"I have known no wise people who didn't read all the time — none, zero." – Charlie Munger

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

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What makes a successful CEO? Most people call to mind a familiar definition: “a seasoned manager with deep industry expertise.” Others might point to the qualities of today’s so-called celebrity CEOs—charisma, virtuoso communication skills, and a confident management style. But what really matters when you run an organization? What is the hallmark of exceptional CEO performance? Quite simply, it is the returns for the shareholders of that company over the long term.


Most CEOs have strong functional backgrounds (marketing, product, engineering, etc.), but almost no experience allocating capital and so CEOs that understand businesses as investments are at a tremendous advantage to their peer group.  Thorndike found and studied 8 CEOs that generated superior returns to Jack Welch and relative to their industry peer group and found several common characteristics that are different than the stereotypical CEO (charismatic, confidence, etc.).  The book has many valuable lessons for managers and also shareholders who are evaluating management teams.

Notable Quotes 

  • “Hire the best people you can and leave them alone” – Tom Murphy, Capital Cities
  • On buybacks – “If everyone’s doing them, there must be something wrong with them” – Henry Singleton, Teledyne
  • “We don’t believe in staff. Staff are people who second-guess people” – John Malone, TCI
  • “Leadership is analysis” – Bill Stiritz, Ralston Purina

Key Takeaways 

  • CEOs have five choices for deploying capital – investing in existing operations, acquiring other businesses, issuing dividends, paying down debt or repurchasing stock and three for raising capital – tapping internal cash flow, issuing debt or equity. Over the long-term returns will be determined by the CEOs decisions on which tools to use and the Outsider CEOs adjusted the use of these tools to the opportunity set and macro environment
  • Common characteristics across the Outsider group – worked out of bare-bone offices, eschewed perks such as corporate plans, avoided the spotlight and rarely communicated with Wall Street, avoided external counsel. First time CEOs w/ very little prior management experience and generally new to their industries.  Happily married, middle-aged, led balanced lives.
  • They were foxes (knows many things) and had familiarity with other companies and industries and disciplined, which resulted in new perspectives and exceptional results
  • Ran highly decentralized operations and often had a strong COO, so that they could focus on allocating capital
  • The Outsider group outperformed the S&P by over twenty times and their peers by over seven times


Capital Allocation Checklist

  • Allocation process should be CEO led, not delegated
  • Start by determining the hurdle rate for investment projects
  • Calculate returns on all internal and external investment opportunities and rank them by return and risk (we wary of “strategic” – it is often code for low returns)
  • Calculate returns for stock repurchases
  • Focus on after-tax returns
  • Determine acceptable, conservative cash and debt levels and run the company to stay within them
  • Consider a decentralized organizational model (ratio of HQ to field headcount)
  • Retain capital in the business only if you have confidence it can generate returns overtime above hurdle rate
  • Consider a dividend if you do not have potential high-return investment projects
  • When prices are extremely high, it is OK to sell stock or assets. Also it is OK to close a business unit that is no longer generating acceptable returns

Eight CEOs Profiled in the Book:

  • Tom Murphy (Capital Cities Broadcasting)
    • Harvard MBA who took over a small struggling radio station for a NY entrepreneur – took over as CEO at age 40
    • Murphy had an excellent COO (Dan Burke) – Dan’s job was to generate the free cash flow and Tom’s job was to allocate it – similar theme with Outsider CEOs that had good COO that allowed CEO to focus on capital allocation
    • Started off in TV/radio broadcasting, but expanded into newspapers and cable
    • Incredible cost discipline, but would spend where the returns were justified – paid up for news talent as the realized the #1 news station received a disproportionate share of ad revenue, also paid for more color newspaper printing for Fort Worth as they realized it was critical to holding leadership position
    • Successful formula of acquiring assets and then improving operations to improve margins – acquired SF Chronicle and TV station – nearly doubled margins on both, acquired ABC in 1986 for $3.5bn (largest acquisition ever ex E&P) and did the same
    • Highlight decentralized operations – hired good people and then left them alone, which resulted in incredibly low turnover – almost no headquarter staff – no departmental leaders
    • Used leverage – would buy assets with leverage, paydown with cash flow and then relever to buy more assets
    • Acquired 50% of shares in the 1970s during market downturn
    • Compared to CBS, which exemplified corporate excess and misallocation of capital
    • In 1995 sold to Disney for $19bn – 28x net income – 19.9% return or 204x ROC
  • Henry Singleton (Teledyne)
    • Singleton was an MIT-educated mathematician and started his career at Litton Industries, one of the large conglomerates
    • At Litton, he invented the inertial guidance system that is still used in commercial and military aircraft
    • In 1960, he left with a Litton colleague to found Teledyne, which got its start by acquiring three small electronics companies and using the combined entity to earn a defense contract
    • There were three main periods of Teledyne’s history and Singleton employed different strategies adapted to the environment of each:
    • 1961-1969 – Conglomerates were the internet stocks at the time and traded at lofty multiples (Teledyne peaked at 50 P/E during this period), so Teledyne used its stock to purchase 130 companies and never paid over 12 times.  Share count increased 14x, but EPS increased 64x
    • 1969-1984 – Acquisition multiples increased and Teledynes stock fell, so they started buying back stock in 1972.  Teledyne acquired 90% of shares over this time period at an average multiple of 8x.  Also took over responsibility for the insurance portfolio and shifted equity allocation from 10% to 77% w/ 70% in 5 companies
    • 1984 – 1996 – Started to spinoff divisions, as he believed it would unlock value of the insurance operations and simplify succession issues.  In 1987, acquisition prices were high (LBO period) and stock prices were high, so he declared a dividend
    • From 1963 to 1990 he generated a return of 20.4% or 180x
  • Singleton promoted a former Naval Academy roommate to President so he could remove himself from the operations- he did not reserve any day-to-day responsibilities for himself to avoid getting stuck in a particular rut
  • Extreme decentralization breaking into smallest components and driving accountability as far down as possible
  • Financed 1980 buyback with fixed rate debt (interest rates were low at the time) and after interest rates increased and Teledyne bought back the fixed rate debt (did not believe interest rates were going to continue to increase) and financed the purchase with pension fund cash (tax-free gains)
  • Similarities with Buffett – CEO as an investor, decentralized operations/centralized investment decisions, investment philosophy (concentrated/simple), no investor relations, no dividends, no stock splits, significant CEO ownership, insurance subsidiaries, restaurant analogy (lots of options)
    • Developed a metric called the Teledyne return to manage and bonus each business unit – it was an average of cash flow and net income
  • Bill Anders (General Dynamics)
    • Anders was a NASA astronaut who piloted the 1968 Apollo mission (and took the iconic Earthrise photograph)
    • After leaving NASA, he had brief stints at GE, Flexitron and then was asked to take the CEO role at General Dynamics with only 10 years of private sector experience in his 50s
    • Following the fall of the Berlin Wall in 1989, the defense industry fell into a downturn with the index falling 40% and General Dynamics had made missteps to make the company’s position even worse
    • From 1991 to 2007, the company was led by three CEOs – Anders, Mellor and Chabraja, who each employed their own successful strategies – in 1991 the company had $600mm of debt, negative cash flow and a market cap of $1bn
      • 1991 – 1993 (Anders)
        • $5bn of cash generation through operational improvements ($2.5bn) and sale of no-core assets ($2.5bn), as defined by any market they did not have a #1 or #2 position in
        • They replaced 21 of the top 25 executives, reduced overall headcount by 60% and corporate headcount by 80%
        • Only bid on projects that had the highest returns
        • Focused the executives and compensation on cash return on capital, which was in contrast to industry focus on product development and revenue growth
        • Sold IT division, F-16 business, Cessna aircrafts, and missiles and electronics businesses as industry peers were paying high multiples – left only tank and submarine businesses
        • Returned cash to shareholders through 3 special dividends, which were tax free as they were categorized as “return of capital” and $1bn tender offer for 30% of the company
      • 1993 – 1997 (Mellor)
        • Acquired bath Iron Works, one of the largest domestic shipbuilders and then passed the baton to Chabraja
      • 1997-2007 (Chabraja)
        • Lawyer by training, who had joined the company in 1993 as general counsel
        • When he took over as CEO, he set a goal to quadruple the company’s stock price during the next 10 years (15% return), which only 5% of S&P companies have accomplished
        • He knew he could get 2/3rd of the way there with market growth and operational improvements and the rest would come through acquisitions
        • Focused on small tuck-in acquisitions at first and expanded into the IT market, but then acquired Gulfstream for $5bn(56% of enterprise value).  Paid for Gulfstream with stock – trading at 23x P/E.  Diluted the shareholders by 30%, but doubled operating cash flow
    • Generated 23.3% return from 1991 to 2008 or 30x
    • Only two people between the CEO and the head of any profit center and all HR, legal and account personnel were pushed down to the operating divisions
  • John Malone (TCI)
    • Malone attended Yale and studied operational research at Johns Hopkins before joining  Bell Labs and then McKinsey, where he learned about the attractiveness of the cable industry (fast growing and predictable)
    • He later joined TCI in 1973, the 4th largest cable company in the U.S., founded in 1956 by Bob Magness
    • TCI had debt of 17x revenue when Malone joined and he spent the first few years renegotiating debt terms with lenders and eventually recapped the debt in 1977
    • In the early 1980’s, Malone realized that they key to future profitability in the cable business was the ability to control programming costs through the leverage of size, so aggressively pursued the acquisition of subscribers and also invested in programmers (40% of costs for cable companies)
    • Positive feedback loop – if you buy more systems, you lower your programming costs, and increase your cash flow, which allows more financial leverage, which can b used to buy more systems, which further improves your programing costs.
    • Between 1973 and 1989, the company closed 482 acquisitions or one every other week, but was patient with acquisitions. Patient with acquisitions. When others were paying up for metro markets, he held off and did suburban and rural, bought metros after they flopped
    • Invented the term EBITDA for lenders and investors and did not focus on EPS
    • Malone also partnered with young programmers, including Ted Turner and Bob Johnson (BET) – included Discovery, Encore, QVC and BET
    • He also established TCI Ventures for non-cable assets, which were very successful (Sprint/PCS joint venture was sold to Sprint for $9bn or 28x ROI, and General Instruments was sold to Motorolo for $11bn)
    • In the early 1990’s, the regulatory environment soured for cable companies (limited access to debt capital) and increased regulation from the FCC
    • In the late 1990’s, competition from satellite TV increased and Malone sold to AT&T in 1998 for 30% return from 1973 to 1998
    • Maintained a ratio of 5x debt to EBITDA and also avoided cross-collateralization, so a system could fail without taking down the rest of the company
    • Would only purchase companies for 5x cash flow after the easily quantifiable benefits from programming discounts and overhead elimination had been realized
    • Repurchased over 40% of the company’s stock during his tenure
    • Managed NOLs, which allowed him to sell off systems without paying taxes and almost always sold assets for stock to avoid taxes
    • Did not invest to improve operations, relative to industry peers
    • Malone had a COO, J.C. Sparkman, was managed the operations through a rigorous budgeting process
    • The company had an employee stock purchasing program, in which the company matched the employees stock purchases and the program was encouraged at all levels of the company – not one senior exec left during his first 16 years
  • Katharine Graham (Washington Post) 
    • Graham took over as CEO of the Post after her husband committed suicide in 1963
    • At 46, she hadn’t been regularly employed for the last 20 years
    • Graham’s stock purchases and acquisition activity were at the beginning and end of her tenure, which coincided with two severe bear markets, one in mid 1970s and another in the early 1990s
    • From the company’s IPO in 1971 to when she stepped down in 1993, the Post generated a 22.3% return
    • When she took over leadership at the Post, it owned the Post, Newsweek and three television stations
    • In 1974, Buffett acquired 13% of the company and joined the board and advised her to start buying back stock
    • During Graham’s tenure, the company purchased 38.5% of shares outstanding – mainly during the 1970’s and early 1980s at single digit P/E multiples
    • Acquired cell franchises in 1983 for $29mm and sold for $197 5 years later as prices soared
    • Also acquired Capital Cities cable television assets for $350mm in 1986 (Capital Cities was forced to divest these and Buffett made the suggestion) – Capital Cities was purchased with debt, but paid down in less than 3 years
    • Extremely disciplined CapEx budgeting process – when other companies spent hundreds of missions to install prepress facilities, the Post delayed these until prices had come down
    • For acquisitions, they had an 11% cash return without leverage threshold over a 10 year period
    • In 1981, Hired a very strong COO – Dick Simmons, who doubled the company’s newspaper and television margins
    • Post has been impacted by overall decline in newspaper business, but has fared better than its peers – compared to New York Times, which overpaid for Ask.com and built an elaborate new HQ building
  • Bill Stiritz (Ralston Purina) 
    • Served in the Navy and then finished his degree at Northwestern and started his career at Pillsbury. He stocked shelves as a field sales rep, where he learned the distribution channels and then spent time at Gardner, where he learned to take a quantitative approach to marketing
    • At age 30 in 1964 he joined Ralston Purina and ran the grocery products division starting in 1971, which increased operating profits 50x during his tenure
    • During the 1970’sRalston had followed suit of other CPG companies and expanded into unrelated businesses – acquiring Jack in the Box, St. Louis Blues hockey team and ski resorts – the stock suffered and CEO stepped down in 1980 with the stock no moving in a decade
    • The Board looked for a new CEO and Stiritz wrote a letter to the board about his plan for the company and was awarded the position in 1981
    • He sold off non-core businesses in early years (Jack in the Box and hockey team, food service operations) and redeployed the cash into stock buy backs and acquisitions – focusing the company on branded operations
    • Two largest acquisitions were Continental Banking (Wonder Bread and Twinkies) and Energizer Batteries, which he bought from distressed sellers and continued to invest in these platforms with marketing and tuck-in acquisitions
    • He also started using spin-offs, which deferred capital gains and allowed for a better alignment of management – spunoff entities into a new entity, Ralcorp
    • Sold Ralston’s protein business to DuPont for stock
    • He sold Ralston to Nestle in 2001 for $10.4bn or 14x cash flow, generating a 20% return for shareholders over the time period
    • Deployed leverage for acquisitions and stock repurchases – 2.6x debt to EBITDA relative to peers at 1.7x
    • Acquired 60% of Ralston’s shares during his tenure
    • Pre-tax profit margins increased from 9% to 15% and return on equity more than doubled to 37%
    • Very similar to Berkshire Hathaway – extracting capital from low return textile business to deploy in higher return insurance and media
  • Dick Smith (General Cinema)
    • General Cinema was founded in 1922 in Boston and when the founder Phillip Smith died in 1962, his son Dick Smith took over the business at 37
    • Dick Smith graduated from Harvard, was a naval engineer and then went to go work in the family business.
    • In the 1960’s Smith opened new locations in suburban areas with two new strategies – lease financing (vs. traditional land purchase) and added more screens to bring more people into theaters to benefit high margin concession business
    • By the late 1960’s, Smith realized the theater business had a limited runway, so he looked at other business and made several very successful acquisitions, which were later sold
      • Acquired American Beverage Company, the largest Pepsi bottler for 5x cash flow and financed the purchase through a sale leaseback of the manufacturing facilities.  He had exposure to the beverage business and Pepsi bottlers traded at a discount to Coke bottlers and prices were attractive from second and third generation family owners.  Expanded through add-on acquisitions of bottlers in the 1970s
      • Acquired Carter Hawley Hale, a large retail conglomerate (including Neiman Marcus).  Received a 10% preferred security and borrowed at 6% to 7% and option to buy Walden Books
      • Acquired Harcourt Brace Jovanovich (HBJ) in 1991 , a publishing business, for $1.6bn over only 6x cash flow, as other buyers were deterred by complex balance sheet
    • Very smart exits
      • In 1989 sold the Pepsi bottling operations for over $1bn after add-on acquisition prices increased and Coke launched an aggressive attack on Pepsi
      • In 2003, sold the HBJ publish assets to Reed Elsevier and in 2006, sold Neiman Marcus to TPG
      • From 1962 to 2005, generated a 16.1% return or 684x ROI
  • Recruited a very small, young set of executives of his peers when he became CEO
  • Key metric was cash earnings (earnings plus depreciation)
  • Acquired ~30% of the company’s stock during his tenure
  • Warren Buffett (Berkshire Hathaway)
    • Graduated from Columbia in 1952 and asked Graham for a job, but was turned down so moved to Omaha and started as a broker, then later worked for Graham from 1954-56
    • In 1956, he launched is partnership in Omaha with $105K (at the time his network was $140K or over $1mm in today’s dollars).
    • From 1957 to 1969, generated returns of 30.4% and closed partnership due to bull market, only retaining his position in Berkshire Hathaway, which he acquired in 1965
    • Market cap of Berkshire was $18mm – he put in place a new CEO who sold off inventories and excess equipment to generate $14mm, which Buffett used to buy National Indemnity
    • In the 1970s and 1980’s with inflation fears, Berkshire invested in brands, which were asset light and could raise prices
    • Discipline in underwriting operations – in 1986, National Indemnity wrote $366mm of premiums and by 1989 they only wrote $98mm and it took them another 12 years to exceed $100mm – allowed them to realize 6.5% underwriting profit vs. 7% loss for P&C industry
    • No regular budget meetings for Berkshire companies – only hear from Buffett unless they need advice or capital
    • No share buy backs – were counter to investor partnership approach

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"I have known no wise people who didn't read all the time — none, zero." – Charlie Munger

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