Notes on the Outsider CEOs

I haven’t done book reviews on this blog and this is not one either.  However, I finally read The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success and I would like to share my short notes here.

As the title says, the book is about eight successful and unconventional CEOs that beat not only their peers and the S&P index as measured by stock market returns, but also rockstar CEOs like Jack Welch. And, they beat them by a large margin.

Returns of Outsider CEOs vs the S&P 500, Their Peers, and Jack Welch

What they did may seem normal and familiar to you.  But, in fact, their strategies were extremely unconventional and unpopular when they were plying their trade.  For example, we live in times of heightened buyback activity.  However, when these CEOs were doing it, buying back shares was something radical.  The sheer magnitude of their buybacks makes them exceptional even today.  They pursued similar reasonable and efficient approaches when operating, acquiring, disposing, and capitalizing businesses.

1. Tom Murphy & Dan Burke (ABC Capital Cities)
Operational success:
– careful cost control
– maximizing advertising market share
Capital allocation success:
– careful acquisitions & subsequent integration
– buybacks at single digit P/E, P/FCF multiples, spent $1.9b on buybacks

2. Henry Singleton (Teledyne)
Operational success:
– decentralization
– high margin products that are essential to the buyer
Capital allocation success:
– 130 acquisitions in the first 10 years
– buybacks – 90% of the stock; issued stock at avg 25x earnings, bought back at avg 8x

3. Bill Anders (General Dynamics)
Operational success:
– turnaround – the defense industry had immense excess capacity after the end of the Cold War => shrink & consolidate
– be only #1-2
– exit unprofitable businesses
– stick to businesses you know well
– shift focus from engineering (better, faster, more lethal weapons) to shareholder focus (CFROE)
Capital allocation success:
– 50% of equity returned as a special dividend, treated as a return of capital (tax free) because of all the sold divisions
– 30% tender

4. John Malone (TCI)
Operational success:
– shelter CF from taxes with high depreciation and interest charges, i.e. grow and leverage (5x EBITDA was normal).
– scale up – drives out small competitors & keeps programming costs, which are the largest cost ~40% of opex, low thanks to negotiating leverage, resulting a virtuous cycle
– largest player & lowest cost = moat
– joint ventures with legendary programmer and cable entrepreneurs
Capital allocation success:
– tracking stocks and spinoffs – transparency and separation between core and related interests

5. Catherine Graham (Washington Post)
Operational success:
– broke off a big union strike, which put her at a significant advantage over competitors crippled by high costs
– hired a daring, gifted editor-in-chief
Capital allocation success:
– few, opportunistic acquisitions
– large share repurchases
– always comparing capex to return and opportunity cost

6. Bill Stiritz (Ralston Purina)
Operational success:
– cycles of diversification and consolidation (there were no sacred businesses, everything had a price)
– tough negotiations with targets, no help from bankers
Capital allocation success:
– big repurchases
– spinoffs
– leverage

7. Dick Smith (General Cinema)
Operational success:
– lease financing to fund new theatres
– diversification into the beverage business (which he was familiar with from concessions)
– no sacred businesses
Capital allocation success:
– leverage (maintained debt-to-cash-flow ratio of at least 3x)
– tax minimization

8. Warren Buffett (Berkshire Hathaway)
Operational success:
– “generate funds at 3% and invest them at 13%”
– delegate to the point of abdication
Capital allocation success:
– the ultimate capital allocator

Common for all outsider CEOs:
– start by asking what the return is (simple algebra, no fancy spreadsheets)
– care about value per share
– delegate / decentralize (all operations, but not capital allocation)
– charisma is overrated (most were introverted)
– patience & jumping at opportunities
– consistent application of a rational, analytical approach to decisions

Blueprint:
– disdain dividends
– make disciplined acquisitions
– use leverage selectively
– buy back shares
– minimize taxes
– decentralize
– focus on cash flow

There you have it – in a very condensed form – the checklist for outstanding management to keep with you when researching companies.

Not that it needs my recommendation – the book has already been reviewed and recommended by Warren Buffett and every blogging value investor out there – but for those, like me,  coming to it late, this may be a nice reminder to bump it up in their reading lists.