Stratagem 35:To Catch the Bandits, Capture Their Leader
“Capture their chief, and the enemy will collapse. His situation will be as desperate as a sea dragon fighting on land.”
—From The Thirty-Six Stratagems
This tactic is used most often during acquisition battles. When company A wants to acquire company B, it can either offer the highest bid or it can offer an incentive tailored to the interests of company B’s owners. When the owners’ incentives differ from the company’s, this second approach can be less costly.
Consider the battle between two media moguls for the satellite television company, DirecTV . Rupert Murdoch, chair of the $68 billion media conglomerate News Corp, and John Malone, chair of Liberty Media, fought for control of DirecTV . One out-thought the market to win the battle; the other found his adversary’s Achilles’ heel and won the war.
Murdoch and Malone met at an industry gathering in 1983 and immediately struck up a friendship as two conservative outsiders in an industry dominated by liberals. Their friendship flourished in a decade-long series of collaborations.
In 1991, when Murdoch was facing a crisis with creditors, Malone was one of the first to buy ] convertible bonds from News Corp. This sign of confidence by an industry leader encouraged others to buy News Corp debt and contributed to Murdoch’s avoiding bankruptcy.
Malone again evidenced his allegiance twelve years later when both media moguls coveted DirecTV They each approached Direc- TV ’s owner, General Motors, but lost out to a $19 billion bid from EchoStar, a pay-TV company. The EchoStar deal, facing tough opposition from the Department of Justice and the Federal Communications Commission, eventually fell through, leaving DirecTV again up for sale. Malone and Murdoch jointly bid for the company.
The following year, however, it became clear that their joint bid would fail. Malone and Murdoch faced two choices for winning control: They could compete with each other or one would need to step aside.
Malone wanted DirecTV badly. It represented a critical piece in his media puzzle because it would enable him to distribute his content across the country. But Malone seemed to place friendship above profit. He backed out of the battle and conceded the DirecTV prize to Murdoch. In December 2003, News Corp purchased DirecTV for $6.78 billion, adding 12 million subscribers to Murdoch’s empire.
Malone, however, had not given up on the prize. He knew what Murdoch cared about most and believed that by using this leverage he could convince News Corp to sell him DirecTV at a discount.
Murdoch was seventy-three years old when he bought DirecTV and was concerned with his empire’s succession. With 30 percent of News Corp’s voting shares, Murdoch effectively controlled the company, and he wanted to make sure that when he passed on his ownership to his three children, the Murdoch family would maintain its control. Malone knew that continued family control would be a higher priority for Murdoch than DirecTV . So Malone forced Murdoch to choose between the two.
Over the years, Malone had acquired 9 percent of News Corps. He was the company’s second-largest shareholder behind his friend. Murdoch might have felt threatened by such a large shareholder and acted to guard his control, but the two were allies. Murdoch felt he could rely on Malone’s support.
In 2004, however, Murdoch began getting nervous about his friend’s intentions. That year, Malone doubled his stake in News Corp to 17 percent. Murdoch adopted a poison pill to protect himself against Malone. News Corp created a provision that allowed the company to issue new shares, holding Malone’s ownership share to 18 percent. News Corp essentially made it prohibitively expense for Malone to increase his level of control. But the defense was not a permanent solution and upset other shareholders.
In 2006, News Corp and Liberty Media began discussions to avert a clash. Murdoch wanted to secure his family’s continued control. Malone wanted what he had always wanted: DirecTV . The two agreed that News Corp would retire Liberty’s 19 percent voting stake in News Corp. In exchange, Malone would receive News Corp’s 39 percent stake in DirecTV as well as $550 million in cash and three regional sports networks owned by News Corp. All in all, Malone received $11 billion in assets for his 19 percent of News Corp.92
Many News Corp investors were displeased with the deal. They felt that Malone would have paid a multi-billion-dollar premium if forced to buy News Corp’s DirecTV stake under different circumstances. But Murdoch controlled News Corp and was able to direct the company to accept the swap, despite any investor discontent. By swapping DirecTV for Malone’s shares rather than selling it outright, Murdoch increased his family’s share in the company to 40 percent.93 By playing on the discrepancies between Murdoch’s priorities and those of News Corp’s shareholders, Malone won the DirecTV prize.
Extinguishing a Siege with One Arrow
In AD 756, a city in China’s Zhenyuan district was under siege by rebels. The governor of this district was able to hold off the rebels’ attacks but unable to turn away the persistent attackers. The governor needed to extinguish the siege permanently, so he decided to implement the stratagem To catch the bandits, capture their leader.
One night, while the rebel army was sleeping, the governor led a surprise attack. His soldiers poured out of the city gates, surprised the rebel soldiers, and killed many of them. In the chaos of battle, however, the governor could not identify the rebel leader. He did not want to claim victory until the leader was found, because if he did, the rebel siege would continue.
To identify the rebel leader, he ordered his archers to use tree branches instead of arrows. The rebels believed by this action that the governor’s forces had run out of arrows. Encouraged, the rebels reorganized for a counterattack. They assembled around one particular warrior—their leader.
As the rebels prepared for a counterattack, their leader mounted his horse and moved toward the front lines. But before the new battle began, the governor ordered one of his best archers to take aim with a real arrow, not a branch. This arrow hit the rebel leader in his left eye. Immediately losing his will to fight, he ordered a retreat.
