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EchoStar spins into orbit

Charlie Ergen outhustled Rupert Murdoch in the bidding for DirecTV. Now if he can only persuade the feds to let him keep it.

Charlie Ergen outhustled Rupert Murdoch in the bidding for DirecTV. Now if he can only persuade the feds to let him keep it.

By Jenny Anderson and Steven Brull
March 2002

Late on the night of Saturday, October 27, 2001, an exhausted Charlie Ergen, the founder and chief executive of EchoStar Communications Corp., drove up to his home in the Denver suburbs. He wearily read a bedtime story to one of his five children, then stumbled off to his room to catch up on four nights with virtually no sleep. He didn't bother to check his answering machine until later. Had he, he would have found a message from media mogul Rupert Murdoch, conceding defeat in his efforts to buy Hughes Electronics Corp., parent of DirecTV, America's leading satellite TV operator, and offering congratulations to his vanquisher.

"It was very gracious and speaks to his character," Ergen told Institutional Investor. "He was very disappointed, as I would have been."

It was the most unlikely of phone calls. For more than a year Ergen and News Corp. chairman Murdoch - a generation apart in age but driven by the same dreams of empire - had battled fiercely to win Hughes, the wholly owned subsidiary of General Motors Corp. Both knew that victory would determine who would dominate America's booming satellite TV business and who would be marginalized. Murdoch, who controls the skies over Europe and Asia, wanted to complete his global reach, while creating a media colossus combining content and distribution that would give him leverage with U.S. cable carriers as well as against rival content providers. With DirecTV, Ergen would have a virtual lock on the nation's satellite TV business, arming him to do battle against the nation's local cable monopolies that he sees as his main rivals. Without it, he and EchoStar would be doomed to a long, self-destructive war with competing satellite operators.

"DirecTV was critical to both our futures," says Ergen. "His for his international global future and ours to compete against cable in the U.S."

Until late that Saturday afternoon, Murdoch, by all accounts, held the winning hand. But at the 11th hour, Ergen pledged much of his net worth as collateral, turned GM's interest his way and prevailed with his $25.8 billion offer as a peeved Murdoch withdrew.

The story of Ergen's triumph, and his rise to the pinnacle of media moguldom, is a classic American tale of a small-town boy made good. Trained as an accountant, Ergen grew bored and restless in his 20s, briefly supporting himself hustling blackjack and poker before spying his first satellite dish and catching a glimpse of the future. He started out in the early 1980s as a franchisee peddling dishes from the back of a truck when the ungainly apparatuses were the size of trampolines and most content was pirated. He moved implacably up the business's food chain: from retailer to wholesaler to manufacturer of TV set-top boxes to satellite owner and content distributor. The arc of his stunning success owes much to a now-vanished, bull market love for all things technological, and the seemingly bottomless tolerance of investors for mountains of junk debt ladled on the balance sheet of a hot growth company.

And the satellite business itself is booming. Just as cable came of age in the 1980s, satellite is now in ascendancy. Despite extraordinary fixed costs - launching and maintaining satellites is hugely risky and expensive - growth has been explosive. Between 1997 and 2001 the number of U.S. satellite subscribers more than quadrupled, from 4.3 million to 17.6 million, each paying about $500 per year; by contrast, cable subscribers rose from 63 million to 69 million. The main reasons for the satellite spurt: satellite's ability to deliver more channels than cable and regulatory changes that allowed an increase in local programming.

The battle for Hughes was breathtaking in its complexity, a cliffhanger filled with the kind of plot twists that subscribers might have paid a premium to receive. "It was a little bit like an Indiana Jones movie," Ergen says. "There would be rocks falling on you, and by the time you got through that, there would be arrows flying at you. By the time you get rid of the arrows, there are crocodiles."

Begin with a glittering cast of conflicted characters. Even as they dueled, Ergen and Murdoch were, in fact, uneasy partners: In 1997 the two had agreed to merge in an ill-fated satellite venture dubbed Deathstar by threatened cable operators; the deal broke apart acrimoniously and led to a settlement that eventually left Murdoch owning 14.1 percent of EchoStar. Even as EchoStar wooed Hughes, Ergen was suing DirecTV for anticompetitive behavior. For the run at Hughes, Murdoch allied himself with John Malone, chairman of Liberty Media Corp., one of the cable giants he previously had battled, and with Microsoft Corp.'s Bill Gates. Though Murdoch had once partnered with Hughes in an abortive satellite venture in the early 1990s, sources say this time around he managed to offend its executives, led by then-CEO Michael Smith, by cricizing their operations.

The sellers, too, twisted themselves in knots. GM, led by then-CEO and president John Smith Jr., owned Hughes, which was run by Smith's brother, Michael, who had resisted overtures from Ergen in 1999. Michael wanted Hughes to remain independent and dragged his feet when GM decided to sell the unit, trying to arrange a management buyout. When that failed, sources say, he approached Ergen in secret, a fact Ergen revealed in a regulatory filing. Soon after, he resigned.

Financing the transaction was an extraordinary exercise, complicated by DirecTV's unusual capital structure: A unit of Hughes, it traded as a tracking stock, and GM, which owned all Hughes's assets, held 30 percent of the tracking shares. GM wanted a chunk of cash up front - as much as $8 billion - to liquidate most of that stake, and it wanted to avoid a big tax hit, so any deal had to be structured as a reverse merger, with the purchaser controlling less than 50 percent of the company. The carmaker's terms slashed the number of potential bidders to two from an initial score or so of interested parties that included AOL Time Warner, Walt Disney Co. and Viacom.

Ergen's offer was straightforward, but his finances and credibility were shaky. Meanwhile, GM struggled to parse Murdoch's plan to merge Hughes into his Sky Global Networks, whose public and private assets spanned Asia, Europe and Latin America. Teams of bankers scouted the globe to assess assets whose public and private values were rapidly changing.

In the interim, the economy tanked, markets plummeted and Hughes's market value dropped from more than $50 billion in September 2000 to $18 billion in October 2001. And the offers kept changing. "The assets that went in changed, the amount of cash changed, the equity ownership in the new company changed," says one banker. The deal stretched out over a year, costing GM and its shareholders billions, as the tech stock swoon sent Hughes's shares plunging from $34.81 in September 2000 to $12.89 in October 2001.

Just about every global financial institution played a role. "You had to be involved in this transaction," says Thomas Gahan, head of global credit products at Deutsche Bank, which represented EchoStar. "You don't get many chances to do this with a company of this quality and caliber."

Success hinged on Wall Street's ability to advance billions in cash amid the worst equity and debt markets in half a century. "The banks' ability to bring capital to the table was critical," says Joe Walker, special adviser to General Motors and a former J.P. Morgan investment banker.

Two banks that fell off the multimillion-dollar gravy train started out as its engineers. Morgan Stanley and UBS Warburg began as co-advisers to EchoStar, but by the time the deal was signed, neither bank was by Ergen's side. Deutsche Bank - brought in as a junior adviser late in the game for its balance sheet - took the lead when a fainthearted UBS failed to come up with its share of a critical $5.5 billion bridge loan just before the GM board met to consider both offers. Credit Suisse First Boston, UBS's main rival, won the business UBS lost. "It was the grand slam of blowing it," says one competitor.

At the last possible hour - the morning GM's board met to pick a winner - Ergen put up $2.75 billion of his own EchoStar stock as collateral to clinch the deal. Murdoch, sensing defeat, grudgingly withdrew - and called his rival. "Nobody who knows Charlie was surprised that he won this deal," says Stephen Ketchum, head of satellite banking at UBS Warburg. "He's been practicing all his life for it."

Now Ergen must defend his prize. It won't be easy. The merger faces massive regulatory hurdles, since the combination of EchoStar and DirecTV would unite the nation's dominant direct broadcast satellite, or DBS, operators into a single entity. And it must surmount fierce opposition, ranging from worried content providers like the National Association of Broadcasters to advocacy groups like the National Consumers League. Then there's Murdoch, who wasted little time after making his congratulatory call before organizing opposition; his lawyers have been hawking an inch-thick briefing book against the merger, "The Essential Guide to the EchoStar/DirecTV Deal." That doesn't surprise Ergen, who says of his rival: "He will fight - not publicly, but certainly behind the scenes."

The Department of Justice has begun an antitrust review of the merger, and the Federal Communications Commission must sign off on it. Several state attorneys general have also expressed their doubts. "It's illegal in America to monopolize," sums up Chuck Hatfield, assistant attorney general of Missouri.

But betting against Ergen has rarely proved wise. He argues that because of cable, the merger isn't monopolistic, and he is proposing a national pricing scheme to assuage consumer groups worried that he'll gouge rural customers who have no alternative to his service. Late last month, EchoStar and DirecTV announced they would offer local channels to all U.S. markets.

His gambits may or may not prevail, but Ergen stands to win either way. If the deal is approved, he'll control the U.S.'s only high-powered DBS company, with the prospect, over the next decade, of serving 30 million households, or roughly one in every three in the U.S.

But if the deal gets scotched, Ergen will still have disrupted the business of his main rival for more than two years, savaging its value. Last year for the first time EchoStar's Dish DBS brand outsold Hughes's DirecTV.

"Charlie will get the deal done," says one of Murdoch's bankers. "He'll wear them down."

Now 48, Charles Ergen has been nothing if not persistent throughout his career. Just shy of six feet tall, lean, with a direct way of speaking that can strike some as rude, Ergen has over two decades made himself a billionaire several times over. But he delights in positioning himself as the ill-educated David battling the Goliaths of the media world. Notoriously tightfisted, the EchoStar CEO eschews fancy suits for his regulation garb of khakis and a blue button-down shirt embroidered with EchoStar's Dish logo; he established his headquarters in Littleton, Colorado, in a run-down strip mall he bought out of bankruptcy. He requires that all EchoStar employees fly coach and double-up in hotels when on the road.

Ergen comes by his penny-pinching the hard way. The fourth of five children, the Oak Ridge, Tennessee, native put himself through the University of Tennessee after his father died of a heart attack by clerking at his dorm, selling fraternity sportswear and hustling schoolmates at poker. He earned his MBA at Wake Forest University in 1976, passed the CPA exam and worked briefly as an auditor before moving to Dallas as a financial analyst at PepsiCo's Frito-Lay division. There he met Candy McAdam, a Braniff flight attendant, at a local bar, according to Stephen Keating's 1999 Ergen biography, Cutthroat. They married in 1982.

Ambitious and bored, Ergen quit his job in 1978 at 25 to search for something he could run, according to Keating. He hopped around the world using McAdam's airline discounts and toyed with starting an import business. For cash he and a Dallas friend, James DeFranco, hit the tables in Las Vegas and Lake Tahoe to make a living from blackjack. They were successful enough, but more than once found themselves tossed from casinos for counting cards. Then one Sunday in the fall of 1980, on his way to a friend's house to watch a Dallas Cowboys football game, DeFranco spotted a van parked on the side of the street with a ten-foot satellite dish on an attached trailer. Curious, he investigated and learned that it was for satellite TV and that it was on loan from a Saint Petersburg, Florida-based company.

He shared his find with Ergen, who had moved to Phoenix. Intrigued, the duo flew to Florida. Soon DeFranco, Ergen and McAdam had scraped together $60,000 for a license to distribute satellite dishes in Colorado, Utah and Wyoming, Keating recounts. The three have remained in business together: McAdam, who got an MBA in 1981, sits on EchoStar's board, and DeFranco serves as an executive vice president, overseeing sales and distribution.

They got off to a rough start: The team's first sale was foiled when the dish fell off the trailer onto Interstate 25. More broadly, though promising, satellite TV was hampered by technology that made it too expensive and too unwieldy to compete with broadcast and cable. Nationally, only 5,000 households owned these so-called C-band satellite dishes, which sported enormous antennas and cost upwards of $25,000 apiece.

But prospects were brightening. One impetus for growth came, paradoxically, from the Cable Reform Act of 1984. Designed to deregulate cable rates, it also allowed satellite viewers to receive programming while allowing programmers to scramble content. The net effect was to legitimize the satellite TV business.

At the same time, technological advances were working in favor of the business, in particular the advent of digital broadcast services. Where early satellite pioneers talked about providing three or four channels, new high-powered satellites promised hundreds of channels. To take this from the world of science fiction into people's living rooms, though, was an expensive proposition.

Ergen soon saw that success in satellite would come not just from selling the hardware, but through controlling the distribution of content by launching satellites to broadcast hundreds of channels. The key was control of the sky. To get in the game, Ergen and his rivals needed to snag one or more of the eight orbital slots on the high-powered Ku band that had been awarded to the U.S. at the 1978 International Telecommunications Union conference in Geneva. The goal was for DBS providers to launch satellites into each slot, 23,300 miles up, from which they could beam programming to earth. Each slot can accommodate 32 transponders, devices attached to the satellite, each of which can receive and send between eight and 12 channels.

The three most coveted slots, located at 101 degrees, 110 degrees and 119 degrees longitude, can reach the whole continental U.S., allowing DBS providers to beam signals from uplink centers to the satellites, which retransmit them all over the country. The other five slots can only reach certain regions of North America.

In six auctions from 1981 through 1996, according to the Carmel Group, a California-based research firm, the FCC awarded licenses to applicants with credible business plans in return for agreements to meet certain milestones, such as contracting and constructing satellites. Only the 1996 auction, the last one, required the bidders to actually pay for the space in the sky. Ownership of the slots has changed through auctions, lawsuits, bankruptcies, mergers and acquisitions.

Ergen filed for his first license in 1987 while still selling C-band dishes and manufacturing set-top boxes. He was awarded a license for 11 transponders on the 119 degree satellite in 1992.

Fiercely independent, Ergen kept pumping money into the business as one big company after another tried and failed to get a DBS company up and running.

Murdoch was an early booster of satellite. In 1983 he proposed Skyband, a service based on dishes four to six feet wide that could receive five channels. The effort, cursed with little content, died within the year. Undeterred, he went on to start British Sky Broadcasting in the U.K., which now dominates that market, and he built up powerful satellite TV networks in Asia and Latin America. And Murdoch repeatedly tried to break into the U.S. market.

Hughes was another early player. In the 1970s it had set up Hughes Communications, which built and leased satellite space to the U.S. military. In the early 1980s it launched its Galaxy fleet of satellites, the transponders of which were leased to HBO and other programmers seeking to distribute content to cable providers. In 1984, the year before it was bought by GM, Hughes won 27 transponders at the 101 degree slot in a federal auction.

As EchoStar grew, ergen perfected his role as scrappy underdog, making his money from the sale of C-band dishes and set-top boxes. He remained a small fry compared to his rivals. In 1990 two big, competitive DBS initiatives were launched. In the first, Hughes joined with News Corp., NBC and Cablevision Systems Corp. to launch a medium-powered DBS service, Sky Cable. The venture quickly collapsed, but Hughes decided to press on, starting its own service, DirecTV.

With the Cold War over and defense spending shrinking, Hughes needed new sources of growth - and, despite GM's deep pockets, new partners. One, Hubbard Broadcasting, won five transponders on the 101 degree orbital slot in 1990, and joined as a co-investor that year. The National Rural Telecommunications Cooperative followed in 1992, with an exclusive arrangement to distribute DirecTV in rural areas. On December 15, 1993, DirecTV launched its first satellite. Service started in 1994. Backed by GM's cash and with Hughes's broad experience in the satellite industry, DirecTV quickly became the market leader, eventually signing up 10 million subscribers in seven years.

In 1990, the same year that Hughes began DirecTV, John Malone, then CEO of Tele-Communications, backed by nine cable companies, announced the launch of K-Star - later renamed Primestar - an effort to serve areas cable could not reach. Prime-star leased space on a medium-powered satellite. It became the No. 2 DBS provider behind DirecTV, but growth was limited because it never moved to high-powered satellites, limiting channel choice and requiring customers to use big dishes.

To compete, Ergen knew he would need more orbital slots - and more money. He consulted with Wall Street, but almost every bank suggested that he find a strategic partner and give up anywhere from 51 to 80 percent of the company's equity. Ergen finally found a sympathetic audience at Donaldson, Lufkin & Jenrette, then a power in junk bond financing. Its solution: Sell high-yield bonds and retain equity.

"He had an audacious plan - to launch a satellite into the sky and broadcast 250 channels," says one of his bankers, Bennett Goodman, now head of global leveraged finance at Credit Suisse First Boston. "He had no money - just a big dish."

With DLJ as his banker, Ergen soon became one of the most active participants in the capital markets, which he tapped repeatedly to feed his cash-guzzling enterprise. EchoStar's trips to the market began in May 1994, when DLJ's high-yield team raised $335 million of senior secured discount notes and warrants for stock. The following year, with Ergen and his wife retaining 90 percent of voting control, EchoStar went public at $17 a share, raising $68 million. Over the next six years, EchoStar issued some $5.2 billion in junk bonds, $1.04 billion in secondary equity and $2.1 billion in convertible bonds, according to Dealogic.

Ergen used this high-octane fuel to construct his Dish network. He built his first uplink center in Cheyenne, Wyoming, in 1994. On December 28, 1995, Ergen launched his first satellite on a Chinese rocket with a less-than-stellar track record.

"The biggest bet was putting our company on top of a Chinese rocket," Ergen says now. "If the launch had failed, I would be an accountant at an insurance company. It was all or nothing."

The rocket flew, and Ergen was in a race on the ground and in space with DirecTV. In six years he launched seven satellites, signing up 6 million subscribers, while DirecTV put up five between 1993 and 2000, on its way to 10 million subscribers in 2001, its growth helped by its 1999 acquisition of Primestar for $1.8 billion. The pair today control all of the transponders at the high-powered positions that can reach the entire U.S.: DirecTV has 46 and EchoStar 50.

Ergen retained his feisty approach as he battled cable interests and the bigger, better-funded DirecTV. At industry gatherings, he taunted DirecTV and its CEO, Eddy Hartenstein, who has run the company since 1990. A tough competitor, Ergen took advantage of his in-house manufacturing to slash the cost of a dish and set-top decoder to $199 from $499, forcing the bigger DirecTV to follow suit. Ergen also offered bounties to retailers who got DirecTV customers to switch to EchoStar. The companies lost hundreds of dollars for each new subscriber. "EchoStar's strategy was always to sell more for less," says Robert Kaimowitz, satellite analyst at SG Cowen. "DirecTV was more of a premium offering on top of cable."

Both knew they suffered from limitations. Ergen concluded that he needed to partner up to gain scale. Hughes needed financial backing from an increasingly reluctant GM, which wanted to focus on cars.

In an odd reversal, Ergen turned to Murdoch. The pair had dueled fiercely over the 110 degree slots that became available in 1996 - Ergen's aggressive bidding led Murdoch, and his partner MCI Communications Corp. to pay $680 million for them. That year they were brought together by junk bond legend Michael Milken, who urged them to merge. In February 1997 Murdoch proposed a $1.7 billion deal that would combine News Corp.'s two satellites (then under construction), its prime orbital slot, an uplink center and cash with Ergen's two satellites, and his orbital slot and a growing subscriber base. Murdoch would be chairman and Ergen CEO. The new entity, which was quickly dubbed Deathstar by competitors because of its ability to beam 500 channels across the country, would provide the first major challenge to cable TV.

But Murdoch and Ergen failed to consummate the deal. Cable interests, led by Malone, who reportedly called the deal "lunacy," leaned on Murdoch, who needed their systems to carry expanded News Corp. content - its Fox news, sports and entertainment channels. Moreover, Ergen and Murdoch each wanted to control Deathstar.

Malone had other inducements. He offered Murdoch help in buying Pat Robertson's Family Channel and suggested Murdoch join with Primestar.

Fatefully, Murdoch listened and backed out of the deal with Ergen. In June 1997 he and Malone announced a plan to spin off Primestar as a new public company. Murdoch was to contribute the valuable 110 degree orbital slot as well as the two satellites under construction in return for $1.1 billion in nonvoting Primestar stock. Primestar needed high-powered satellites to compete against EchoStar and DirecTV. But in mid-1998 the Department of Justice quashed the deal, reasoning that Prime-star's cable owners would not compete vigorously enough.

In the meantime, Ergen had filed a $5 billion breach-of-contract lawsuit against Murdoch. In November 1998 the two settled out of court. Ergen paid $1.2 billion in EchoStar shares to News Corp. and MCI for their two satellites, the orbital slot and the uplink center, equivalent at the time to 37 percent of the stock. (News Corp.'s stake was 30 percent: That eventually fell to 14 percent as EchoStar's share price rose.)

BY 1999 IT HAD BECOME CLEAR TO ERGEN THAT EchoStar needed to merge with someone - Hughes, or perhaps a big vertically integrated media firm like Walt Disney Co. - to compete. It was getting harder and more expensive to acquire new subscribers, and cable operators had become tougher competitors: Most cable systems had gone digital, boosting the number of channels - and their picture quality - to DBS standards. Cable was also signing up millions of households for broadband Internet connections. DBS's broadband solution was two-way satellite, but it could never compete fully on cost or speed with terrestrial systems.

Hughes executives also realized that they faced strategic problems. "This was getting to be a mature business for both of us," says DirecTV's Hartenstein. "If you look at where the highest costs are - programming - the bulk of the programming services are vertically integrated tentacles, if you will, of the cable companies."

Another factor encouraging consolidation: In 1999, at the urging of DBS operators, Congress passed the Satellite Home Viewer Act, permitting satellite companies to carry local broadcasts. That removed a major impediment, since carrying local channels is key to continued subscriber growth. There was a catch: The law requires DBS operators to carry all the broadcast stations in a market. This "must carry" provision means in practice that if a satellite signal covers multiple local markets, and each has, say, 15 stations, including low-powered UHF stations and multiple educational channels, the satellite service must carry all of them. Because delivering all these channels consumes precious spectrum, it limits the number of markets in which local stations can be rebroadcast.

Anticipating the problem of spectrum shortage, Ergen decided to approach Hughes in mid-1999, exploring merger possibilities and spectrum sharing. "I knew [the merger with DirecTV] was a necessity in November 1999 - I knew it would happen," says Ergen now. "Even if this does not go through today, it will happen. There will only be one DBS provider because it is the only economic model that will provide effective competition to cable."

But the companies could not agree. Sharing would have required some customers to switch their set-top boxes or adjust their dishes to pick up signals from a different satellite. "We had major disagreements about how to switch spectrum around," says Ergen.

There were also issues over control. "It was pretty clear they didn't want me running the company," Ergen says.

If Hughes had its doubts about Ergen, GM had its own doubts about Hughes. Times had changed since 1985, when GM had bought Hughes looking for new fast-growing businesses. Hughes needed to invest heavily to add subscribers to DirecTV and to build out new businesses, such as two-way broadband, while GM was struggling in a mature industry focused on earnings per share.

Hughes was costly and burning through cash. In 1996 it had paid $3 billion for 81 percent of PanAmSat Corp., whose international satellite distribution of cable and network TV programming mirrored Galaxy's domestic service. In 1999 it bought Primestar, boosting its subscriber base.

In the fall of 2000, GM decided to put Hughes up for sale. At the time, Hughes's market capitalization amounted to more than $50 billion. GM was well aware of how difficult the transaction was going to be.

"Even in benign markets a tax-free spin-off is complicated," says GM treasurer and vice president of finance Eric Feldstein. "It's even more complicated when you have to unwind a tracking stock and issue an asset-based stock, when you need billions of dollars of financing, when you have to work with strategic equity partners and when you are working with Latin American assets."

Few potential partners could jump through all those hoops. GM sent information on Hughes to 18 media firms in late 2000. But the number showing interest dropped off rapidly as the stipulations became clear. "You basically keep running up into a concrete wall," says Hughes CEO Jack Shaw. "Some companies can do this and some can't, so you've got to back off and you've got to start over."

Murdoch, alone, seemed eager to do a deal. "When we were ready to move on Hughes, Murdoch called everybody in the company who might have cared, to let them know that he was interested in this asset," says Feldstein.

Murdoch's initial offer was complicated. He proposed merging Hughes into a new entity, Sky Global Networks, which would group together his globe-spanning public and private satellite holdings, including a 37 percent stake in British Sky Broadcasting, Murdoch's public U.K.-based satellite television provider; a 40 percent holding in Gemstar, an interactive programming guide that is also public; NDS Group, a private company that provides technology to scramble TV signals; a 40 percent stake in privately held Sky Latin America, with satellite assets around the region; Sky PerfecTV, a public Japanese satellite company; Stream, an Italian pay TV group; and Star, a satellite and Internet company with operations in China, India, Indonesia and the Philippines.

Ergen made overtures in November 2000 and through the spring of 2001 but was brushed off, in part because GM doubted his sincerity. "Was the tactic to derail the Murdoch deal, or was he serious?" says Feldstein. Hughes executives, who did not think a merger with EchoStar would get past regulators, reckoned he was bluffing to increase the price - and delay the timing - of a merger with News Corp.

Fueling the skepticism, EchoStar had filed suit against DirecTV in February 2000, charging that it had strong-armed Circuit City Stores and RadioShack Corp. into exclusive retail relationships. "You're out there trying to kill each other every day, and then all of a sudden for somebody to ask you to turn the switch and say, 'Hey, embrace them,' that's a damn hard thing to do," says Shaw.

The persistent Ergen says his team tried "a lot of different avenues" to get GM to take him seriously. "We were frustrated we weren't getting a fair hearing at the GM board level." Nonetheless, he concedes, "A lot of people thought we weren't committed and maybe we were just playing a game."

Murdoch quickly emerged as the likely winner. By February 2001 News Corp. and GM had agreed to a general framework for the merger. Murdoch's first formal bid, in early February, was for $36.5 billion, a slight premium over the market value of Hughes at the time. It included $8 billion in cash, with about $5 billion from Microsoft and $1 billion from Liberty Media. Murdoch would have controlled 35 percent of the company.

But GM and Hughes were not operating on the same wavelength. Hughes's then-CEO, Michael Smith, did not want to be bought by Murdoch. He wanted to do a leveraged spin-off and find a strategic partner, and he publicly denounced the deal. But he had to raise at least $6 billion from an equity partner - or from debt - to monetize most of GM's stake in Hughes. He picked a bad time to raise capital, and equity partners could not be found, because of the deal's complexities and the stock market meltdown. Smith considered selling assets to raise cash, but these would have broken up a valuable constellation of satellite properties.

Meantime, Hughes's business was suffering. For 2001, revenues would increase by 13.4 percent, to $8.3 billion, but earnings before interest, taxes, depreciation and amortization fell to $389.9 million from $594.0 million. Net losses would reach $621.6 million, compared with income of $813 million in 2000.

"Smith was a real impediment to the process," says one News Corp. banker. "GM screwed around with the whole process, letting Hughes management run amok. They waited until Hughes stock was down and the world was falling apart."

By the third week of April, Murdoch, who reportedly had grown frustrated with Smith and the slow pace of talks, had revised his bid, ceding more to Hughes's shareholders. This time he proposed lowering his ultimate ownership from 35 to 30 percent. The offer gave GM $7.2 billion in cash and securities, with Microsoft contributing $2.9 billion and Liberty delivering $1 billion. J.P. Morgan Chase & Co. and Citigroup backed the offer with a $6.5 billion credit line. On May 1 GM and Hughes announced that they were in formal talks with News Corp. and began the difficult task of valuing Sky Global's assets around the world.

Unable to find an equity partner, Smith resigned in May, clearing space for Murdoch. And though the aggressive mogul planned to keep Hartenstein on as CEO of DirecTV, Murdoch hurt his cause, say sources, in his dealings with Hughes executives. "Murdoch's big mistake was how he treated people like Mike Smith," says one person close to the deal. "He could have romanced him a little more. The Hughes business was a mess, a total disaster, and Rupert was clear about the fact that he thought that. Charlie romanced them."

But Ergen still had deep financial concerns. EchoStar had $1.3 billion in cash for a transaction that required $5.5 billion up front. His company had a market cap that was less than half that of Hughes and sported a B+ credit rating - junk status - meaning that the financing would be riskier and the costs higher. In the quarter ended March 31, 2001, EchoStar had lost $167 million on revenues of $862 million.

With $5.2 billion in debt, three times that of Hughes, and less than half of Hughes's revenues, Ergen was taking a big gamble. He sought to buttress his balance sheet and build his cash reserves with a $1 billion convertible offering in May. To lead the deal he turned to Morgan Stanley and UBS Warburg, a coup for the Swiss bank, which had hired several of Ergen's former bankers from DLJ and was eager to break into the big time in the U.S. Ergen got his money - he insisted on a bought deal - but not before Morgan Stanley walked away from the transaction in a dispute over pricing exacerbated by the choppy markets that saw another Morgan Stanley-led deal, that for Nextel Communications, fizzle. Sources say that UBS ended up stuck with as much as $500 million of the issue on its books. "We had more than a normal amount, but not $500 million and not enough to cause concern," a bank spokesman says.

With the additional money raised, Ergen made two offers for Hughes in May. In the first, he would buy PanAmSat in a taxable transaction - giving GM the cash it wanted - and then the rest of Hughes in a second stage. In his second, EchoStar would buy Hughes and give GM the $5.5 billion in cash, but if the merger was turned down by the Justice Department, he would still buy PanAmSat. This was $500 million more in cash than Murdoch's offer. Ultimately, GM rebuffed both of Ergen's offers.

Finally, on August 5, a frustrated Ergen launched a "bear hug" bid for Hughes. He offered $32 billion in stock, an 18 percent premium. Soon after, he offered to substitute the $5.5 billion in cash for some of the stock. Hughes's shareholders would control 66 percent of the company; EchoStar would control 34 percent. Hughes shareholders would be issued a new asset-backed stock to replace their tracking stock.

It was a bold gambit since Hughes was a tracking stock and unsolicited offers can't be made. But it got the attention of GM's board. "When he sent us the letter with a significant premium and he had brought in bankers on this who had spent a lot of time with him, then we began to take him seriously," says GM special adviser Walker. "It was a process that steadily built in momentum. He got more engaged as he put more into it."

To show his seriousness, Ergen offered a $500 million breakup fee if the merger was not approved by regulators. When GM asked for $600 million, he assented. Ergen also offered to buy PanAmSat, no matter what happened, for $3.4 billion and assume its $2.6 billion in debt. And he agreed to abandon his Dish brand name, in favor of DirecTV.

Other key doubts began to ease as well. Famed litigator David Boies, hired by EchoStar, persuaded executives from GM and Hughes that a merger could pass regulatory muster. His argument: DirecTV and EchoStar operate in a pay TV market that includes cable - meaning the combination of the two would result in a more effective competitor to cable rather than in a monopoly.

"Once they had an open mind about regulatory issues, the merits of the deal were clearly in our favor," says Ergen. "Then it became a financing issue."

But financing remained a sticking point. Though UBS continued to act as lead bank, in August Ergen added Deutsche Bank for extra firepower. In September UBS's North American CEO, John Costas, assured Ergen over dinner that his bank would be able to deliver $2.75 billion in financing on reasonable terms.

Ergen made his final bid in late October. EchoStar shareholders would get 1.37 shares of the new Hughes stock for each EchoStar share they owned, valuing the deal at $25.8 billion, including the $5.5 billion in cash. GM would have an 11 percent stake in the new EchoStar.

Through all of this, sources say, GM consistently told Murdoch that it was leaning toward his offer. Murdoch made his final bid in early October, offering $22.5 billion - down from nearly $37 billion earlier in the year. GM would get its liquidity - $4.2 billion in cash and $1 billion in News Corp. stock - as well as stock appreciation rights valued at about $800 million; Murdoch would control 28 percent of the new company.

GM set its decisive board meeting for October 27. It was the third time the carmaker had set a date, and even though, sources say, GM had told Murdoch it had to go through the motions with Ergen, the News Corp. team felt they were being gamed. "We waited at GM's request as they gave EchoStar time to get financing," says one of Murdoch's bankers bitterly. "We came into work knowing we were getting shopped."

The night before the board meeting, in fact, GM CFO John Devine stopped by Murdoch's midtown Manhattan office to inform him that he was the favored bidder. Ergen's financing was falling apart as GM insisted on loan terms that UBS wouldn't accept. At issue was a material adverse change clause that GM said was too open-ended. Post-September 11, UBS wanted the option to cancel its commitment if there was a material adverse change in the market. Deutsche Bank would agree to one dictated by GM that simply said it could walk if the debt and loan markets were deemed illiquid within 16 days of regulatory approval; UBS wanted a much broader definition of what would constitute a MAC event.

UBS tried to negotiate. It offered to require its MAC terms only until it syndicated the $2.75 billion down to $1.5 billion, at which point it would have acceded to GM's terms. Two days before the board meeting, Ergen kicked UBS off the deal. "I was disappointed," he says. "We were counting on the commitment. I didn't have any reason to believe they would not be able to do it."

As time ran out, Deutsche Bank offered to try to finance the full $5.5 billion but concluded it could only do half.

Tired of being jerked around, Murdoch had warned that if a deal wasn't reached on Saturday, he would walk. But he went into that Saturday with assurances that he had the deal all but wrapped up. Indeed, just ten minutes before the start of the GM board meeting, Devine called to tell him that it looked as if the deal was his.

But Ergen had one last shot. Early on Saturday morning, he decided to finance the rest of the bridge loan himself - pledging as collateral $2.75 billion of his own EchoStar stock, some 40 percent of his personal wealth. "The only solution I could come up with was to put up my net worth," says Ergen. "I didn't know if it would work or not, but I knew that News Corp. was not putting up their own money."

The gesture worked. "It was Charlie Ergen providing bridge financing," says Feldstein. "This is money where your mouth is." After discussing Murdoch's deal for much of the day, a small group of senior GM management, including chairman Jack Smith and CEO G. Richard Wagoner reportedly left the room and returned asking to give Ergen's offer another look. Why remains a mystery, though some on Murdoch's side whisper that, in the end, it came down to GM's Smith doing his brother's wishes in thwarting Murdoch - even though Michael was gone from Hughes. In any event, GM asked Murdoch for more time, and Murdoch, realizing his bid was doomed, folded. (One week later CSFB would lend Ergen the $2.75 billion he needed. UBS subsequently clawed its way back into the deal, assuming $550 million of the loan, as did Lehman Brothers.)

"It wasn't about money," says one source. "They wouldn't have sold it for more money. It was the Mike Smith question. They just did not want to sell it to Murdoch."

Why did GM reject Murdoch in favor of Ergen? Why did it take so long to get the deal done? Some close to the deal blame Michael Smith for initial foot-dragging; others fault GM for indecision and delay that cost Hughes shareholders more than $10 billion; others fault Murdoch for his abrasiveness. And Hughes executives also grew increasingly wary of the demands of News Corp.'s partners - John Malone's Liberty Media and Microsoft. The cash they provided came with strings attached: Liberty wanted carriage for its programming, including the Discovery Channel, USA Network and Encore; Microsoft wanted to market its operating software and Internet services via Sky Global. "At some point in time you say to yourself, 'That's too expensive,'" says Hughes's Shaw.

In any case, by 9:00 p.m. on Sunday the 28th, a team of six EchoStar and Deutsche Bank executives, including Ergen and company attorney David Moskowitz, boarded a private jet sent by Hughes to bring them to New York for a press conference. They left an hour late because Ergen had to run home and get a suit. "We've never been one to look a gift horse in the mouth," says the frugal Ergen. "We certainly appreciated the gesture - as long as my people don't get used to it."

The merger between EchoStar and DirecTV creates an industry behemoth. With 17.6 million subscribers, as many as top-ranked cable TV operator AT&T Broadband - which announced a $72 billion merger with Comcast in December - the partners say they will offer local channels to all of U.S. households, versus 60 percent today. Eliminating duplication will open up spectrum to broadcast eight to ten high-definition TV channels, versus two or three today, while providing broadband services at prices closer to those charged by cable.

Financially, the new DirecTV will save millions on programming costs through bargaining power and eliminating duplication. The companies estimate merger synergies will yield $5 billion in ebitda improvements by 2005. To shore up his finances, Ergen brought in another partner, French media giant Vivendi Universal, late last year. Vivendi agreed to invest $1.5 billion in cash for 5 percent of EchoStar-DirecTV or 10 percent of EchoStar if the deal fell through. Vivendi will also provide content on a nonexclusive basis for eight years.

Defenders of the deal say that consumers will benefit, getting additional programming thanks to more efficient use of the spectrum (that is, more space for more channels) and more product choices, like high-speed Internet access. Opponents say the deal will cause too much market concentration, leading to higher prices and poor customer service.

"Charlie Ergen is making the argument that with other efficiencies, somewhere down the line the consumer will be better off," says Jimmy Schaeffler, satellite analyst at Carmel Group. "Maybe he's right. But will the DoJ and the FCC take the risk of betting on the alleged efficiencies juxtaposed against the natural tendency of monopolies?"

In addition to reviews at the Department of Justice, the FCC and about 30 state attorneys general are deciding what if any action to take against the merger.

"It seems like there is a groundswell of opposition," says Michael Regan, head of government affairs for News Corp. "There's an obvious interest on the state level. It's a valid consumer issue, and they are the protectors of the consumer interest."

Such a torrent of negative comment letters poured into the FCC that when it released the filings last month, Armand Musey, satellite communications analyst for Citigroup/Salomon Smith Barney, lowered his estimate for the deal's likely approval, from 40 to 20 percent. (Citi, of course, is one of Murdoch's bankers.)

In the meantime, Murdoch is wasting little time challenging the deal, which would effectively keep him out of a market he has been trying to break into for two decades. He has assembled a team of Washington lobbyists and state specialists like former New York attorney general Robert Abrams, as well as former head of antitrust for New York Lloyd Constantine, who wrote the antitrust guidelines for the National Association of Attorneys General. By early 2002 they had visited authorities in several states, including the attorneys general in Connecticut, Iowa and Montana. Some had already swung into action.

Ergen vows to argue his side with each attorney general just as he did with the Hughes and GM executives last August. "Ultimately, all regulators, including attorneys general, will understand that a strong satellite industry against a strong monopolistic incumbent cable industry is better for competition than weaker satellite companies that only are allowed to compete in rural America," he says.

If the deal dies, Murdoch will almost certainly be waiting. Last month, though, he lost a key executive when Chase Carey, head of satellite operations, resigned, a move many interpreted to mean Carey thought Ergen would ultimately prevail. But Ergen doesn't underrate Murdoch's power. "He hasn't lost many battles on Capitol Hill or with the FCC," he says.

Doesn't that sound just like Charlie Ergen - poor-mouthing his chances?

"Ergen says he's just a country accountant from Tennessee, not one of these big guys," says Michael Alpert, a Washington-based telecommunications consultant. "But he's smarter than all of them."

The making of a monopolist?

Is Charlie Ergen the next Bill Gates?

That's a question the Department of Justice and the Federal Communications Commission will answer, in effect, in their antitrust review of Ergen's $25.8 billion merger with Hughes Electronics Corp. Will Ergen, if he controls the only satellite company in the U.S., help or harm consumers?

The combination of EchoStar Communications Corp. and Hughes's satellite TV operation, DirecTV, significantly increases the concentration of power in the subscription TV "multichannel video programming market." In rural areas of America, where there is no cable alternative, the merger creates a "perfect" monopoly (with two competitors shrinking to just one). In areas where there is cable, the merger will create a satellite monopoly to contend with the much-derided cable monopoly (shrinking three rivals to two). Under the 1914 Clayton Act, an amendment to the Sherman Act antimonopoly law, a three-to-two or two-to-one merger is illegal.

"You have a two-to-one merger in parts of America," says Missouri Assistant Attorney General Chuck Hatfield. "Even in parts of America where there is cable, the merger is suspect under the Clayton Act because it tends to lessen competition."

EchoStar and DirecTV contend that they need to merge to compete effectively with cable. By combining, they eliminate duplicative programming, freeing up spectrum to broadcast more local channels and offer more broadband access. They also lower costs by combining operations, which they argue will result in lower prices for consumers.

"The history of their rivalry would indicate that the merger would cause harm to competition," says Douglas Melamed, who was an acting assistant attorney general in the DoJ antitrust division during the Clinton administration. "But I think there are compelling efficiencies to justify the merger: spectrum scarcity and additional local output."

The merger partners argue that competition with cable will drive pricing policy at the combined company. "We have an enormous incentive to price competitively," Peter Standish, a partner at Weil, Gotshal & Manges and lead antitrust counsel for General Motors Corp. and Hughes, told Institutional Investor. "The satellites are up there. We don't need to put another one up to get a subscriber - the signal is there."

Ergen has offered a national pricing plan - one price across all markets - which would force him to compete against the lowest-cost cable provider. "It's not a duopoly for the purpose of setting prices," says Standish. "There are many competitors." Counters Hatfield, "There is no exemption in the Clayton Act for national pricing."

Reviewing comments released by the FCC, Citigroup/Salomon Smith Barney satellite communications analyst Armand Musey concluded that one of the most damaging filings against the merger came from the National Rural Telecommunications Cooperative, one of DirecTV's original partners. It showed that every time EchoStar or DirecTV offered a price incentive - free installation, rebates or lower monthly rates - the other had responded immediately. The filing shows that price sensitivity is to each other - not to cable.

"DoJ will look at market concentration, and here EchoStar and DirecTV fail," says Musey. "And the DoJ will look at pricing power. The NRTC shows that they fail there as well."

EchoStar and DirecTV will have to prove that they need additional spectrum to compete against cable. That will be tough.

In a case against the FCC and the National Association of Broadcasters last spring, the Satellite Broadcasting & Communications Association with EchoStar and DirecTV argued that satellite providers could not offer local channels in all markets - as required by the "must carry" provision of the Satellite Home Viewer Act - because of technological limitations. The merger, they now say, will give them the necessary spectrum to reach more communities. But in last year's case, the DoJ called a technical witness who testified that both DirecTV and EchoStar could do that on their own. Hughes flatly rejects the witness's argument.

EchoStar and DirecTV will also have to explain why spectrum sharing without a merger is not a possibility. The two companies discussed doing so in 1999 but could not reach agreement.

As with Microsoft Corp., state attorneys general may also challenge the deal independent of any decision by the DoJ. However, even if they conclude that the deal violates the law, they can choose not to act. "The real ground for debate," says Lloyd Constantine, former head of antitrust for the New York State Attorney General's Office, "is when the proponents go to the AGs and say, 'You could sue us, but you should use your prosecutorial discretion for X, Y and Z reasons.'" The carrots Ergen could offer: increased availability of local channels in rural areas or future promises of broadband access.