"The Outsiders" by William Thorndike

[Dexter]

I just started re-reading William Thorndike's fantastic book entitled "The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success."  The book profiles eight CEOs who excelled at capital allocation and obtained shareholder returns that blew away their industry peers and the S&P 500.

If you get the chance, you should pick up a copy and give it a read -- it will be well worth your time. 

[Dexter]

I just finished reading Chapter 2 of "The Outsiders" last night, and I thought I would jot down a few thoughts I had about Henry Singleton and Teledyne.

Henry Singleton was a mathematician and scientist who never earned an MBA, but he racked up one of the best records in corporate history at Teledyne.

The book states on page 52: "From 1963 (the first year for which we have reliable stock data) to 1990, when he stepped down as chairman, Singleton delivered a remarkable 20.4 percent compounded annual return to shareholders (including spin-offs), compared to an 8 percent return for the S&P 500 over the same period and an 11.6 percent return for other major conglomerate stocks....A dollar invested with Henry Singleton in 1963 would have been worth $180.94 by 1990, an almost ninefold outperformance versus his peers and a more than twelvefold outperformance versus the S&P500."

On the Chapter 2 title page, their was this quote from Warren Buffett in 1980 that I thought was pretty interesting: "Henry Singleton has the best operating and capital deployment record in American business...if one took the top 100 business school graduates and made a composite of their triumphs, their record would not be as good as Singleton's."

Teledyne was a midsize conglomerate that was founded in 1960 by Henry Singleton and Georgy Kozmetzky (Singleton's colleague at Litton Industries).  Shortly after starting Teledyne, Singleton and Kozmetzky acquired three small electronics companies and bid for a large naval contract.  In 1961, Teledyne went public.

In the 1960s, conglomerates were the hot stocks to own (similar to the internet stocks of the 1990s).  They sported nosebleed stock prices and high Price-Earnings (P-E) ratios.  The investing public couldn't get enough of them -- and Teledyne was no exception.

Singleton took full advantage of this situation.  Between 1961 and 1969, Singleton purchased 130 companies in various industries (aviation electronics, specialty metals, insurance, etc.).  In all but two of these acquisitions, Teledyne's pricey stock was used.  During this time period, Teledyne's P-E multiple ranged from 20 to 50, while Singleton never paid more than 12 times earnings for a company.

Then, in 1969, with the P-E multiple of his stock falling, and acquisition prices rising, Singleton stopped acquiring businesses.  He never made another material purchase after that, and never issued another share of stock.

In 1969, Singleton and George Roberts (then President of Teledyne) worked to improve existing operations and free cash flow.  The freed up cash was sent to headquarters to be allocated by Singleton.

In 1972, Singleton realized that Teledyne's stock was cheap.  So, he initiated a tender offer for the stock.  Between 1972 and 1984, in eight separate tender offers, Singleton bought back an unprecedented 90 percent of Teledyne's stock.  Singleton believed that this was a far more tax-efficient method for returning capital to shareholders.  Singleton bought back these shares at attractive prices.  According to the book, Singleton generated "an incredible 42 percent compound annual return for Teledyne's shareholders across the tenders."  (It's important to remember that all of this took place before share repurchases became popular.)

Then, during the period from 1984 to 1996, Singleton shifted his focus to optimizing shareholder value when results at some operating divisions had stagnated.  Singleton began spinning off companies to unlock value.  (He was also a pioneer in this field.)  He spun off Argonaut, the company's worker's compensation insurer, in 1986.  And in 1990, Singleton spun off Unitrin, the company's largest insurance operation -- which accounted for the majority of Teledyne's enterprise value at the time.

Later on, in 1987, when acquisition and stock prices were high (and no other attractive investment opportunities were available), Singleton declared the company's first dividend.

Singleton retired as chairman of Teledyne in 1991, but returned in 1996 to help negotiate the merger of Teledyne's remaining manufacturing operations with Allegheny Industries and to fend off a hostile takeover.


Henry Singleton was an interesting individual.  He took time to think through his options and make rational choices.  Many of these choices led him to pursue capital allocation actions that were different than his peers.  However, Singleton's facts and reasoning were generally correct, and thus, his actions translated into superior shareholder returns. 

There's a lot that we can and should learn from Henry Singleton and Teledyne.

[Dexter]

Here's a cautionary (and fascinating) tale.  Bill Ackman and a few other smart investors believed that Mike Pearson, former C.E.O. of Valeant Pharmaceuticals (VRX), was an "Outsider," when in fact, he was not. 

http://www.vanityfair.com/news/2016/06/the-valeant-meltdown-and-wall-streets-major-drug-problem

Some excerpts:

"One of Valeant's biggest investors, hedge-fund billionaire Bill Ackman, is trying to salvage both the multi-billion-dollar investment his fund, Pershing Square, made in the company and—with Pershing Square down 18 percent so far this year after a 19 percent loss last year in part due to Valeant—his own reputation. Ackman is far from alone. The investors in Valeant were once viewed as a Who's Who of the smartest guys on Wall Street. The company's fall is wrecking both their careers and their legacies."

"After lunch, Ackman handed out copies of The Outsiders, a book by William Thorndike, which celebrated 'outsider' C.E.O.'s, mavericks who had done things differently, such as Buffett, TCI's John Malone, and Washington Post Co. C.E.O. Katharine Graham. Ackman told investors Pearson's name should be added to the list."

"'We greatly admire what you have accomplished and are delighted to be your partners once again,' he [Ackman] e-mailed Pearson. It was a huge investment. Pershing Square bought 16.5 million shares at an average price of $196 a share, at a cost of more than $3 billion, which was about 19 percent of Pershing Square's total capital."

"Ackman, whose fund bought two million more shares at a price of $108 per share, started firing off e-mails to Pearson. 'Perception very quickly becomes reality when reasonable questions remain unanswered,' he wrote in one. 'While I know that Mike greatly prefers to answer questions one on one with shareholders, the time to do so has run out . . . . As things stand, the torpedoes are in the water and the sharks are circling. They will kill the company.'"

"'That a stock could go from $230 to $30 in a matter of months in and of itself tells you that no one knew what was going on,' says Scilipoti."

"A week later, in a long-weekend board meeting, Ackman, who had come to believe there were what he calls 'serious cultural issues' at the company in terms of the pressure to produce earnings, argued that Pearson had to go. On March 21, the company announced he would leave and that Ackman would join the board."

"Ackman, who also testified, said, 'Clearly [there] were things I did not understand about the business and that was a failure of due diligence on my part.'"

[Dexter]

Here's a video interview at Google with William Thorndike, author of "The Outsiders." 

https://www.youtube.com/watch?v=D6h5bvxnBKk

At around the 30 minute mark, he mentions a few contemporary CEOs that have "outsider" traits.  Interestingly, he mentions Mike Pearson of Valeant Pharmaceuticals, which shows that it can be hard to predict who the outsiders are before the fact.