Author : William N. Thorndike, Jr.
The book looks at 8 CEOs with a common pattern of behaviour :
- Tom Murphy and Capital Cities (Media + Broadcasting)
- Henry Singleton and Teledyne (Electronics, industry)
- Bill anders and General Dynamics (Defense)
- John Malone and TCI (Cable business)
- Kay Graham and the washington post company (Media)
- Bill Stirlitz and Ralston Purina (food)
- Dick Smith and General Cinema (Movie theaters)
- Warren Buffett and Berkshire Hathaway (Investing)
Warren has admired and personnaly invested in most of those CEO’s himself.
The general lessons spelled out by Thorndike in the final chapter are :
Always do the maths: The CEOs only went forward with projects that based on simple math and conservative assumptions, offered compelling returns. In many cases, they eschewed financial mpodels for single page write ups.
The denominator matters : The CEOs focused on maximizing value per share, not overall company size or revenues. This meant opportunistically buying back shares when prices were attractive, and avoiding dilutive financing.
A feisty independence : The CEOs aggressively delegated operations, running very lean corporate teams, but they did not delegate capital allocation. In many cases, they were willing to make important investment decisions in a single day, or even a single meeting (with advance prep).
Charisma is overated : The CEOs ignored investor relations and earnings guidance, and avoided spotlight.
A crocodile like temperament that mixes patience with occasional bold action. The CEOs were willing to wait a long time for the right opportunity, and then act with boldness and blinding speed.
The consistent applicationof a rational, analytical approach to decisions large and small.
A long term approach.
In Summary : “They disdained dividends, made disciplined (occasionally large) acquisitions, used leverage selectively, bought back a lot of stock, minimized taxres, ran decentralized organizations, and focused on cash flow over reported income.”
The outsiders checklist
- The Capital allocation process should be CEO-led, not delegated to finance or business dev
- Start by determining the hurdle rates. This should generally exceed the blended cost of equity and debt capital (mid teens or higher)
- Calculate returns for all internal and external investment alternatives, rank them by return and risk. Use conservative assumptions. Be wary of the adjective “Strategic” -> often corporate code for low returns.
- Calculate the return for stock repurchases. Require that acquisitions returns meaningfully exceed this benchmark
- Focus on after tax returns, and run all transactions by tax counsel
- Determine acceptable, conservative cash and debt levels, and run the company to stay withing them
- Consider a decentralized organizational model
- Retain capital in the business only if you have confidence you can generate returns over time that are above your hurdle rate
- If you do not have potential high-return investment projects, consider paying a dividend
- When prices are extremely high, it’s ok to consider selling business or stock. It’s also OK to close under performing business units if they are no longer capable of generating acceptable returns
Additional notes :
How Tom Murphy made acquisitions :
- The purchase price had to be such that would deliver > 10% annual after tax returns after 10 years without leverage
- Murphy would ask the seller what they thought the property was worth, and if the offer met his benchmark, he would take it
- If murphy thought the seller’s proposal was too high, he would counter with his best offer. If the seller rejected this offer, Murphy would walk away.
Capital Cities approach to management :
Phil meek told me a story avbout a bartender at one of the management retreats who made a handsome return by buying capital cities stock in the early 70’s. When an executive later asked why he had made the investment the bartender replied : ” I have worked a lot of corporate events over the years, but capital cities was the only company where you could not tell who the bosses were”
How Henry Singleton and Teledyne measured the business :
The Teledyne return : An average of cash flow and net income for each business unit, which was the basis for bonus compensation for all general managers
Henry Singleton on the role of the CEOs :
I do not define my job in any rigid terms but in terms of having the freedom to do whatever seems to be in the best interests of the company at any time. No strategic plans, to better maximize flexibility. I like to steer the boat each day rather than plan ahead way into the future.
How Henry Singleton bought back stock :
Infrequent, large repurchases, timed to coincide with low stock prices, typically made within very short periods of time, via tender offers and funded by debt.
Bill Anders and decision making :
Anders wanted to improve General Dynamics position in fighter planes, so he approached lockheed to buy their fighter plane division. Lockheed refused to sell, and instead made an extravagant offer of 1.5 Billion $ for General Dynamics F-16 business. Anders sold it, even though it shrank his company tpo less than half its formner size and deprived him of his favorite CEO perk : flying the jets. It was the rational business decision consistent with growing per-share value.
Bill Anders and CEO succession :
Anders served as chairman for a year before retiring to a remote island in the northwest. He believed in the naval succession model in which retiring captains avoir returning to their ships so as not to interfere with their successor’s authority, and proudly told me that he had spoken only once to his successors.
