← The Latticework Podcast, presented by MOI Global
The Latticework Podcast, presented by MOI Global
Shareholder Value Creation According to Henry Singleton
01:53:19
Shareholder Value Creation According to Henry Sin…
Loading summary
Transcript219 lines
- [00:02]
A
Hello, I'm John Mihailjevic with the Manual of Ideas. Visit us at www.manualofideas.com. today we have a program on Henry Singleton, one of the nation's most brilliant engineers and businessmen of the 20th century. In this program, we will look at a book on Mr. Singleton entitled Distant Force and authored by George Roberts, a longtime business associate and president of Teledyne Corp. Which Henry Singleton founded. First, we're gonna survey a few articles on Henry Singleton and give you an overview of his life before going through some of the most interesting passages of the biography that George Roberts wrote about Mr. Singleton. In a New York Times obituary in 1999, the year of Mr. Singleton's death, Leon Cooperman of Omega Advisors is quoted as saying that Henry Singleton understood how to move between real assets and financial assets in a way you don't see today. He was the most brilliant industrialist that I've ever met, and I've met many, said Mr. Cooperman. Singleton was said to have an ability to recite lengthy passages from Shakespeare and other poets. And he also liked to play chess without looking at the board, keeping the positions of the pieces in his head, according to the New York Times article, and quoting Arthur Rock, a venture capitalist who provided the initial financing for Teledyne and served on its board for 33 years. Mr. Rock said about Singleton that he really didn't care what other people thought. His style was to really stay in his office and to think things up and to get other people to carry them out. Singleton was not only a businessman but also a real scientist. He invented a method for degaussing submarines, which allowed American submarines to go by German submarines without being detected. He has many patents to his name and has been quite well respected in scientific circles as well as business circles. Here's a comment by Bill Nygren, fund manager of the Oakmark fund, in a July 2002 letter to investors. Nygren says that in 1960, and I quote, Henry Singleton founded Teledyne, a company that grew rapidly for a decade via a combination of internal growth and acquisitions. When the opportunities for value added acquisitions disappeared, Singleton switched gears. From 1970 to 1984, he used his cash to repurchase 82% of Teledyne's grossly undervalued common shares. The result? The stock price increased from $2 to $250. Singleton says Nygren was a pioneer of maximizing shareholder value by shrinking the business. Quite an interesting concept, and we'll get into this a little bit later in the program. But really one of the keys To Singleton's success at creating shareholder value was his ability to reduce the share count and really not worry so much about growing the size of Teledyne as about growing value on a per share basis. And in the book the Money Masters, John Train writes, and he quotes Buffett, Warren Buffett, as saying that the failure of business schools to study men like Singleton is a crime. Instead, they the business schools hold up as models executives cut from a McKinsey Co cookie cutter. And Buffett lamented that. Warren Buffett himself wrote in a letter to shareholders in 1980, if a fine business is selling in the marketplace for far less than its intrinsic value, what more or more profitable utilization of capital can there be than significant enlargement of the interest of all owners at that bargain price? And so Buffett was, in a sense, advocating for share repurchases below fair value. Of course, Berkshire has not pursued that avenue since. Buffett has felt most of the time that he can deploy the capital in other businesses. And Buffett himself has taken the view that shareholders of Berkshire should really be shareholders for the long term and that he'd prefer not to enrich one group of shareholders, presumably the ones staying with the company at the expense of another group, presumably those who would be selling at a low price if Berkshire was buying back shares. John Trane also quotes Buffett as saying
- [06:18]
B
that
- [06:20]
A
Henry Singleton has the best operating and capital deployment record in American business. And that's quite a statement coming from. From Buffett himself. Now, of course, there have been many stories that have not been very complimentary of Henry Singleton. And there was a story in BusinessWeek in 1982 that really blasted him for buybacks. And obviously that story, having been written in 1982, just before the great bull market, could not have come at a worse time for Business Week, because the buybacks that Singleton was executing at the time proved to be extremely prescient. Also, one of the things that Singleton believed was engaging in an uncertain world with a flexible mind. And there's a quote by Singleton that says, I know a lot of people have very strong and definite plans that they've worked out on all kinds of things, but we're subject to a tremendous number of outside influences, and the vast majority of them cannot be predicted. So my idea is to stay flexible. My only plan, he said, is to keep coming to work every day. This improvisational Grand Design BusinessWeek magazine saw as the milking of tried and true operating businesses and the diverting of funds to allow the chairman to, quote, unquote, play the stock market. Obviously this criticism is not warranted, but it's something that is pointed out in an article in the New York observer that was published in 2003. That article also goes on to say that Singleton's reserve was icy. Singleton's disdain for the press was complete and thoroughgoing. The Businessweek article just rolled off his back. It puzzled him that his friend Leon Cooperman would bother to draft a nine page rebuttal complete with statistical exhibits. Why go to the trouble? Singleton might have said. Another point that the Businessweek article failed to raise was really under what circumstances the buybacks that Teledyne was making occurred. And there's a really stark contrast between companies doing repurchases when their executives are selling stock and companies repurchasing stock simply for the benefit of their continuing shareholders. Now it's interesting to note that Henry Singleton never sold a single share of Teledyne, and so the share repurchases actually made his percentage stake in the company grow over time. And this contrasts sharply with many companies that have come to be large repurchasers of stock in recent years, often at prices way above intrinsic value rather than below value. One of the perhaps most infamous recent examples is Countrywide Financial, which spent nearly 2 billion on stock buybacks over two years, and subsequently its stock price lost more than 75% of its value. Now while the buybacks were occurring, Countrywide CEO Angelo Mozillo was selling shares, and that is something that would have been antithetical to a Henry Singleton. Now let's look at an article on Singleton that was published in Forbes magazine in July 1979. There's a lot of interesting tidbits here, and so I want to walk through a few of them. It says about Singleton. The article describes him as the aloof son of a well to do Texas Ranger is noteworthy in two respects for the size and quality of the company Teledyne that he built from scratch, and for his almost arrogant scorn for most conventional business practices. The article goes on to say that what really distinguishes Teledyne beyond its position on various things lists is that during a period when inflation has been eroding most corporate profit margins, a period when corporations have been selling more and enjoying less, Teledyne's profitability has been growing, not shrinking. Again, the article was written in 1979, obviously after a period of rampant inflation in the U.S. now it says this by way of background on Henry Singleton. He spent three years at Annapolis, then switched to the Massachusetts Institute of Technology, where he earned his bachelor's, master's and doctorate of science, all in electrical engineering. This reminds me a little bit of John Malone of Liberty, who went to Yale, a liberal arts school. And yet Malone studied science there and has since obviously gone on to greatness in business. Singleton was educated as a scientist, not a businessman. He did not leap into entrepreneurship, but trained for it over several decades at the best schools of practical management in the US first as a scientist at General Electric, then as a management man at Hughes Aircraft, then in the early days at Lytton Industries, when founder Charles Tex Thornton and Roy Ash were building one of the first truly hot companies of the post World War II era. Not until 1960, when he was 43, did Singleton found Teledyne. According to the Forbes article, Singleton, and this has been observed by several folks, was supremely indifferent to criticism. During the early 70s when investors and brokers alike lost their original enthusiasm and deserted Teledyne, Singleton had Teledyne buy up its own stock stock. As each tender offer was oversubscribed by investors of little faith, Singleton took every share they offered. When Wall street, indeed even his own directors urged him to ease up, he kept right on buying. Between October 1972 and February 1976, he reduced Teledyne's outstanding common 64% from from 32 million shares to 11.4 million. Once again, quoting from the Forbes article, there's a remarkable statement by Singleton. He says, I don't believe all this nonsense about market timing. Just buy very good value and when the market is ready, that value will be recognized. Now this is a really interesting statement by Singleton on market timing because one can obviously look at his repurchases of stock at low prices and issuance of stock when it was highly priced to make acquisitions as nothing other than market timing. But Singleton did not view it that way. He never operated with a compass that said, how can we time the stock price? Is the stock going to go up or down? He really operated with the mindset that if we're buying the stock when it's undervalued, it'll go up at some point. And if we are making acquisitions, you using a currency that may be overvalued because Wall street is too optimistic, then we might be getting a good deal. And that's really key because sometimes when investors are able to acquire assets at below their intrinsic worth, in hindsight it'll look like very good market timing when in fact there was no market timing attempted. And now let's quote a little bit more from the article by Forbes in 1979. What is most impressive is that Teledyne's capital shrinkage was not achieved at the expense of growth or by partially liquidating the company or all. During these years, Teledyne kept growing where in its early years it had grown through acquisitions, 145 in all. In its capitalization shrinking days, Teledyne grew from within and steadily. In 1970, when acquisitions had ceased, revenues were 1.2 billion. In 1974, 1.7 billion. In 1976, 1.9 billion and so on. This year, that is. In 1979, Teledyne will do 2.6 billion. Yet in the year sales were more than double from the 1.2 billion level. Teledyne made only one minor acquisition. Nor did Teledyne get deeply into debt. In the early stages of his stock buying program, Singleton did have Teledyne borrow rather, rather heavily. But he paid the debt down out of the company's cash flow. When investors disillusioned with growth again began to be dividend conscious, Teledyne continued to refuse to pay a cash dividend, the second highest priced stock on the board after Superior Oil. Teledyne's cash yield is zero according to the Forbes article. Now this is. I find this quite interesting and considering that at the time in the late 70s, large companies were really expected to pay a nice dividend and equities to some extent were valued on dividend yield. And perhaps so one of the reasons why Teledyne's stock price may have swung so wildly is that there was no dividend and therefore the shares didn't have something tangible, namely a dividend yield that would help investors peg the price of the stock. This of course turned out to be of great advantage to Teledyne's long term shareholders because it allowed Singleton to buy in the shares when they got too cheap and to issue stock when it got ahead of itself. Now the article goes on to say let's put Singleton in perspective. During the time when he was all but ignoring Wall street, many of America's top executives were trimming their sails to Wall Street's changing winds. And the article talks of a few interesting examples. In 1974, Textron chairman William Miller wanted to go after troubled Lockheed and his shareholders would have been delighted with this. But analysts really questioned that proposed action and Miller backed away. Now Textron would have had an opportunity to really get a big chunk of Lockheed stock when it was selling at $3 a share. Only five years later it was selling at 21 a share. So giving in to Wall street analyst demands, Textron was worse off. Another Example that's mentioned is American Express attempting a tender offer for McGraw Hill. And that would have been a good
- [20:18]
B
deal at the time.
- [20:19]
A
But American Express Chairman James Robinson III ultimately backed off that deal because there was resistance on the street. In 1968, Xerox, which was trading at a P multiple of 53, was about to merge with CIT Financial, which was a major company at the time, trading at a much lower multiple. And so this would have been a very accretive deal for Xerox. They could have done it in stock. But investment analysts really question the deal. Why dilute a high tech stock with a grubby money lending business? And ultimately Xerox chairman Peter McCullough retreated from this deal and instead blew $920 million for scientific data Systems, a fledgling computer company. And so instead of making a great deal, Xerox ended up making a bad deal. The Forbes article says about that, that it would be hard to picture Henry Singleton trying an unfriendly takeover.
- [21:40]
B
But it would be harder to picture
- [21:41]
A
him backing away as American Express did. Once he had made an offer. It would be inconceivable for him to back away from the Lockheed deal or the CIT deal just because the brokerage fraternity disapproved. He kept buying up his own stock with both hands when the street called him crazy. So far, the article says, we have not even mentioned what Teledyne makes or sells. That's because what Teledyne makes or sells is less important than the style of the man who runs it. The fact is that Singleton unashamedly runs a conglomerate. What are the products and services upon which Singleton has put his stamp? Offshore drilling units, auto parts, specialty metals, machine tools, electronic components, engines, high Fidelity speakers, unmanned aircraft and water pick home appliances. So really what's evident here to me is that for Singleton, it really all did come down to financial return. And that's what a lot of CEOs forget these days. They think that their company is in a particular business and it's destined to be in that business forever. And whatever free cash flow the business throws off is mindlessly reinvested in that business, when really the purpose of a company is to maximize value for its shareholders. And so a company does not have a requirement to stay in a business that's failing or whose margins are shrinking or whose returns on capital are insufficient to justify continued reinvestment. Now, unfortunately, a lot of CEOs to this day forget that.
- [23:51]
B
Now the Forbes article goes on to
- [23:54]
A
mention Singleton's partner, George Roberts, who is also author of the Book we'll delve into a little bit later. And it says Singleton works closely with his president, George Roberts, who has his doctorate from Carnegie Mellon in metallurgy. Roberts is the chief operating officer and an extremely effective one. This is not the kind of conglomerate where headquarters staff only loosely supervises a number of good sized, semi independent operations. Taking a leaf from Harold Jeannins book, Teledyne has super tight financial controls. Taking a leaf from 3M's corporate books, it breaks up a huge business into a cornucopia of small profit centers. 129 in Teledyne's case. And so far in 1979, writes Forbes, all 129 of those are profitable. That's obviously quite a remarkable feat. Now George Roberts, Singleton's partner, goes on to say, forget products. Here's the key. We create an attitude toward having high margins in our system. A company can grow rapidly and its manager can be rewarded richly for that growth if he has high margins. If he has low margins, it's hard to get capital from Henry and me. So our people look and understand having high margins gets to be the thing to do. No one likes to have trouble getting new money. Now this is interesting that Roberts focuses on margins and not return on capital. Obviously the two are highly correlated, but it's just an interesting distinction that for Roberts anyway, margins were the thing that made a business good. Roberts also says the only way you can make money in some businesses is by not entering them. And that's really another statement that a lot of CEOs should heed. The airline industry certainly comes to mind here. Warren Buffett has observed that the airline industry since inception until today has had a cumulative loss. And according to him, it would have been better for society if the airline industry had never come into being. Be that as it may, I think the takeaway for individual companies is that sometimes the best thing to do is to do nothing and to preserve capital for when it can be deployed in a rewarding way. Now Forbes also states that Singleton has an intellectual
- [27:25]
B
and old fashioned respect for
- [27:28]
A
cash instead of bookkeeping profits. And there's something that says you can't pay bills with bookkeeping profits. And Fairholme Fund manager Bruce Berkowitz comes to mind in this context because he has said repeatedly that cash is the only thing you can spend. And that's why Berkowitz focuses on the free cash flow that his investee companies generate. Now let's look at value creation from a string of acquisitions and how that value was created when Singleton used stock to buy companies subsequent to that, when his own stock became cheap after the conglomerate crash of 1969, Singleton went in and bought enough of it to shrink the capitalization back to where it was was when Teledyne had been a much smaller company. It was as though he had been able to renegotiate his earlier purchases at 85% off the original prices. And that's a really interesting way to look at this. If one can use stock as currency at inflated prices to acquire businesses that are fairly priced or even underpriced, and then one's own shares decline, as they inevitably do at some point, simply due to volatility in the market, sometimes companies could actually renegotiate, in a way, their earlier purchase price by buying back their own stock, thereby eliminating the shares that were issued in the previous acquisition. Singleton was thrust into the role of portfolio manager at Teledyne quite by accident. It might never have happened, Singleton told Forbes, if Teledyne's Argonaut insurance subsidiary had not got into serious trouble. Writing Medical man malpractice insurance in 1974, Singleton is quoted as saying, the idea of indexing isn't something I believe in or would follow, he says with scorn, according to Forbes. And this is quite amazing considering that this is a statement made in the 1970s, way before indexing had ever reached the extent to which it's used today. Here's how Singleton chose stocks for the portfolios of Teledyne's insurance subsidiaries. He decided to buy those companies he felt were well run and undervalued. His biggest move was to put over $130 million, or 25% of his equity portfolio into Lytton, a company that he had known for a long time. Singleton is quoted as saying, it's good to buy a large company with fine businesses when the price is beaten down over worry about one problem. Lytton's problems, or rather Lytton's problem, was not a general one, but an isolated problem, as ours was with Argonaut Insurance. To me, it was hard to believe the heads of a 3 billion or 4 billion business would not be able to handle one business problem, said Singleton. And this is really quite an interesting statement about investing and security selection. And Warren Buffett has talked about this as well when discussing his purchase of American Express back in the days of the Salad Oil scandal, when a single issue unrelated to American Express's business franchise had depressed the stock price so much that Buffett saw it as a phenomenal opportunity to acquire a quality business that was being rocked by one issue that ultimately would not impair the value of the entire business franchise. And so this is something that as investors, I think we all should try to look for as an opportunity to pick up good businesses when there's an issue that scares the market at large. Singleton also bought many insurance company stocks for the portfolio and also for the company to run. Insurance being a business that Singleton knew
- [33:02]
B
very well,
- [33:05]
A
he also bought blocks of oil stocks and had good gains in those. Teledyne companies did geological exploration and made drilling rigs. So again, Singleton was choosing a field he understood very well in which to make investments in public securities. Now, here's Singleton's reasoning on the subject of tenders. In this climate where tender offers mean overpaying, I prefer to buy pieces of other companies or our own stock or expand from within. The price for buying an entire company is too much. Tendering at the premiums required today would hurt, not help our return on equity, so we won't do it, singleton said. Also, why pay 10 times earnings in a tender for a company when I can buy pieces of companies for six times earnings and my own stock for five times earnings? And this once again goes to his views on allocating capital to where
- [34:32]
B
that
- [34:32]
A
capital can go into the most undervalued assets. He was not an empire builder. He was somebody interested in value creation on a per share basis. Singleton says he wouldn't sell any of his blocks to would be acquisitors. This is regarding some of the large positions in marketable securities that Teledyne held, such as Litton. There was a lot of speculation at the time that Singleton was acquiring large blocks to either then make a bid for companies himself or obviously that he might sell out at a premium to would be raiders. Singleton, however, remained a friendly acquirer and ultimately that was to his benefit. That's another parallel to Warren Buffett, who also has gone to painstaking lengths to make sure that companies know he is a friendly investor rather than a potential threat. Here's more on dividends that Teledyne didn't pay, Forbes says in 1979, says a few years ago, when Teledyne stock was selling, selling around 10, one of Singleton's closest associates begged him to pay at least a token dividend. Singleton refused. He still refuses. To begin with, he asks, what would the stockholder do with the money? Spend it. Teledyne is not an income stock. Reinvest it. Since Teledyne earns 33% on equity, he argues he can reinvest it better for them than they could for themselves. Besides, the profits have already been taxed, paid out as dividends. They get taxed a second time. Why subject the stockholders money to double taxation? What is Henry Singleton's own sense of economic reality at a time when many top businessmen are gloomy about the future of the company country? This is forbes speaking in 1979. Singleton has this to I'm convinced the
- [37:03]
B
coming recession will not be too deep
- [37:06]
A
or long and will have a good recovery. Following is so fashionable to complain about the restrictive regulatory environment in Washington that makes people forget how very much worse things could be long run. I'm happy about the prospects for America, for for business and for Teledyne. While this was a statement SINGLETON Made in 1979, it's something that could be echoed today in 2009.
- [37:38]
B
And it's essentially what Warren Buffett has
- [37:41]
A
been saying ever since late 2008 when investors got very concerned about the outlook. Some thought the world was coming to an end. And yet as Singleton pointed out 30 years ago, that same sentiment would have been absolutely the wrong sentiment. And so I think this is another mark of really great investors is that they have an ability to look beyond the now and imagine what could be and what will be in the future. And so when the broader market becomes too optimistic, those investors become cautious. And when the market becomes fearful, those investors become more optimistic because they see great values that they can acquire and ride for the long term. Here's another quote by Singleton. I do not define my job in any rigid terms, but in terms of having the freedom to do what seems to me to be the best in the best interests of the company at any time.
- [39:05]
B
This is obviously
- [39:08]
A
a very broad statement. And coming from managers without a track record of creating shareholder value, this statement could be frowned upon. But having a Henry Singleton say this is really quite interesting because here's a guy who created value because he was flexible and did not paint himself into a box or an industry or really exceed to the demands of investment analysts. Now let's turn to the biography by George Roberts entitled Distant Force. By the way, a book that I would highly recommend. It's available on Amazon.com as well as by the author himself. If you do a Google search for George Roberts Distant Force Roberts actually has some data here on what Singleton really accomplished at Teledyne. An investor who put money into Teledyne stock in 1966 achieved an annual return of 18% over 25 years or a 53x return on invested capital versus 7x for the S&P 509x for general Electric. Now, I believe this is from 66 through 93. Roberts also states in the book, and we're going to quote quite a few
- [41:05]
B
passages now,
- [41:08]
A
that Singleton believed and often said that the key to his success was people, talented people who were creative,
- [41:17]
B
good managers and doers.
- [41:19]
A
From the start, he surrounded himself with that kind of person.
- [41:24]
B
Henry's search for talented people went down even to the individual managers of his smallest companies.
- [41:33]
A
Now today, stressing the importance of people is something that all companies do and often it's just a statement that is meant for PR consumption. But Singleton was not a man prone to hyperbole or making statements simply for PR reasons. So it's quite notable that he put so much emphasis on the talent of his employees and executives, George Roberts being one of those. And actually the way that Roberts ultimately teamed up with Singleton was in 1966 when Roberts was at Vanadium Alloys Steel Company in Pennsylvania, also known as Vosco. The two friends who had remained in
- [42:32]
B
contact over the years
- [42:35]
A
agreed that a
- [42:36]
B
merger of their companies would be profitable to both. With that merger, George became president of Teledyne and with Henry as Teledyne's chief executive officer and chairman.
- [42:50]
A
Now in the book that we're gonna go through over the next half an hour or so, Roberts searched his archive of corporate documents to construct a memoir that describes the first decade of aggressive acquisitions and diversification. Henry's reasons for adding financial institutions to his highly technical mix, his controversial program of aggressive stock buybacks, the spin off to shareholders of certain entities which greatly broadened their flexibility in handling their investments, and finally, the difficult days of hostile takeover attempts that followed Singleton's retirement from Teledyne, Singleton was born a farm boy in Texas. Born on November 27, 1916 on a small ranch in Hazelet, Texas, some 20 miles north of Fort Worth, where his father raised cotton and cattle. This early rural background gave him a love of the land and cattle ranching that never left him and led him in later years to become one of the largest private landowners in the United States. Roberts writes that he can attest to Singleton's lifelong fascination with love of and belief in the importance and value of real estate of all types. His family, Teledyne and property were clearly the three major loves of his life. According to Roberts. Speaking about Singleton, one of Henry's great talents was mathematics. At the academy. This is the Naval Academy at Annapolis. An initial intense two year program of
- [45:06]
B
mathematics covered what would normally be done
- [45:08]
A
in three or four years at the average college. At the end of those first two years, Henry ranked first in mathematics in our class of 820 students.
- [45:26]
B
Now let's see what Roberts writes about
- [45:29]
A
the beginnings of Teledyne. Henry had three great ideas in creating and growing Teledyne. His first was to recognize the future importance of digital semiconductor electronics when this technology was in its infancy and by selective acquisitions create a strong base in this growing field on which to diversify his company. The second was to acquire and organize a selection of financial companies within his company to provide a strong financial base which also allowed the rest of the financial world to recognize Teledyne as an important entity and potential client. The third was his innovative use of
- [46:15]
B
stock buybacks to further strengthen the corporation
- [46:19]
A
and enhance shareholder value. Sales of Teledyne in 1961, the first full year of operation, were 4.5 million
- [46:32]
B
with a net income of 58,000 and a per share income of 13 cents. By the end of the second fiscal
- [46:43]
A
year in October 1962, Teledyne sales had
- [46:47]
B
reached 10.4 million with a net income of 331,000. Now, in making many of the acquisitions that Teledyne made,
- [47:01]
A
Roberts says Henry depended
- [47:04]
B
on several very talented management people to survey the field for possible acquisitions and evaluate them as to their technique, technology, management, history and markets and desirability as Teledyne properties. Henry, however, made the final decisions based on his judgment as to their value, suitability and potential profitability as well as their fit into the rapidly expanding family of Teledyne companies. One of these men was Claude Shannon, who was a good friend of Henry's from his days at MIT and was a director of the company company for many years. He also played a valuable part in helping Henry evaluate many of Teledyne's important acquisitions.
- [47:50]
A
Now this is quite notable because Claude Shannon is a very famous scientist of the 20th century. In fact, there's quite a bit written on him in William Poundstone's excellent book Fortune Spirit Formula.
- [48:09]
B
Writes Poundstone, there are few sure things. Least of all in the competitive world of academic recruitment. Claude Shannon was as close to a sure thing as existed. That is why MIT was prepared to do what was necessary to lure Shannon away from AT&T's Bell Labs and why the Institute was delighted. What Shannon became a visiting professor in 1956. Shannon had done what practically no one else had done since the Renaissance. He had single handedly invented an important new science. Shannon's information theory is an abstract science of communication that lies behind computers, the Internet and all digital media. It's said that it is one of the few times in History, or somebody founded the field, asked the right questions and proved most of them and answered them all at once was noted by Cornell's Toby Berger. So here's somebody, Claude Shannon, who in terms of scientific accomplishment, perhaps even exceeded Singleton himself. But this is the kind of man
- [49:28]
A
that Singleton attracted as a director of
- [49:31]
B
TE and someone to help him with acquisitions. Now, Shannon was also an investor himself,
- [49:38]
A
and in the book Fortune's Formula, Poundstone
- [49:43]
B
writes that in the late 1950s, Shannon began an intensive study of the stock market that was motivated both by intellectual curiosity and desire for gain. He filled three library shelves with something like a hundred books on economics and investing. The titles included Adam Smith's the Wealth of Nations, John von Neumann and Oscar Morgenstern's Theory of Games and Economic Behavior, and Paul Samuelson's Economics, as well as books with a more practical focus on investment. One book Shannon singled out as a favorite was Fred Schwed's Rye classic Where Are the Customers Yachts? At the time Shannon was designing the roulette computer with Thorpe, Shannon kept notes in an MIT notebook. Part of the notebook is devoted to the roulette device and part to a wildly disconnected set of stock market musings. Shannon wondered about this device, statistical structure of the market's random walk, and whether information theory could provide useful insights. He mentions such diverse names as Bachelier, Graham and Dodd, Magee, AW Jones, Morgenstern and Mandelbrot. He considered margin trading and short selling, stop loss orders and the effects of market panics, capital gains taxes and transaction costs. Shannon Graff's short interest in Lytton Industries shorted shares versus price. The values jump all over with no evident pattern. He notes such success stories as Bernard Baruch, the lone wolf, who ran 10,000 into a million in about 10 years, and Hetty Green, the witch of Wall street, who ran a million into 100
- [51:44]
A
million in 30 years. As we'll learn, Singleton's record was quite remarkable as well.
- [51:57]
B
Now, as background to Teledyne's acquisition period, writes Roberts, it is interesting to consider what was happening in that decade of the 60s, during and after the end of World War II. There were all sorts of emerging new technologies, new ideas, new markets, and new opportunities that hadn't existed before the war. There were many opportunities for small new companies to go into business during the war to provide the diverse products needed for the war effort, and many did so very successfully. In addition to this, many veterans came out of military services at the war's end and through the GI Bill had an opportunity to get tuition free education in some of the most prestigious universities and schools in the country. They learned technologies they might never have
- [52:46]
A
had an opportunity to learn otherwise.
- [52:49]
B
They studied basic science skills such as physics, chemistry and mathematics, and also specialized technologies such as electronics, metallurgy, geophysics, oceanography and others. And some of these men and women used their new knowledge to start companies,
- [53:05]
A
often on just a shoestring, with their own family money. By the 1960s, many of these companies
- [53:12]
B
had matured into established, profitable companies and many of their owners were ready to relinquish control and do other things with their lives. Or they had reached the point where they needed more capital to control, continue to develop, and were looking for ways to do that. Then along came a company such as Teledyne with a high PE ratio that was growing rapidly and was interested in acquiring them.
- [53:36]
A
It was a wonderful opportunity for these
- [53:38]
B
people, writes Roberts, and many of the companies that Teledyne acquired were this type of family owned company. Now in a September 1967 interview with
- [53:51]
A
Forbes magazine, Henry Singleton we have what is called a management inventory.
- [54:00]
B
We work our heads off to increase
- [54:02]
A
our own capability at collecting and promoting the right people.
- [54:07]
B
To the extent we succeed, the whole company will succeed. We increase our bets on the men who seem to be performers. We try to get all our people and instead of competing amongst each other within Teledyne, to look outside and see that the real competitors are all the other large corporations in the U.S. our objective is to increase our rate of earnings faster than they do. It is a lot of fun. As a result, we visualize it as a competitive game. And it's been observed many times that the best managers, and the best investment
- [54:48]
A
managers for that matter, view what they do really as a game.
- [54:53]
B
They love the challenge that it presents, the competition, and they excel at that.
- [55:00]
A
And that's really a common trait that one will encounter with many of the best managers. In 1963, Teledyne entered the field of optics with the acquisition of Kiernan Optics.
- [55:19]
B
This was a company founded by Russ Kiernan in 1950.
- [55:24]
A
Russ has some interesting recollections of Singleton and Teledyne.
- [55:31]
B
He says, my first contact with Henry
- [55:34]
A
was in 1960 through a professor at
- [55:38]
B
USC, where I was teaching in the Graduate School of Business, which I was doing concurrently with running my own company, Kiernan Optics. Henry's interest in my company was because he wanted a precision optical capability while he was striving to obtain the IHAS Integrated Helicopter Avionics System contract.
- [55:59]
A
Our first meeting was brief, but but it was one in which Each of
- [56:03]
B
us spoke with complete candor and that
- [56:06]
A
became the basis for our lasting relationship.
- [56:09]
B
All our meetings were short, but they were very effective.
- [56:13]
A
In our first meeting we had agreed
- [56:15]
B
on a mutually satisfactory figure for the acquisition. But during the short period in which the deal was being consummated, the Teledyne share price declined slightly. I requested a renegotiation, but Henry quickly responded.
- [56:32]
A
You wouldn't be making that request if
- [56:34]
B
the price had gone up.
- [56:37]
A
End of discussion.
- [56:39]
B
Looking back on that, I thought, this is the kind of man I respected and wanted to work for. Either during the acquisition period or shortly thereafter, Henry made a very informal appearance
- [56:51]
A
at Kierdan Optics, which created an immense impression on on our employees.
- [56:58]
B
It had been my intention to return to USC to teach full time and write a book, but Henry asked me to stay around for a while. That for a while lasted 18 years as I saw Teledyne grow from a 20 million a year company into over 3 billion annually during the very early period 1963-60.
- [57:22]
A
In 1864, Henry sought various methods for
- [57:25]
B
raising cash to support company operations.
- [57:29]
A
One technique he used was to borrow
- [57:32]
B
on the physical inventories of the individual companies.
- [57:38]
A
Another tidbit shared by Kiernan is that
- [57:43]
B
Henry would sometimes call me and invite
- [57:46]
A
me to have lunch with him. We always went to a Gardena poker parlor. Because the lunches were inexpensive.
- [57:54]
B
I would drive down and pick Henry up at his El Segundo office.
- [57:59]
A
These lunches gave us the opportunity to
- [58:01]
B
get away from the office environment for discussions about the company or just to chat.
- [58:06]
A
When it was time to pay for our lunches, Henry would always have me
- [58:10]
B
pick up the check. I was surprised at first, but I
- [58:14]
A
was delighted to have the privilege of having lunch with him.
- [58:18]
B
I think maybe he was continuing to teach me the value of frugality by not inviting me to an expensive restaurant.
- [58:24]
A
And the thread of frugality really goes
- [58:28]
B
through everything
- [58:30]
A
that I've read about Singleton and Teledyne and also about other successful business managers. While some expenses trivial, that culture of frugality ends up permeating an organization and the results can be enormous.
- [58:53]
B
Kiernan also writes that as successful as the company became, Henry never felt that luxury automobiles were a necessity at any facility.
- [59:07]
A
In fact, at one point Henry suggested that Ford Pinto's be used for company
- [59:12]
B
cars at all facilities. This caused a bit of a problem
- [59:16]
A
when Jim Stittel and four of his
- [59:19]
B
staff, they were all big men in
- [59:20]
A
the 6'5 250 pound class who worked
- [59:24]
B
in the offshore oil industry, tried to
- [59:27]
A
squeeze into A pinto. It was an impossible task. The policy was later amended so that large station wagons could could be used for field conditions. I remember my final meeting with Henry
- [59:44]
B
on February 1, 1981, my day of
- [59:48]
A
retirement after 18 years with Teledyne, writes Kiernan.
- [59:53]
B
I mentioned my desire to write an
- [59:55]
A
instructional book on business related matters based on my experiences.
- [60:00]
B
Henry immediately sat down at his newly acquired computer. It was the first such device at Teledyne in those days and proceeded to instruct me in the modern methods of
- [60:10]
A
writing using a computer.
- [60:12]
B
He spent about a half an hour
- [60:14]
A
explaining these modern techniques.
- [60:16]
B
I was truly amazed that this man
- [60:18]
A
who was running a 3 billion corporation
- [60:21]
B
would take the time to be interested in my retirement ambitions. I never completed that business policy book, but my thoughts of that last meetings
- [60:30]
A
still remain with me to this day.
- [60:34]
B
This is quite interesting because what I've
- [60:37]
A
also experienced with many leaders is that when you're in a meeting with them, they never seem rushed. They always appear to have all the time in the world. And I think people who've met Buffet would attest to that as well. Even though someone like Buffett obviously could
- [61:01]
B
be working frantically all day long.
- [61:05]
A
But for some reason, the most successful business managers manage to structure their time in such a way that any meeting that they do have, the person meeting with them feels like they are the most important thing in the world right at that moment. And there is no distraction taking place during a meeting. Roberts writes that Teledyne made a major breakthrough in January 1965 because of Henry's original interest in inertial control system for aircraft.
- [61:53]
B
He and his staff had undertaken the
- [61:55]
A
development of an advanced airborne computer system
- [61:59]
B
that would allow helicopters to take off
- [62:01]
A
and land in remote areas without ground navigation aids, to fly in close formation
- [62:07]
B
in zero visibility and to maneuver over
- [62:09]
A
difficult terrain without pilot assistance.
- [62:13]
B
Fed data from an inertial platform and radar.
- [62:17]
A
It became known as the Integrated Helicopter
- [62:21]
B
Avionics System, or ihas. Competing against some of the largest, most
- [62:27]
A
well established companies in the field, such
- [62:29]
B
as IBM and Texas Instruments. Teledyne was awarded the prime contract for
- [62:34]
A
this system by the Navy. Suddenly Teledyne had become a major factor to contend with in the aerospace and military systems industry and the company started. Stock soared from 15 a share to 65 within a year. This gave the company resources to acquire much larger companies than it had been able to before.
- [62:58]
B
Sales had reached 86 million in that
- [63:01]
A
year with net income of 3.4 million.
- [63:05]
B
Company employees had risen from 450 in 1961 to 5,400 by year's. End, 1965. It was an incredible record for a company that was only in its fifth year of existence.
- [63:29]
A
Then in 1966,
- [63:33]
B
Teledyne acquired Vasco, which
- [63:36]
A
is the company that Roberts had had been at. It had 43 million in sales.
- [63:42]
B
And this really made Teledyne a fully integrated specialty steel producer with electric arc melting, argon, oxygen decarborization, refining, vacuum induction melting and vacuum arc remelting for the production of the highest quality steel products. These new capabilities.
- [64:06]
A
With these capabilities, metals soon became one
- [64:10]
B
of the largest segments of Teledyne's business.
- [64:14]
A
And what's striking here is that Teledyne
- [64:16]
B
really evolved into
- [64:20]
A
an industrial conglomerate,
- [64:24]
B
many
- [64:24]
A
parts of which would be difficult to understand for an investor. But Singleton apparently was able to clearly understand the business dynamics of each of these businesses and allocate capital to the ones that would earn him the best return.
- [64:46]
B
Now, Henry Singleton took George Roberts to Houston, Texas. Shortly after
- [64:56]
A
Roberts joined the company in Houston was Fayez Sarofim, one of Teledyne's directors, who hosted a meeting with financial
- [65:09]
B
analysts and Houston business people to meet
- [65:12]
A
Henry Bowman Thomas of Seward Seacraft, the
- [65:17]
B
ship construction company that had been acquired, and Dick Bailey of the seismic Exploration
- [65:23]
A
company were also there.
- [65:25]
B
Fayez Serofim had been a classmate of our director, Arthur Rock, who had been instrumental in the early financing of the company and had brought Henry and Jay last together, creating Teledyne's first major semiconductor operation. Rock was an executive at Hayden Stone Co. At that time and had introduced Henry to Fayez, who ran a very successful business investment service for clients.
- [65:56]
A
Arthur Rock, of course, is one of the original venture capitalists and we've done a little bit of looking into Fayez Sarofim, who apparently has done extremely well in the investment business. In a 13F filing with the SEC, as of June 2009, Sirofim's investment management firm had listed an equity portfolio with a value of more than $13 billion. So these are all men of great success that Henry Singleton managed to associate himself with in the early days of Teledyne. Roberts goes on to say that Henry
- [66:45]
B
spent hours studying the stock and bond markets and was anxious to have both the funds and opportunity to pursue his life interest. I remember well, just after returning from
- [66:57]
A
Houston, receiving a letter from Faez extolling
- [67:02]
B
the benefits he could provide us with if I as president would allow him to select our investments, since I didn't yet have any investment authority. I showed the letter to Henry. He quickly told me that he wanted to control the investing of his stockholders money. He did so and no one interfered, not even the heads of the insurance companies who later joined us with their copious millions for investment. It was not until 20 years later that Henry allowed Fayez to participate directly as a manager of investments for one of our then independent insurance companies. But Henry sought his advice many, many times over those years. Henry did teach me how to study the markets as he did, though only rarely did he ask for my initiative in making selections. He knew, of course, that I was aware of the bank of information on corporate stock he maintained on his computer system, which he had used in evaluating his selections. He frequently discussed the reasons he had for making investment judgments with me so that I would be able to participate and back up his actions and discuss
- [68:14]
A
those actions with our directors and executive team.
- [68:17]
B
He kept his Apple II and Apple 3 computers busy at his home building his database, and used those tools incessantly in his management methods. He was a very early pioneer in using personal computers for business, financial and technical purposes, as most engineers did. He loved the Apple concept and subsequently joined Arthur Rock on Apple's board.
- [68:46]
A
So here's further evidence of Singleton really pioneering some methods, both in business management
- [68:56]
B
as well as in managing Teledyne's portfolio.
- [69:04]
A
And here's Henry talking about Russ Kiernan, whom we mentioned earlier when Roberts asked Henry, what is so unique about Russia?
- [69:16]
B
Kieran.
- [69:17]
A
And Singleton says that what's unique about him is that I'll ask him a
- [69:23]
B
question about one of these companies that I've asked him to supervise, and he always knows the exact numerical answer. If I asked him what they did in sales last month, he knows right away without calling someone to find out. So Henry said, that's the kind of fellow that you pick who runs a
- [69:44]
A
company and does it well, but is
- [69:45]
B
also able to quickly understand and supervise
- [69:49]
A
and have the facts about other companies under his wing. That's the kind of a group leader we need.
- [69:57]
B
Now let's talk about the second phase acquisitions by Teledyne from 1966-70. In the first six years of operation, from 1960 to 1966, sales had gone from 4.5 million to 257 million. Net income rose from 58,000 to 12 million, and shareholder equity had risen from 2.5 million to 90 million. The company had started with 450 employees. Five years later, it had nearly 14,000 employees. Roberts writes that he and Henry had always hoped that the owners of managers of the companies they acquired would stay on and continue to manage their operations, and most did. Many of these men had started their companies 20 or 30 years earlier with family money and had managed them into the successful and viable business that had attracted our attention and some were ready to retire. In those cases, we often asked if there was a son or other relative
- [71:10]
A
who knew the business and would take over and manage it.
- [71:14]
B
Sometimes one of the other top executives or technical people accepted the job. These men knew more about their specific
- [71:21]
A
businesses than we did and we wanted
- [71:23]
B
to keep their expertise. We had no intention of making managing
- [71:26]
A
these businesses from the corporate level.
- [71:29]
B
We did, however, establish our own unique financial and operations reporting system under the direction of George Forensky, which enabled us to monitor their performance closely on a monthly basis and see any trouble spots
- [71:44]
A
before they became serious. Now, Buffett has said that he gets monthly reports from his subsidiary companies as well, and perhaps one learned from the other. But it seems that both Buffett and Singleton wanted to have very timely data from the subsidiaries so they could evaluate their operations and progress and profitability without necessarily speaking with those business managers every
- [72:26]
B
month or even every quarter or year. Now here's some standards that Teledyne had for deciding whether or not a company was a good acquisition candidate. Here are the questions that Teledyne asked. Is the company profitable? Do they have a good balance sheet? Is their profit and loss statement accurate? Do they have a clean inventory? Is their backlog realistic and well documented? Is their management on top of their operations? Would management be willing to stay if acquired? Have they made long range plans to maximize their profit in a single sellout? Does the business have growth potential? Is there opportunity for growth in profit? Can cash be taken from the company for use elsewhere? How is depreciation counted and is it a significant percentage of profits? What is the condition of their physical plant? And finally, and probably most important, would this company be a good fit within Teledyne organization and its goals? Now this is a list of acquisition
- [73:45]
A
criteria that should be on every CEO's mind.
- [73:53]
B
Obviously, not all of those criteria had to be met 100%. But those were the things that Singleton
- [74:00]
A
looked at and considered when doing deals.
- [74:04]
B
Perhaps one of the things that's not
- [74:06]
A
on the list but was of immense importance to Singleton was the price that
- [74:15]
B
was being asked by the seller and
- [74:18]
A
also the currency that Singleton could use when making the acquisition. Singleton also used creative MA consideration at
- [74:31]
B
times, not just cash or stock.
- [74:35]
A
When they were acquiring Continental and needed
- [74:40]
B
to acquire more shares.
- [74:44]
A
Robert says that with continental shares priced
- [74:47]
B
at 18 on the New York Stock Exchange in 1969 we offered one $30 principal amount, 7% subordinated debenture due in
- [74:59]
A
1999 for each share of Continental's common stock.
- [75:03]
B
These debentures paid $2.10 annually, yielding better than 12% to those tendering their stock.
- [75:11]
A
An attractive deal.
- [75:13]
B
So just to recap, here we have
- [75:18]
A
Continental shares trading at $18, Singleton apparently unwilling to offer a big premium with either cash or Teledyne shares, but willing to give $30 in principal amount on a 30 year fixed rate bond that had a 7% coupon.
- [75:43]
B
So in effect a 12% yield that
- [75:46]
A
was fixed fixed for 30 years. And obviously that seemed much better consideration to Singleton than either stock or cash.
- [76:02]
B
Now let's look at an acquisition that George Roberts talks about in 1967. He writes, In April of 1967, Henry and I had become quite interested in a new company in Fort Collins, Colorado, called Aquatec. These people had developed a very successful product that you will probably recognize called the Water Pick. It introduced the original idea of using a pulsed jet of water as an oral hygiene adjunct to the toothbrush. It was very efficient at removing food particles from between the teeth that a toothbrush often caused could not remove. It was called to our attention and highly recommended by a broker in New York who knew Henry. And there was quite a bit of competition for the acquisition at that time. We prevailed, however, and acquired it for 120,000 shares of Teledyne common stock and up to 35,000 additional shares dependent upon certain contingencies. The acquisition had a market value of over $23 million. Now, I find this quite interesting as another great capital allocator, Warren Buffett, has said that he's really not interested in buying companies at auction or companies that have a lot of competition for them. It seems that Singleton, while he obviously preferred to make acquisitions with no other buyers there, he didn't shy away from competitive situations as long as he could use a currency that he thought gave him an advantage. And in this case it was teledyne stock. By 1969, writes Roberts, Henry and I decided the price prices for other companies we might be interested in were getting too high. This was partly due to increasing competition for these companies by conglomerates such as TRW and others who were growing the way we were. Also, after more than a decade of acquisitions by conglomerates, including ourselves, many of the better companies had already been acquired from those available, and there were fewer companies that were really attractive to us. So this is when Teledyne essentially ended its first program of acquisitions in 1969. And once that program was ended, then there was no longer a need for some of the finders, as they call them, whose main activity had been finding and negotiating the buyout of suitable new companies. And this is when several key execs left the company as they were no longer needed. Now let's talk about Teledyne's diversification into insurance and finance. And Roberts calls this Singleton's second great purpose. He writes, henry talked to me on several occasions about a book by the former chairman of General Motors Corporation. He told me he had learned a very important concept from that book which he wished to use in the growth of Teledyne. He explained that in about 1921 or 1922, after World War I and during a very difficult economic time of recession, General Motors had needed additional funds to finance their growth and and had a plan to sell bonds to the general public. The bond sale was a complete failure and the chairman had written in his book that it had taught him an important lesson. It was that for a corporation to grow and to have a strong financial base, it needed to have as a part of itself an interest in substantial financially oriented institutions. So General Motors had started the General Motors Acceptance Corporation and invested in other financial groups. As a result of his interest in this idea, Henry had decided that at some point when Teledyne had reached a certain size, he would seek out financial organizations we could acquire. So near the very end of our acquisition period, we did go in that direction. Before we finally stopped, we began acquiring a number of financial and insurance companies which was a significant change from our usual aerospace, metals, industrial and consumer company acquisitions. The first of these financial institutions was an insurance company in the life insurance business in Chicago. It was the United Insurance Corporation, which worked under a holding company called the Unicoa Corporation. In the years 1968 and 1969, we turned to the Northern California area and acquired a personal savings and loan company organized under the California thrift and Loan statute called Fireside Thrift and another insurance company in Menlo park specializing in workers compensation insurance called Argonaut Insurance, after the majority stock of the Chicago Insurance Company had been acquired through through several tenders, we went to Texas and bought Trinity Universal Insurance Company of Dallas, which was in the property and casualty insurance business. So then we had life insurance and casualty insurance operations of substantial size and a thrift and loan company. Henry was once asked why the insurance business? And he responded that if a company is going to keep on growing at the rate we want to grow, it has to do some new things along the way. What we're doing now is providing the more stable base that will enable us to produce that growth four or five years from now. Now, what's interesting here is that neither Singleton nor Roberts really mentioned float as a key reason for going into insurance, even though the investment portfolio of those insurance subsidiaries eventually contributed major profits to Teledyne. Obviously, Buffet has talked extensively about float and how it's helped Berkshire grow value over time. The other interesting point here might be that this notion that for a company that wants to grow big and keep growing, it needs to have some sort of financial businesses within it. I think today, especially sitting here in 2009, might be a very controversial notion, as many otherwise fine companies over the past few years got into trouble precisely because they had financial arms. Just think of General Electric or even GM or Chrysler. So I think this notion, to some extent at least, has been discredited, but probably because many of those finance companies that have been part of larger companies were really mismanaged in the real estate boom of, say, 2005 to 2007. And it's hard to imagine that Singleton would have bought many of the financial instruments that brought some of these larger companies to their knees. And certainly the idea of using float has not been discredited in the least. Roberts goes on to write that by 1970, as we began our second decade, we had stopped our direct acquisition of companies. We decided there was no point in paying inflated prices for complete ownership of companies when we could buy a substantial interest in them through our insurance companies when the market prices were favorable. Of course, we wanted profitable companies that were well managed and businesses that we thought had a good future. Each of our insurance companies had the usual investment committees to manage how their portfolios were invested. But in keeping with our system of running financial matters from the corporate office, Henry headed an investment panel that made all the final decisions on these matters. In the February 20, 1978 issue of Forbes magazine, Henry was quoted about his philosophy in regard to There are tremendous values in the stock market, but in buying stocks, not entire companies. Buying companies tends to raise the purchase price price too high. Don't be misled by the few shares trading at a low multiple of 6 or 7. If you try to acquire those companies, the multiple is more like 12 or 14. And their management will say, if you don't pay it, someone else will. And they're right, someone else does. So it's no acquisitions for us. While they're overpriced, I won't pay 15 times earnings. That would mean I'd only be making a return of 6 or 7%. I can do that in T bills. We don't have to make any major acquisitions. We have other things we are busy doing. As for the stocks we pick to invest and the purpose is to make as good a return as we can. We don't have any other intentions. We do not view them as future acquisitions. Buying and selling companies is not our bag. Those who don't believe me are free to do so, but they will be as wrong in the future as they have been about other things concerning Teledyne in the past. By the end of 1969, writes Roberts, our 10th year in business sales had passed the billion dollar mark for the first time at 1.3 billion and our net income had reached an all time high of 60 million. Shareholders equity over those years had grown at a compound annual rate of 94%. And in a letter to shareholders for the year 1970, Singleton pointed out the strong financial condition of Teledyne is evident in our balance sheet. We have an excellent cash position, a ratio of current assets to current liabilities, a nearly 3 to 1, and a low funded indebtedness of about 25% of total capital. Now here's a point on continued internal growth of the company. Some outside analysts wondered whether we would
- [87:34]
A
whether we could keep up the kind
- [87:36]
B
of growth and success we had been having without the income from continuing acquisitions. But they really hadn't seen anything yet. In spite of the adverse economic conditions of the 1970s as well as a malpractice insurance problem, and without the contribution of additional income from new acquisitions, Teledyne achieved continuous and rapid growth in sales and income throughout that difficult decade of the 70s. From 1971 to 1981, our compound annual growth rate in sales was 11.4% and in net income it was 22.1%. Some of this in the first year of that decade was due to the results of our new financial sector companies. So that once again speaks to the importance of those financial companies. Once Teledyne had matured as a company and it wanted to continue its growth. Now here's an interesting tidbit on the Teledyne identity and corporate image. Roberts writes that when the discussion of how the acquired companies should be identified had come up, Berkeley recommended that instead of keeping their original name or one we gave them, they should essentially keep their name and call themselves Teledyne in front of that name. So Teledyne would become an integral part of each name and give each company a more direct identity as part of Teledyne. He suggested that we do this by calling them Teledyne so and so Henry thought that was a good idea. So we eventually had names such as Teledyne Systems and Teledyne, Brown Engineering and so forth. With the Teledyne name up front, our company quickly became recognized throughout the business world. These company identification system standards were enforced quite rigorously. And when an operating company deviated in their printed material or signage, which a few did occasionally, we brought them to task on that. Henry was quite interested and involved in this process. He was very concerned about Teledyne's image. Now this may sound a little bit contrary to what is said about Singleton elsewhere, namely that he really doesn't care about what the press thinks of him or analysts think of him. But I think there's an important distinction to draw here. He did obviously care very much about what his potential customers thought of Teledyne because that had a direct economic impact on the company. Whereas what Wall street analysts thought or the press thought did not impact the fundamentals of Teledyne. In fact, the effect it did have was that sometimes the stock got so cheap that Henry could take it in at a bargain price. Roberts writes about some of Teledyne's financial controls to some considerable extent. And this is a chapter that, by the way, I would highly recommend reading.
- [91:06]
A
In the book Distant Force.
- [91:08]
B
Roberts writes, for a corporation of our size we ran a rather lean corporate staff confined to the planning and reporting and auditing of the individual company results. We had a legal department headed by the corporate secretary, a financial department headed by the corporate treasurer and a controller, a public relations department to communicate with our publics and very few other activities. I think at max we had fewer than 150 persons on our corporate staff. At the corporate level, our basic interest was in seeing that each company remained a financially healthy and profitable organization. Although we did establish a group executive system, we never let our corporate connection to our individual companies be filtered through too many minds and levels of management, as many companies do. There was always essentially a one on one relationship between corporate and the managers of each operating unit.
- [92:07]
A
He also writes that a lot of
- [92:09]
B
people have said that Henry and I managed Teledyne by cash flow and we really didn't do a lot of management by cash flow. We developed a measure that we called Teledyne return which was the average of your cash return and your profit. We'd say you reported a profit of a million dollars, but you only had half a million dollars of cash, so you only made $750,000. So tell us about the rest of the profit when you get it. Now I find this Quite interesting because many value investors will say that they only look at the cash flows. They want to base their investment decisions on free cash flow, primarily or exclusively. And there is a flaw in that in my mind because there was a reason why accrual accounting was developed. And the idea was that on the income statement you could show items that were not in that period's cash flow but would be expected to contribute or detract from cash flow in future periods. And so the idea of accrual accounting is actually quite important. Perhaps one of the reasons that many value investors prefer to look at the cash flow statement these days is because of the abuses that the income statement has suffered by virtue of management massaging earnings and making accruals that really depended on what the street expected of the company rather than on what made the most sense. But I find it quite interesting that Teledyne took an average of net income and cash flow and that's how they managed their companies. Roberts also writes that Henry spent most of his time planning the company's strategy for future moves and directing our investment portfolios. He was interested in the big picture. I was the one who handled the day to day details of operating the company, but he most certainly got involved when there were major decisions to be made or problems to be solved. Almost every day I was in town, Henry and I usually discuss discussed any of the problems or opportunities the company was facing. But quite often Henry simply talked about his philosophy of running a corporation and the various financial strategies that he came up with as he sat in his corner office each day, often working at his Apple computer. He was a brilliant business strategist, just as he was a brilliant chess strategist. He held a 2100 rating, just 100 points short of a master, according to Claude Shannon. And he came up with many creative ideas, ideas that were sometimes contrary to the currently accepted methods of managing a large corporation that prevailed in those days. He always tries to work out the best moves, Shannon said. And maybe he doesn't like to talk too much because when you are playing a game, you don't tell any, anyone else what your strategy is. Now on the Teledyne financial reporting system, Roberts writes that it was a system in which the individual controllers of each company, each profit center, reported to the president of his company and to the home office controllers department at the end of each calendar month. Our fiscal month always ended on a Friday and by the following Tuesday morning these reports from all 160 reporting entities were in our home office controller's office. They came in by electronic mail.
- [96:09]
A
And this really speaks to
- [96:13]
B
the very good reporting system that Teledyne had in place, where even as early as the 1970s, here was a company using electronic Mach mail to send financial reports from the company level to the holding company level by Tuesday morning following a Friday, giving obviously senior management a very good view into how the business was doing with these systems in place, writes Roberts, we were able to maintain very close financial control of our operations and our capital management. Though we were criticized for this in some business publications, we were very conservative in our expenditures for capital equipment and facilities as well as for research and development. We concentrated on turning the businesses we owned into efficient cash generators. Now this to me brings to mind
- [97:18]
A
some of the criticism that Eddie Lampert has been subjected to as chairman of Sears.
- [97:25]
B
And perhaps one can make the argument
- [97:28]
A
that with Sears and Kmart it's a little bit different. But the criticism really of Lampert has
- [97:36]
B
focused on the fact that he is, or he's supposed to be a retailer. And as a retailer, one is expected to make significant capital expenditures into the existing stores to remodel them and so forth, and also to have plenty of inventory on hand to display in the stores. And Lampert obviously has disagreed with this, arguing that he can deploy the cache elsewhere and and reap higher returns. Singleton apparently had the same outlook on capital allocation. Now, Roberts writes that there was a certain amount of resistance to some of the company's controls in some quarters. Many of the acquired companies had been started by local entrepreneurs who had come close ties in their communities. And there was a certain amount of resentment at now being financially responsible to so called absentee managers half a continent or more away. These feelings gradually dissipated as new and younger managers were brought up through their organizations. Some of these companies had also reached a level of maturity before they were acquired in which their managers and staff had become quite clear, comfortable with their current operations and sales and profits, and lacked the drive to innovate or take risks in expanding their markets or product mix or sales. This attitude also dissipated in most cases with our help as time went by. Now let's turn to the all important stock buyback period that was really crucial to compounding value per share at a superior rate at Teledyne. Roberts writes that in the early 60s, Henry had used Teledyne stock to make a limited number of equity acquisitions in relatively small companies. He was limited in the size of the companies he would acquire by his company's relatively low stock price at that time. But by 1965, Teledyne stock had jumped from 15 to 65 a share in one year largely because of the company's success in winning the IHAS inertial helicopter guidance system contract against big competitors such as IBM and Texas Instruments. That gave us the ability to use Teledyne stock to acquire more and bigger companies such as I've discussed described until there were 130 in all by the end of the decade. These events were followed by the bear market of the early 70s and Teledyne stock prices fell along with the rest from about 40 a share to less than 8. Henry saw opportunity where most other company heads saw none. Teledyne stock that had gone from a P e ratio of about 30 to 60:70 in the 60s suddenly went to a PE ratio of about 9 or 10 or 11 to 1 which was about the same or less than that of companies we had been acquiring. Now let me just correct something here. The P E ratio fell to a PE of 9, 10 or 11. It never fell to 1. One morning in May of 1972, Henry walked into my office at about 8:30 and said, George, we're going to make a bid for our stock at 20 a share. I said, are we really going to do that? I was totally amazed as he hadn't even hinted about that to me before. It was also a surprise to everyone else at Teledyne when they heard about it, including our trust rock who was certainly involved in most of our stock activities. This was an excellent example of how Henry made all investment and stock decisions on his own. He did this every single time. They were all done when our stock was at a low PE ratio. He believed that our stock was grossly undervalued and it was the first of a series of eight stock buyback offers. Roberts interestingly takes the book Good to Great by Jim Collins to task. He writes the author Jim Collins considered that Teledyne had never become a great company because its founder had not prepared a successor when he retired and thus the return to shareholders declined, declined abruptly. At that point he presented a graph titled the ratio of Teledyne's cumulative stock returns to the general market. It showed the steep rise in that ratio over the years to a peak of about nine times at the point of Henry's retirement and then a decline in the following years. What this graph did not include after Henry's retirement was the return that shareholders still receive from the stock of the financial companies Unitrin, Argonaut and other entities that had been spun off to them and that continue to provide them with returns that actually far exceed the returns from Teledyne itself. If cumulative return to shareholders is his criterion in that graph, he missed the mark by a wide margin in judges Henry's company and this is quite an interesting point here. Roberts very deftly dismisses the criticism in
- [103:32]
A
the book Good to Great.
- [103:33]
B
But I imagine that for those only reading that particular book, the chart would very much support Collins view that once a towering founder and CEO such as Singleton retires without a good succession plan in place, that value can decline rapidly. And obviously the chart showed that. But the chart was completely incorrect in this case. Now let's look very quickly at Teledyne's international marketing and here's something that was said by Russ Kiernan, whom we had mentioned earlier in this program. He said that as the decade of the 60s came to a close and in the early years of the 1970s, Henry recognized the advantages of developing international markets for the company's products and services. A few companies had already been engaged in foreign markets and had even established limited overseas manufacturing facilities to meet these growing operations. Teledyne's international marketing organization was established in the early 1970s with offices in Geneva, Switzerland and Singapore.
- [105:04]
A
So here was a corporation smaller than
- [105:08]
B
many other large US companies that went global as early as the 1970s. Roberts writes about the start of Teledyne's third decade. We had emerged from our second decade in business as one of America's leading and most successful corporations, and we looked forward optimistically toward the third. In 1980, our consolidated companies achieved 2.9 billion in sales with a net income of 344 million. Then Roberts talks about Teledyne's first spin off,
- [106:00]
A
and the interesting tidbit here is he writes that in keeping with Henry's
- [106:08]
B
philosophy that the shareholders should be given the opportunity to decide whether or not they wanted to be in this kind of a business, we decided to spin these operations off to them under the name American Ecology. Thus, shareholders could opt to sell their interests in that business without selling their Teledyne shares if they wished. In the first quarter of this year, we distributed one share of American Ecology stock to our shareholders for each seven shares of Teledyne common stock. 1986, writes Roberts, was a year of significant management realignments in our company.
- [106:54]
A
At the annual meeting in April, Henry
- [106:57]
B
announced that he was giving up his title of chief executive officer and that I would assume that title in addition to my position of president. He would remain chairman of the board. He told the shareholders that the title change was in recognition of my leadership since I joined the company as president in 1966. He reiterated those comments in the only intracranial that he ever wrote. Henry was 69 at the time of the announcement. He stressed that the realignment would not mark any major change in Teledyne's management style and told shareholders that he anticipated that we would continue to work together as a team as we had for the previous 20 years. Indeed, we did work very closely together for the next 10 years. Roberts also has a paragraph again on Fayez Sarofim, who was the founder, chairman, president and chief executive officer of his investment firm Fayez Sarofim Co. In Houston, Texas. Sarofim was elected to the Teledyne board at that same time meeting at which Singleton announced his retirement. Fayez was one of our early investors and a major shareholder and in later years became an important advisor to Henry in these investment matters. In 1987, Henry was 70 and Roberts was 68. And Roberts writes, a number of our key directors and company managers were over 65. The question of successors and in fact the whole question of just what would happen to Teledyne in the coming years was widely surmised in an article in the June 16, 1987 issue of Financial World. The possibilities discussed ranged from spinning off large parts of of the company or breaking it up to taking Teledyne private or selling out. Henry's response was, we're not particularly persuaded by quick temporary gains. We'd rather get something permanent and it takes time. If there's anybody who wants us to do something real fast that's going to be astonishing in terms of increased earnings or something, I don't know how to satisfy such desires. When pressed about spin offs being a good way to boost shareholder value when acquisitions are too pricey, he replied, you're thinking in the short term. I'm in the long term, so I wouldn't do anything like that for a temporary rise in the price of the stock. You know, there are companies that will sell one division and buy another because today this division generally sports low multiple and the one they're buying has a high multiple and they think that may rub off on the whole company. That absolutely turns me off. The whole concept is repulsive. We don't do things like that. We look at the economic long term possibilities. Obviously a very strong statement here by Singleton regarding some of the idiocy that he saw in business management at the time. And unfortunately that hasn't gone away over the decades. Now here's an interesting, perhaps final paragraph from the book. Roberts writes that a final assignment from Henry Singleton was unfortunately given to me in his home. A few weeks before he finally left us knowing he had a brain tumor, he had a final concern about our 1986 spin off of Argonaut Group. The board of Argonaut in 1989 had agreed with Henry that a study should be made to sell the company to another group or company so that we could be excused from managing the antenna. He was disappointed as an investor in the performance of the stock under $20 a share and hoped that we could sell it for at least 30 a share. An outside firm had been hired to help do this job. After a number of months, the effort was cancelled by the board as no buyers were found. Henry always thought that the management of the company, not wishing to be replaced, had failed in the marketing effort. He told me on that sad day that if he left us, it would be my duty to replace the management and solve his problem. I think what this paragraph really shows is the unique dedication. You could call it fanatical, perhaps, that Singleton kept to Paladine T till the very last days of his life. Now, subsequent to Singleton's retirement and passing, Teledyne was targeted by several hostile acquirers, eventually ended up merging and today certain pieces of Teledyne exist as independent companies while others exist as parts of larger companies. This brings our program about Henry Singleton to an end. Thank you for your time. Once again, Visit us at manualofideas.com and discover why some of our research has won the high acclaim that it has. This recording is property of Beyond Proxy, the publisher of the Manual of Ideas. I do point out that many of the quotations in the recording are from George Roberts book Distant Force, which we highly recommend.
- [113:17]
A
Thank you.