The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success
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You really only need to know three things to evaluate a CEO’s greatness: the compound annual return to shareholders during his or her tenure and the return over the same period for peer companies and for the broader market
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CEOs need to do two things well to be successful: run their operations efficiently and deploy the cash generated by those operations.
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Basically, CEOs have five essential choices for deploying capital—investing in existing operations, acquiring other businesses, issuing dividends, paying down debt, or repurchasing stock—and three alternatives for raising it—tapping internal cash flow, issuing debt, or raising equity.
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Essentially, capital allocation is investment, and as a result all CEOs are both capital allocators and investors.
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Singleton focused Teledyne’s capital on selective acquisitions and a series of large share repurchases. He was restrained in issuing shares, made frequent use of debt, and did not pay a dividend until the late 1980s.
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Singleton had a highly differentiated approach. Specifically, he believed in an extreme form of organizational decentralization with a wafer-thin corporate staff at headquarters and operational responsibility and authority concentrated in the general managers of the business units.
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Capital allocation is a CEO’s most important job. • What counts in the long run is the increase in per share value, not overall growth or size. • Cash flow, not reported earnings, is what determines longterm value. • Decentralized organizations release entrepreneurial energy and keep both costs and “rancor” down. • Independent thinking is essential to long-term success, and interactions with outside advisers (Wall Street, the press, etc.) can be distracting and time-consuming. • Sometimes the best investment opportunity is your own stock. • With acquisitions, patience is a virtue . . . as is ...more
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our outsider CEOs, also shared an interesting set of personal characteristics: They were generally frugal (often legendarily so) and humble, analytical, and understated. They were devoted to their families, often leaving the office early to attend school events.
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The residents of Singletonville, however, represent a refreshing rejoinder to this stereotype. All were first-time CEOs, most with very little prior management experience. Not one came to the job from a high-profile position, and all but one were new to their industries and companies.
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This group of happily married, middle-aged men (and one woman) led seemingly unexciting, balanced, quietly philanthropic lives, yet in their business lives they were neither conventional nor complacent. They were positive deviants, and they were deeply iconoclastic.
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the “fox,” who knows many things, and the “hedgehog,” who knows one thing but knows it very well. Most CEOs are hedgehogs—they grow up in an industry and by the time they are tapped for the top role, have come to know it thoroughly.
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Foxes, however, also have many attractive qualities, including an ability to make connections across fields and to innovate, and the CEOs in this book were definite foxes. They had familiarity with other companies and industries and disciplines, and this ranginess translated into new perspectives, which in turn helped them to develop new approaches that eventually translated into exceptional results.
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This freshness of perspective is an age-old catalyst for innovation across many fields.
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In all cases, this led the outsider CEOs to focus on cash flow and to forgo the blind pursuit of the Wall Street holy grail of reported earnings.
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Buffett’s partner, Charlie Munger, calls “a prosperity-blinded indifference to unnecessary costs.”
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Murphy’s goal was to make his company more valuable. As he said to me, “The goal is not to have the longest train, but to arrive at the station first using the least fuel.”
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The formula that allowed Murphy to overtake Paley’s QE2 was deceptively simple: focus on industries with attractive economic characteristics, selectively use leverage to buy occasional large properties, improve operations, pay down debt, and repeat.
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Capital Cities under Murphy was an extremely successful example of what we would now call a roll-up. In a typical roll-up, a company acquires a series of businesses, attempts to improve operations, and then keeps acquiring, benefiting over time from scale advantages and best management practices.
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in January 1986, Murphy, in his masterstroke, bought the ABC Network and its related broadcasting assets (including major-market TV stations in New York, Chicago, and Los Angeles) for nearly $3.5 billion with financing from his friend Warren Buffett.
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“Decentralization is the cornerstone of our philosophy. Our goal is to hire the best people we can and give them the responsibility and authority they need to perform their jobs. All decisions are made at the local level.
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There were no vice presidents in functional areas like marketing, strategic planning, or human resources; no corporate counsel and no public relations department (Murphy’s secretary fielded all calls from the media).
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“The company was careful, not just cheap.”
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The two primary sources of capital for Capital Cities were internal operating cash flow and debt.
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“always, we’ve . . . taken the assets once we’ve paid them off and leveraged them again to buy other assets.”
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Interestingly, Murphy never borrowed money to fund a share repurchase, preferring to utilize leverage for the purchase of operating businesses.
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Acquisitions were far and away the largest outlet for the company’s capital during Murphy’s tenure.
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When he saw something that he liked, however, Murphy was prepared to make a very large bet, and much of the value created during his nearly thirty-year tenure as CEO was the result of a handful of large acquisition decisions, each of which produced excellent long-terms returns.
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Like others in this book, he relied on simple but powerful rules in evaluating transactions. For Murphy, that benchmark was a double-digit after-tax return over ten years without leverage. As a result of this pricing discipline, he never prevailed in an auction,
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When an executive later asked why he had made the investment, the bartender replied, “I’ve worked at a lot of corporate events over the years, but Capital Cities was the only company where you couldn’t tell who the bosses were.”13
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I change my mind when the facts change. What do you do?
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During this heady period, there was significantly less competition for acquisitions than today (private equity firms did not yet exist), and the price to buy control of an operating company (measured by its P/E ratio) was often materially less than the multiple the acquirer traded for in the stock market, providing a compelling logic for acquisitions. Singleton took full advantage of this extended arbitrage opportunity to develop a diversified portfolio of businesses, and between 1961 and 1969, he purchased 130 companies in industries ranging from aviation electronics to specialty metals and ...more
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Singleton and Roberts eschewed the then trendy concepts of “integration” and “synergy” and instead emphasized extreme decentralization, breaking the company into its smallest component parts and driving accountability and managerial responsibility as far down into the organization as possible. At headquarters, there were fewer than fifty people in a company with over forty thousand total employees and no human resource, investor relations, or business development departments.
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“No one worried who Henry was having lunch with.”
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Singleton ignored this orthodoxy, and between 1972 and 1984, in eight separate tender offers, he bought back an astonishing 90 percent of Teledyne’s outstanding shares. As Munger says, “No one has ever bought in shares as aggressively.”
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Singleton spent an incredible $2.5 billion on the buybacks.
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the average price-to-earnings ratio for Teledyne’s stock issuances was over 25; in contrast, the average multiple for his repurchases was under 8.
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Charlie Munger said of Singleton’s investment approach, “Like Warren and me, he was comfortable with concentration and bought only a few things that he understood well.”
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Singleton believed “there was a time to conglomerate and a time to deconglomerate.”
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In 1987, at a time when both acquisition and stock prices (including his own) were at historic highs, Singleton concluded that he had no better, higher-returning options for deploying the company’s cash flow, and declared the company’s first dividend in twenty-six years as a public company.
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One of the most important decisions any CEO makes is how he spends his time—specifically, how much time he spends in three essential areas: management of operations, capital allocation, and investor relations.
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Anders, borrowing a page from his former GE colleague Welch, believed General Dynamics should only be in businesses where it had the number one or number two market position.
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In the first two years of their regime, Anders and Mellor reduced overall head count by nearly 60 percent (and corporate staff by 80 percent), relocated corporate headquarters from St. Louis to northern Virginia, instituted a formal capital approval process, and dramatically reduced investment in working capital.
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Most of the CEOs in this book avoided detailed strategic plans, preferring to stay flexible and opportunistic.
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key point across the CEOs in this book: as a group, they were, at their core, rational and pragmatic, agnostic and clear-eyed. They did not have ideology. When offered the right price, Anders might not have sold his mother, but he didn’t hesitate to sell his favorite business unit.
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“Most CEOs grade themselves on size and growth . . . very few really focus on shareholder returns.”
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Anders and his successors focused on two primary priorities: decentralizing the organization and aligning management compensation with shareholders’ interests.
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So what do you do with a high-priced stock? Use it to acquire a premium asset in a related field at a lower multiple and benefit from the arbitrage.”
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Prudent cable operators could successfully shelter their cash flow from taxes by using debt to build new systems and by aggressively depreciating the costs of construction. These substantial depreciation charges reduced taxable income as did the interest expense on the debt, with the result that well-run cable companies rarely showed net income, and as a result, rarely paid taxes, despite very healthy cash flows.
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To Malone, higher net income meant higher taxes, and he believed that the best strategy for a cable company was to use all available tools to minimize reported earnings and taxes, and fund internal growth and acquisitions with pretax cash flow.
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Malone pioneered the active use of debt in the cable industry. He believed financial leverage had two important attributes: it magnified financial returns, and it helped shelter TCI’s cash flow from taxes through the deductibility of interest payments.
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