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The Outsiders

Page history last edited by Chris Yeh 9 years, 2 months ago

The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success

William N. Thorndike, Jr.

http://www.housatonicpartners.com/about.html

http://bobmorris.biz/william-n-thorndike-jr-an-interview-by-bob-morris

 

The book looks at 8 CEOs with a common pattern of behavior.  These CEOs are:

Tom Murphy and Capital Cities

Henry Singleton and Teledyne

Bill Anders and General Dynamics

John Malone and TCI

Kay Graham and The Washington Post Company

Bill Stirlitz and Ralston Purina

Dick Smith and General Cinema

Warren Buffett and Berkshire Hathaway

 

Note that Buffett is one of the main common threads, having known, admired, or invested in most of the CEOs on the list!

 

The general lessons are spelled out by Thorndike in the final chapter:

  • Always do the math
    • The CEOs only went forward with projects that, based on simple math and conservative assumptions, offered compelling returns.  In many cases, they eschewed financial models 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 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 (thanks to advance preparation)
  • Charisma is overrated
    • The CEOs ignored investor relations and earnings guidance, and avoided the 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 application of a rational, analytical approach to decisions large and small
  • A long-term perspective

 

In summary: "They disdained dividends, made disciplined (occasionally large) acquisitions, used leverage selectively, bought back a lot of stock, minimized taxes, ran decentralized organizations, and focused on cash flow over reported net income."

 

The Outsider's Checklist

 

1. The capital allocation process should be CEO-led, not delegated to finance or business development.

2. Start by determining the hurdle rate.  This should generally exceed the blended cost of equity and debt capital (usually in the mid-teens or higher)

3. Calculate returns for all internal and external investment alternatives, and rank them by return and risk.  Use conservative assumptions.  Be wary of the adjective "strategic"--it is often corporate code for "low returns."

4. Calculate the return for stock repurchases.  Require that acquisition returns meaningfully exceed this benchmark

5. Focus on after-tax returns, and run all transactions by tax counsel.

6. Determine acceptable, conservative cash and debt levels, and run the company to stay within them.

7. Consider a decentralized organizational model.

8. Retain capital in the business only if you have confidence you can generate returns over time that are above your hurdle rate.

9. If you do not have potential high-return investment projects, consider paying a dividend.

10. When prices are extremely high, it's OK to consider selling businesses or stock. It's also OK to close under-performing business units if they are no longer capable of generating acceptable returns.

 

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 about a bartender at one of the management retreats who made a handsome return by buying Capital Cities stock in the early 1970s.  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.'"

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 CEO: "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 offer, and funded by debt.

Bill Anders and decisionmaking: Anders wanted to improve General Dynamics position in fighter plans, 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 agreed on the spot to sell the business, even though it shrank his company to less than half its former size and deprived him (a former pilot and Apollo astronaut) of his favorite CEO perk: flying fighter 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 avoid 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 Mellor's [his successor] successor, Nick Chabraja, since 1997.

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