $47.5 million in what was arguably one the of shrewdest business moves ever, outbidding Paul McCartney for the publishing rights to the Beatles catalog.
But it all began one night in 1982 when McCartney invited Jackson to London to work together on a record.
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One night McCartney showed Jackson a thick, bound notebook filled with song titles. Jackson knew that McCartney had bought numerous song catalogues, including the works of Buddy Holly.
Jackson, never one to hide his emotions, became more excited as he turned the pages. He wanted to know more about owning songs: How do you buy them? What do you do with them after you have them?
The conversation moved on to other matters, but Jackson couldn’t get the song catalogues out of his head.
– Robert Hilburn
Fast forward to 1984, McCartney told the current owners of the Beatles catalog ATV, owned by Australian corporate raider Robert Holmes à Court, that he’s willing to pay 10 percent more than any bidder!
Back in 1982, Jackson joked to Paul McCartney and said: “Someday I’m gonna own your songs.” Paul laughed, and responded: “Great, good joke!”
Back to 1984, Jackson’s longtime lawyer, John Branca, got wind that ATV was for sale and informed Jackson. Jackson told Branca to obtain the catalog, no matter the cost.
Michael Jackson set out strictly to buy copyrights. But the package [the whole of ATV] included buildings, a recording studio and some studio equipment–and a life insurance policy on his friend, Paul McCartney.
The ATV lawyers negotiating the deal thought Jackson’s bid was on behalf of McCartney, as they assumed McCartney was using friends to avoid paying the extra 10 percent.
Once they learned that Jackson was not bidding on behalf of McCartney and was offering a $7.5 million more than the next bidder, in attempt to scare them off, negotiations between ATV and Jackson began. In October of 1985, the deal was done and Jackson now owned the entire Beatles music catalogue.
How did the investment pay off? Well, Paul McCartney missed out for a third time purchasing the publishing rights to the Beatles Catalog.
In 1995, Michael is approached by executives at Sony with an offer he can’t refuse. Sony offers to pay Michael $95 million ($160 million in 2014 dollars) to merge ATV Music with their catalogue company and form a new 50/50 joint-owned publishing powerhouse. This was a great deal, because not only did Michael instantly earn back nearly twice his initial investment, he now owned 50% of a much larger music publishing company that would likely grow even bigger in the future. And by the way, Michael still controlled 100% of his own songs through his separate company, Mijac Music.
Between 1995 and 2005, Sony/ATV Music Publishing would grow to own over 200,000 songs. Between 2005 and 2013, the company would grow to own over two million songs, including dozens of valuable catalogues and individual songs by artists like Eminem, Lady Gaga, Akon, Shakira, Beck, Neil Diamond and Bob Dylan. In 2012, Sony/ATV earned an estimated $1.25 billion per year from licensing and royalties and had a net income of $500 million. Today, the total value of Sony/ATV is estimated at $2-4 billion! Even if you use the low end of that estimate, Jackson’s 50% stake is worth a whopping $1 billion! Not a bad return on a $47.5 million investment.
– Brian Warner
Michael Jackson taught us to moonwalk, but perhaps he should have taught us how to invest instead.
Music back catalogues are an asset and like any asset;
If bought at a reasonable price and well administrated, catalogues are considered an excellent investment. They are such good investments, in fact, that it is increasingly difficult to find one on the market. The rule among today’s songwriters after the Beatles’ example: Never sell your publishing.
– Ken Kelley
What is the purpose of explaining Michael Jackson’s purchase of the Beatles Catalog?
Apart from showing off Jackson’s business acumen, it is to explain that there are universal rules governing successful investment in income producing assets, regardless of which market it is traded in or what form it takes.
Look at the first line of Ken Kelley’s statement, ‘If bought at a reasonable price and well administrated, catalogues are considered an excellent investment.’
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Warren Buffett
There are share market speculation strategies, masquerading as investment strategies, promoted to investors that cannot be applied outside of the share market to other income producing assets.
For Instance, investing in real estate, privately family owned businesses or even the music catalogs.
That is one test you can apply when deciding on which investment strategy to apply, plus require at least 20-30 years proof that it has been practised in the market with market beating results. It needs to go come through a bear market, like the 2008 financial crisis and continue to work.
These speculative strategies commit the most basic and serious cardinal sin that there is in investing. And you’re about to read what, why and how.
Contrast Jackson’s purchase of the Beatles catalog with purchases of CDOs, made by professional investment managers.
In 2009, several Australian municipal councils across the state of New South Wales (NSW), had seen their investments halve in value, their mark to market losses were then over AUD$200 million!
Broken Hill City Council has had to write-down its investments in the last financial year by just over $2 million and there is a probability that this financial year, the council will need to write-down the face value of its investments another $1.5 million to $2 million.
Then in 2013, the NSW Government released a report titled, ‘Review of NSW Local Government Investments April 2013’, were some of the key findings were:
- Over the past four financial years, councils have realised losses of approximately $192 million, $160 million in CDOs and $32 million in Capital protected products;
- As at 30 June 2012, councils anticipate further (unrealised) losses of $170 million, $155 million in CDOs and $15 million in Capital protected products;
- Total losses (both realised and unrealised) at 30 June 2012 was $362 million from structured financial products
- The market value of the investments held by NSW Councils is currently $5.37 billion, a fall of $320 million from the book value.
A few Key findings and recommendations from the ‘Cole Report’ in 2008 found specifically:
In relation to the longer term investment portfolio, the nominal rate of return required by Councils should preferably be sufficient to accommodate inflation in respect of capital works. The nominal returns required could probably have been achieved by investment in traditional fixed interest securities. However, Councils appear to have invested these longer term assets to seek out the highest return available, so long as investments were consistent with the restrictions imposed by the Investment Order.
It is unclear whether the new suite of investment products offered to NSW Councils was initially ‘demand driven’ or ‘supply pushed’ but it was most likely a combination. However, it is clear that once the market was identified, the product suppliers aggressively sold these complex investment products as complying with the Investment Order.
The manufacturers of these investment products promoted them directly to Councils. A limited number of distributors both promoted products as well as acted as advisors to the Councils. In one case, the participant acted as product promoter, advisor, and investment manager. A party performing more than a single function has a responsibility to deal with the conflict of interest in a transparent manner. There is anecdotal evidence this was not the case.
The challenge facing product promoters offering complex investment products to NSW Council investors with limited broad investment experience was to thoroughly explain all the product risks. The difficulty of this task is highlighted by a current court case between a NSW Council investors and the product provider that misleading representations were made in relation to the security underlying the Federation CDO.
In the short term, the investment activities of NSW Councils would be restricted to low-risk investments until competence was established to the satisfaction of the Regulator.
How did these professional investment managers manage to lose over AUD$350 million? And how are both stories related?
The answer to both questions is simple.
At the core of both stories is a simple foundational rule to investing, which is to understand how the asset produces income and its risk profile.
Now you may be thinking, well duh…everyone knows this. Yes, most people do, but as the history has shown it is rarely put into practice.
How would you feel being in the shoes of one of those investment managers, knowing that millions of dollars were lost on your watch? Money needed for capital works like water treatment plants, to provide safe clean drinking water for local residents.
“Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius—and a lot of courage—to move in the opposite direction.”
— E. F. Schumacker
Millions will continue to be lost in the coming years, the rule will be tossed away at the chance to look smart among their peers, or to follow the crowd.
Where did these bad ideas come from? Perhaps the business schools, universities and other professional financial institutions who continue to teach their students investing methods & strategies more focused on the price movements of an asset, which essentially down plays the significance of the fundaments of the underlying asset. Critical thinking skills don’t seem to be a requirement in investment courses.
Michael Jackson never took a finance class but understood the value of the Beatles catalog as an income producing asset, whereas the investment managers at the local municipal councils didn’t have a damn clue what was inside the CDOs or how income was earned, and they got the results they deserve.
There are other universal rules governing investment in income producing assets adhere to or ignored in both stories, to name a few;
- The links in the chain between the asset and the assets owner.
- Risk – What is the absolute risk?
- The relationship between Interest rates and asset prices.
- The investor’s circle of competence.
- Prediction and its downfalls.
The key takeaway is to always understand the income producing asset inside and out. Avoid the complicated assets, if you find yourself needing to become an expert in the use excel, move on to the next investment opportunity. As Charlie Munger once remarked, “People calculate too much and think too little.”
The Global Financial Crisis and Regional Australia, House of Representatives Standing Committee on Infrastructure, Transport, Regional Development & Local Government, 2009.
REVIEW OF NSW LOCAL GOVERNMENT INVESTMENTS: FINAL REPORT, APRIL 2008 [Michael Cole]