Cover Story April 24, 2008, 5:00PM EST

The Midas of Misery

(page 5 of 5)

Browse Issues

Story Tools

(Media General's shareholders were expected to vote on Falcone's nominees at the company's Apr. 24 annual meeting, a day after BusinessWeek went to press.)

Falcone has chosen to take a less public approach with some investments in his portfolio. He's quietly buying power plants from Queens, N.Y., to California. About $2 billion of his fund's portfolio is tied up in a 21% stake in San Jose (Calif.)-based power producer Calpine, which just came out of bankruptcy in January. The cost to build a plant is skyrocketing, and the hedge fund manager figures there won't be enough of these utilities to meet demand in the future, especially near major urban areas. Electricity "is not a luxury," says Falcone. "It's an absolute necessity."

"WHOEVER SUCCEEDS WILL NEED SPECTRUM"

He applies the same logic to his wireless holdings. At his annual meeting in February in the ballroom of Manhattan's St. Regis Hotel, Falcone explained to investors that he plans to focus on "asset-rich companies with access to finite resources." As Falcone sees it, there's a limited supply of spectrum licenses, essentially the legal rights to the airwaves used by wireless carriers like AT&T (T), Sprint Nextel (S), and Verizon Wireless (VZ). But demand is rising rapidly, Falcone notes, with people now paying more for their mobile-phone service than their land lines. In his office, he keeps a complex color-coded map that details all the different types of spectrum in the world, including those for wireless, digital television, radio, and satellite.

For the past two years, Falcone has been making a big play for spectrum, either by buying stakes in companies that own it or by picking up the licenses directly from firms willing to sell at low prices. His holdings in such spectrum-rich companies as Terrestar (TSTR), Inmarsat, and SkyTerra Communications (SKYT) account for almost $2 billion, or 9%, of Harbinger's portfolio, according to filings with the Securities & Exchange Commission.

There are signs the investments could pay off. A recent auction for wireless spectrum sold licenses at a price more than six times higher than the one Falcone paid for similar licenses half a year ago. "I don't know who will succeed [among the mobile-phone providers]. And I don't care who succeeds," Falcone says. "All I know is that whoever succeeds will need spectrum."

Looking to the future, Falcone will be tested as never before. He'll go up against an increasing number of investment powerhouses seeking to capitalize on the wave of failure washing across the market. Some wonder whether Harbinger can be as nimble at $19 billion or more as it was when it was much smaller. The size of Falcone's largest holdings is now typically around $600 million, up from $200 million just a couple of years ago. "[Falcone] has got so much money now that he has to raise his stakes bigger and bigger," says Barry W. Ridings, an investment banker at Lazard. "[Harbinger's] problem is finding good deals, as it is everybody's problem."

Falcone seems unfazed. With more money, he argues, Harbinger can go after bigger targets with higher profiles—like The New York Times and Calpine. As for the skeptics, he says: "It drives me when people doubt me."

Business Exchange related topics:
Value Investing
Recession Spending and Investing
Investing in Commodities

With Susan Zegel in New York and Christopher Palmeri in Los Angeles