The Wary Capitalist : Media: Hot air balloons and a Moroccan bash made Malcolm Forbes a celebrity. Supreme caution left him a bit player as others built empires.

When Forbes magazine, chronicle of wealth and industrial might, recently listed the 400 biggest private companies in the United States, it implicitly made what could be judged an embarrassing admission.

Forbes Inc., the magazine’s 72-year-old parent, was too small to make the cut.

The list was sprinkled with media giants, including the Newhouse family’s Advance Publications (with $2.9 billion in estimated annual revenue), Hearst Corp. ($2 billion) and Reader’s Digest Assn. ($1.8 billion, according to a prospectus for its planned sale of public shares).

Yet Forbes, though highly profitable, has annual revenue of perhaps $160 million--or barely more than one-third that of the smallest entry on the list--making it something of a midget at a time when competitors have grown to frightful proportions.

Make no mistake, Forbes Inc. Chairman and chief shareholder Malcolm S. Forbes is rich. Experts value his company’s flagship business magazine as high as $600 million, while its American Heritage magazine, suburban newspaper, real estate and art holdings almost certainly add $100 million or more to the Forbes family fortune.

But the Forbes enterprises are barely a blip on today’s big-scale corporate landscape. That’s apparently because the company’s 70-year-old patriarch, despite his larger-than-life image, likes it that way.

The very symbol of capitalist machismo when he is aloft in his balloons or swathed in leather for an outing on one of his Harley-Davidsons, Malcolm Forbes has been cautious--some would say too cautious--in running his own business. Risk averse and wary of debt, Forbes has focused sharply on a single magazine, even as rivals such as Time Warner Inc., which publishes Fortune, and Dow Jones Inc., parent to the Wall Street Journal, pursue a panoply of international, electronic and entertainment-oriented ventures.

Gingerly, Forbes Inc. is now expanding with Egg, an 11-by-11-inch “style” magazine for the arty crowd, and Forbes FYI, a life-style quarterly for executives. (The title Egg is supposed to conjure up images of new life, not of Malcolm’s famous collection of bejeweled Faberge eggs, according to Forbes executives.)

Both magazines are relatively modest forays, however. Forbes executives expect to spend on Egg only a fraction of the $12 million that it might have cost them to buy Interview from the Andy Warhol estate, as the company considered doing in the past year. Forbes FYI--touted as a sophisticated book on the order of Hearst’s Esquire, which Forbes also declined to buy from previous owners because the price was too high--will be distributed, at least initially, as a free handout with special issues of Forbes magazine.

And even the new German edition of Forbes will be wholly owned by West Germany’s Burda Publishing, which will simply license rights to the Forbes name and some of the business magazine’s stories. That contrasts sharply with Fortune, which publishes its own international edition backed by extensive foreign news bureaus and already co-owns Italian and French language versions of the magazine, with more to come.

“We’re willing to cook some more, but it’s all built on not getting our eye off the main ball,” explains Malcolm Forbes, mixing up a batch of the homey metaphors that are a trademark of Forbes journalism.

Forbes magazine, “the main ball,” has been a smash hit for the past decade. Founded in 1917 by Forbes’ late father, B. C. “Bertie” Forbes, the magazine developed a smart-and-tart editorial mix, which combined with Malcolm’s promotional flair to catch the 1980s bull market and the pro-business winds of the Reagan era just right. Since 1979, advertising linage has surged 50% while rates rose sharply, as biweekly Forbes pulled ahead of Fortune in ad space (though often not in revenue) and gained ground on McGraw-Hill’s Business Week, which publishes more often than its two main competitors.

James Kobak, a magazine consultant who evaluates media empires for the annual Forbes 400 “rich list,” estimates that Forbes magazine has pretax income of roughly $40 million a year on revenue of approximately $140 million from both advertising and circulation.

According to Publishers Information Bureau reports, all three big business magazines will post record ad revenue and linage this year. But insiders at each of the three concede that published figures should be discounted by as much as 30%, because the three have been giving away pages in various promotional schemes.

Privately, some Fortune executives also charge that Forbes stepped up its giveaways this fall, after Fortune outpaced Forbes through much of the year.

“Truthfully, Fortune is the worst offender,” retorts Malcolm (Steve) Forbes Jr., the 42-year-old president of Forbes magazine and Malcolm Sr.’s heir-designate. Steve says Forbes will have a record year in terms of “cash in the till” and that Fortune artificially boosted its ad totals thanks to Time Warner’s Max-Plan, which gives free pages for stepped-up advertising in any of the conglomerate’s magazines.

Fortune General Manager Gregory J. Zorthian maintains that his magazine--increasingly known as a “hot book” under Managing Editor Marshall Loeb--has gained relatively few pages from Max-Plan, which he says operates more to the advantage of Time and People magazines.

Some current and past Forbes writers nonetheless worry that Malcolm and his family have been too slow to recognize the sheer power of media groups such as newly formed Time Warner and may have erred badly in failing to place some bets on broadcasting or some form of electronic information delivery, as Dow Jones, McGraw-Hill, Time Warner, News Corp., Times Mirror (publisher of The Los Angeles Times) and other media giants have done.

“If Time Warner works, Malcolm’s got a problem,” maintains one longtime Forbes editor who left the magazine recently. “In Forbes terms, he’s either the smart entrepreneur who stuck to his knitting, or he’s going to be the guy who got stuck with an antique.”

Malcolm acknowledges that he has bypassed some enormous opportunities, often because he simply didn’t find them interesting. “Cable television and all of that is a big business, and an important business, and a profitable business if well run, but not one we’ll be in,” he says.

While Forbes might, according to insiders, team up with Sony Corp.’s Guber-Peters Entertainment Co. unit to produce a television special based on next year’s rich list, Malcolm particularly doesn’t want to see his company go Hollywood. In the chairman’s words: “We don’t intend to end up an entertainment company, where I consider the tail now wags the dog, as in Time and Warner. The publications are secondary there. (Rupert) Murdoch is verging on that (through ownership of Fox Inc.). Our heart is in print and news journalism.”

Forbes may be wise to lavish attention on his magazine just now, as it weathers a tricky transition to the 1990s, which will presumably bring not just a new national mood but also a new management team to the Forbes masthead.

According to Malcolm, James Michaels, the 68-year-old editor who has run Forbes for 28 years, will hand power at some point to 39-year-old Lawrence Minard, who was named managing editor last July after working his way up through the ranks for 15 years. Minard replaced Sheldon Zalaznick, a sophisticated magazine veteran who had been regarded as a potential successor to Michaels when he left New York magazine to join Forbes in 1976. At various times, Frank Lalli, now managing editor of Money, and Norman Pearlstine, managing editor of the Wall Street Journal, had also been seen as candidates to follow Michaels.

The transition will be matched by the ongoing shift in power from Malcolm to his son Steve and by the eventual appointment of a new publisher to replace 72-year-old Caspar Weinberger, the former Reagan defense secretary who replaced 68-year-old James Dunn as publisher in 1988.

Change hasn’t come easy. Past and current writers at the magazine complain, for instance, that stories have taken on a more archly conservative political cast as Michaels ages and as Steve Forbes--a Reagan appointee to chairmanship of the board that oversees Radio Liberty and Radio Free Europe--has made his influence felt. Malcolm, Steve and Michaels all deny that the magazine is more ideologically driven than in the past.

“Steve and I discuss this all the time. I’m always watching when something doctrinaire creeps in. . . . We’re alert to the danger,” says Malcolm, whose impish “contrarian” streak has kept his generally conservative political leanings from becoming too predictable.

The magazine’s latest blowups have shown it to be anything but predictable. In an unusual incident last July, for instance, Malcolm used his “Fact and Comment” column to assert that a Forbes report downplaying the AIDS threat parroted “asinine” views and should have been killed. Malcolm, in fact, had made a show in 1987 of contributing $1 million to his good friend Elizabeth Taylor’s anti-AIDS drive. Before his apology got into print, however, the story evenhandedly managed to offend what it called right-wing “monogamy buffs” and liberal purveyors of “AIDS hysteria,” triggering demonstrations outside Forbes’ Fifth Avenue headquarters.

Earlier, according to several magazine insiders, Steve Forbes had killed at the last minute another volatile story that strongly attacked racial hiring quotas by citing research which claimed to show that blacks consistently score lower than whites in culturally unbiased tests of mental ability.

An edited version of the story, which circulated through the ranks at Forbes, summed up “The New American Dilemma” of racial quotas as a simple productivity problem. “If the implication of mental testing is correct,” it said, “there simply aren’t always enough qualified minorities available to make the numbers come out right. The only way to achieve the result the equalizers would like is to drop standards. If standards are relaxed, overall productivity will presumably suffer.”

Both Michaels and Steve Forbes declined to discuss the incident. Yet some Forbes watchers cite the story as just the sort of diversion into National Review-like political positions that could disrupt the magazine’s lucrative business journalism franchise.

“If they do crazy things, it will deplete their value. If they just get dull, it could take a long time to fail,” Kobak notes. Pointing to the relatively high stability of business publications, he adds: “The whole field is pretty much trouble-proof.”

If Malcolm has been slow to expand his reach, it may be partly because so much of his energy has gone into sustaining the “Happy Millionaire” image that has become part and parcel of the magazine’s success. Chief executives of big companies admire him--and often buy ads from him--less for his business skills than because he lives the way that they wish they could.

“The thing I admire most about Malcolm is that he can articulate his needs better than anybody I’ve ever met. . . . He doesn’t make apologies, nor give a damn, which is first-rate as far as I’m concerned,” says Charles Wohlstetter, chairman of Atlanta-based Contel Corp., and a longtime Forbes friend.

For many years, Malcolm has entertained the fraternity of chief executives royally on his succession of yachts, all named “The Highlander,” and in a growing collection of mansions and retreats that range from his Morocco pleasure palace, to his “ancestral” estate in New Jersey, to an island in Fiji that is open to the paying public as a luxury resort.

The classic Forbes ploy is luncheon at his New York townhouse, which adjoins the Forbes Inc. headquarters. After lunch, a hand signal to the help indicates brandy and cigars beneath the Rubens in Malcolm’s private office. Editorial employees excuse themselves. The boss then pitches his ads at $40,000 per color page. One advertising executive for a rival magazine estimates that Malcolm sells 300 to 400 pages, or 10% of his magazine’s published ad total, in such close encounters.

Mixing high adventure--a boat trip up the Amazon, cycling through China--with baronial splendor, Forbes has kept his cachet high. He appears to have survived even the backlash of his famous Morocco birthday bash last summer, which provoked well over 20,000 press clips, not all of them admiring. (“You gritted your teeth a little bit when Ted Koppel thought it was worth a night’s coverage,” concedes Steve, though he still says the birthday party helped sell Forbes and its plans around the world.)

Despite the hoopla, however, Malcolm has kept his business surprisingly limited in scope. He has only about 600 employees and depends heavily on a small clique of longtime managers that includes his four sons, editor Michaels and Leonard Yablon, the administrator and accountant who oversees the financial side of most Forbes businesses. Contel’s Wohlstetter, for one, believes that the relative dearth of strong executives kept Malcolm from expanding his interests. In his words: “Sensible people expand according to the management depth they have.”

Moreover, Malcolm has been extremely reluctant to grow by borrowing against his considerable cash flow--a position that may owe something to memories of dark Depression days, when his father kept the fledgling magazine alive with his earnings as a star financial columnist for the Hearst newspapers. “I don’t want to be working for the banks or bondholders,” he says. Nor does Forbes wish his family to part with any of its closely held stock.

As Bertie Forbes’ third son, Malcolm consolidated his ownership of Forbes Inc. by buying out other family members after his brother Bruce died of cancer in 1964. Another brother, Duncan, died in a car accident at age 16. Malcolm continues to own about 85% of Forbes Inc., although about eight years ago he began distributing shares to his sons in rough proportion to their participation in the business. According to Malcolm, his married daughter, Moira Mumma, has expressed no interest in Forbes and will receive other property to match the share distributions.

Malcolm and his wife, the former Roberta Laidlaw, divorced in 1985. The publisher’s ex-wife spends much of her time at her Wyoming ranch and plays no role in the Forbes business.

On Malcolm’s death, Steve will inherit 51% voting control of the Forbes empire--along with a potential tax nightmare, because state and federal taxes on big estates are levied at approximately 55% and the 1987 tax reform closed loopholes that had eased the burden on family businesses.

The estate tax threat has shadowed Forbes Inc. through its best years, since Forbes magazine’s big increase in value came relatively late in Malcolm’s life. While Forbes family members declined to discuss estate tax plans in detail, it is clear that their business strategy has been constrained by the prospect of a tax bill that could exceed $300 million. (A professed tax-phobe, Malcolm campaigned for the New Jersey governorship in 1957 on a “No state income tax, no state sales tax” platform. He lost.)

According to Malcolm, much of his company’s income is being used to purchase “enormous sums of life insurance,” a device that can legally transfer millions of dollars in cash to his beneficiaries without an estate tax assessment. That cash can then be used to pay the inevitable tax bill on other assets without a big selloff--assuming that the government doesn’t insist on massive valuations for some of the company’s non-magazine holdings.

Forbes insiders say the magazine has refrained from printing Malcolm’s net worth in its annual rich list largely to avoid setting benchmarks that may be used by government officials in levying estate taxes. The 1989 list published only widely varying estimates of Forbes family wealth from outside publications.

The valuation problem may be particularly touchy when it comes to Forbes’ landholdings, which include much of the 400-square-mile Trinchera Ranch in southern Colorado and about 6,000 acres of still unsold recreation land in the 12,800-acre Forbes Lake O’ the Ozarks development in Arkansas.

In the past, Forbes Inc. has sold portions of its landholdings for a stiff premium--by some accounts, several times what neighboring parcels command--by marketing acreage through Forbes magazine and otherwise under the cachet of the Forbes name. During the past two decades, Malcolm acknowledges having reaped about $125 million by selling less than half the acreage in the two tracts. That’s “several dozen times” what he paid for them, he says.

If the remaining property were valued on the basis of those sales, the family’s estate tax bill could be boosted by tens of millions of dollars. Yet Forbes has slowed land sales in Colorado to a near halt and is even pushing about 10,000 head of cattle off the land, to operate it as a $1-million-a-year elk hunting resort--a device that might conceivably help the family to avoid a big assessment.

Another potential valuation headache is Malcolm’s million-piece collection of both fine art and assorted doodads, including toy soldiers, model boats and presidential signatures. Malcolm maintains that most of the collection should be valued at the often shrewdly low prices that he paid for it. “It’s very hard to take a half-dozen painting sales that have nothing to do with art, but more to do with dollars, and to say that’s what somebody else’s art is worth,” Malcolm says.

According to tax attorney Barry Fink of the Los Angeles firm of Christensen, White, Miller, Fink & Jacobs, however, government appraisers have been aggressive in valuing art-heavy estates against recent comparable sales. “The IRS monitors every auction at Sotheby’s and Butterfield’s,” Fink says. Thus Forbes, when he paid a record $1.76 million for the 11th of his 12 Faberge eggs in 1985, may have beaten the Kremlin to it--but he may also have penalized his family by raising the presumed value of his first 10 eggs.

Fink suggests that aging art holders like Forbes would be wise to put their collections in a charitable foundation. Malcolm said he hasn’t done so and adds that he doesn’t take any special tax deduction against the art just because it is displayed to the public in a series of galleries on the first floor of the magazine’s offices. “That’s baloney,” he says of speculation to the contrary. “I wish you could tell me how to do it.”

According to Fink, Malcolm could have mitigated future tax problems still more by “transferring opportunities” to his sons--for instance, by allowing them to own the new magazines outright, while he served as their primary lender.

Yet Forbes hasn’t taken that route, perhaps because, at age 70, he is having too much fun to part with the joys of ownership. In any case, his sons appear disinclined toward any sharp reversal of his stay-at-home strategy once they do come into their own.

“When you see what McGraw-Hill is going through . . . sometimes when you expand, it dilutes the effort,” says Steve, shuddering at his competitor’s recent $220-million quarterly charge after misfires in its book publishing and information services sectors.

Clearly, Malcolm has shrunk from some major tests of his family’s editorial and business skills, having turned his back on not just Interview and Esquire but also U.S. News & World Report, which he almost purchased in 1984, before deciding that its real estate entanglements and $160-million price tag were more than he wanted to tackle.

Yet Forbes Inc. has usually done well where it has chosen to dabble. The company paid a reported $8 million for American Heritage in 1986 and quickly bolstered its fortunes under the supervision of both Malcolm and 36-year-old son Tim by chasing corporate advertisers and selling ads in a package with Forbes magazine. Somerset Press, a chain of six weekly New Jersey newspapers purchased for an undisclosed price in 1987, is overseen by Steve and Malcolm and has also prospered, the family says.

According to corporation papers filed with the state of New York, Forbes Inc. also owns the Social Register Assn., which publishes an annual guide to society’s best, though Malcolm continues to honor a longstanding tradition by refusing to say exactly who runs it. “Next question!” he responds when asked.

Forty-year-old Robert Forbes will oversee Forbes FYI, but Malcolm remains editor-in-chief of that new enterprise, as of Forbes magazine, where 39-year-old Christopher (Kip) is assistant chairman and is mentioned by some insiders as the likely next publisher.

Malcolm is likewise editor-in-chief of the forthcoming Egg, which is to be directly supervised by Tim.

The latter enterprise defies conventional publishing wisdom, with its odd size, pages of white-on-dark type and jumbled snippets of material interspersed with full-sized stories. “They’re trying to do something that’s never been done before, and they’re succeeding--to the detriment of the reader,” moans magazine consultant Kobak, upon surveying a prototype that featured a round table interview between Egg Editor Hal Rubenstein and three female impersonators over lunch at Manhattan’s Le Cirque restaurant.

After years of guarding its resources, however, Forbes Inc. is probably overdue for a fling on the wild side of publishing. And besides, explains Tim: “We do things we get turned on by. . . . The world doesn’t always work by logic. Success and failure obviously defy what you can program into a computer and spit out on a spreadsheet.”