Chapter 12 - The Gambler: How Penniless Dropout Kirk Kerkorian Became the Greatest Deal Maker in Capitalist History
Today’s Chapter is based on the book “The Gambler: How Penniless Dropout Kirk Kerkorian Became the Greatest Deal Maker in Capitalist History” by William C. Rempel.
“You don’t tell Babe Ruth how to hold the bat.”
— Alan Greenberg on Kirk Kerkorian
Buy it on Amazon here:
https://www.amazon.com/Gambler-Penniless-Kerkorian-Greatest-Capitalist/dp/0062456776
Here’s what I have learned from the book:
Handshake Deals
“I have no contracts with my clients; just a handshake is enough”
— Irving Paul Lazar
As mentioned in the title of the book, Kirk Kerkorian is one of the greatest businessman in history. He was a business tycoon that transformed the landscape of Las Vegas and Hollywood. He was notorious for being an unmatched genius at making business deals. This may make you believe that he made shrewd deals, but yet, Kerkorian was considered one of the most honest businessmen.
“In my experience, Kirk always made sure the other guy got a fair deal.”
— Mike Millken
As a matter of fact, Kerkorian wanted to make friends and not enemies through his deals. He was more than willing to return the entire purchase price or to reopen settlement talks if he deemed that the deal initially agreed on was not fair to the other party.
“Woodley once bought a used DC-4 from Kirk only to have his maintenance people complain it was leaking fuel so badly that it was a safety hazard simply parked on a tarmac. “Art, so help me, I didn’t know it was in that kind of shape,” Kirk apologized. He returned the entire purchase price without debate. And Woodley considered Kirk one of the most honest businessmen he’d ever known.”
— William C. Rempel
“After Alex once negotiated a severance deal with a fired MGM Grand executive, Kirk ordered him to reopen settlement talks. “It’s not enough,” Kirk said. “You made too good a deal.” To Kirk, Yemenidjian said, “It was never about the money. It was about what was fair.” But Alex did acknowledge some personal chagrin at being sent back to ask if they would accept double his hard-fought original terms.”
— William C. Rempel
Furthermore, Kerkorian enjoyed making deals through handshakes rather than through long contracts written by lawyers. In fact, he often followed up his handshakes of agreements with the following words, “Don’t let the lawyers screw this up.” This is eerily similar to Warren Buffett who is well known for his handshake deals and one-page contracts.
“I went to see Mrs. B (Rose Blumkin) carrying a 1 1/4-page purchase proposal for NFM [Nebraska Furniture Mart] that I had drafted. Mrs. B accepted my offer without changing a word, and we completed the deal without the involvement of investment bankers or lawyers (an experience that can only be described as heavenly)”
— Warren Buffett
For Kerkorian, once a deal was made and sealed by a handshake, the negotiating was over. There will be no do-overs and no altering of the conditions. And this was true even when no further contract has been signed or even when an even better deal appears on the table. There are no exceptions.
“First thing in the morning, however, things got complicated. New buyers appeared with a much better deal—an extra $15 million in cash and no contract contingencies. Suddenly, the Japanese deal was looking second rate. Alex called Kirk. “What should we do?” “Did you make a promise to the Japanese buyers?” Kirk asked. “Nothing’s been signed, it’s still…” “I didn’t ask if you’d signed anything,” Kirk interrupted. “Did you agree to a deal?” “Well, I guess I did,” said Alex. “Then why are we even discussing it?” The phone call ended abruptly.”
— William C. Rempel
Anonymity
“Frugality is the foundation of all virtues.”
— Cicero
Perhaps due to the fact that he started out as a penniless Grade-8 dropout, Kerkorian was always humble and preferred privacy over fame and popularity. Despite being a billionaire, Kerkorian did not have any chauffeur and continued to drive your typical average American car. Similar to many others, he did not enjoy having his name among the Forbes 400 richest Americans as he considered it an intrusion of his privacy. As such, it was not uncommon for Kerkorian to not be recognized by his own employees at the MGM Grand Hotel.
“Kirk drove his own cars, retained no staff chauffeurs, and kept basic American models in his garage—a Ford Taurus and a Jeep Cherokee were typical. He would routinely walk to lunch appointments around Beverly Hills, arriving with neither an entourage nor a bodyguard. And although he was the controlling stockholder of MGM with ready access to private screenings of the latest films, Kirk preferred to get behind the wheel of his Taurus and take a friend out to one of the movie houses in neighboring Westwood Village. He loved his personal anonymity, the freedom to be able to wait in line and not be recognized—that, and the freedom to make a million-dollar bet on one roll of the dice.”
— William C. Rempel
“Kirk was also getting public attention throughout the international business world from his listing that year in Forbes magazine as one of the four hundred richest Americans. Like many moguls on that list, Kirk considered the popular magazine feature of questionable value, questionable accuracy, and an intrusion on his privacy.”
— William C. Rempel
“Many of them wouldn’t have recognized Kirk if they were stuck in an elevator together. According to one story, a young MGM Grand desk clerk once kept Kirk waiting to check in while she had a brief row over the phone with her boyfriend. She was very apologetic and then asked him for the name on his reservation. “Kirk Kerkorian,” he said. She gasped in horror, but he smiled and reassured her. “We all have our days.””
— William C. Rempel
Not only was Kerkorian humble, he was also very willing to give back to others. For example, he was once asked to donate two million dollars to the American Red Cross who was raising an emergency fund to help Rwanda genocide survivors. But once he learned that they needed more, he did not hesitate to give out more than the amount that was originally requested. And yet, even in charity, Kerkorian made sure to do it in complete anonymity.
““What do you need from me?” Kirk asked. It was his standard response to such calls. “We need two million dollars,” she said. “You’ve got it.” That was so easy! The Red Cross president gushed with gratitude. And then she said, “Kirk, you have other wealthy friends that might be willing to help us. Would you mind asking whether—” “Wait—” he interrupted. “It sounds to me like you need more than two million. How much do you really need?” “Well, we really need four million,” she said. “You got it.””
— William C. Rempel
“The very private Kerkorian wanted his name on nothing. Two things characterized Kirk’s charitable giving: generosity and anonymity. Like the old 1950s television show The Millionaire, Kirk’s gifts came with strict admonitions that he could never be identified as the source—no Kerkorian name on buildings or street signs, no banquets in his honor, not the simplest public expressions of gratitude, not even a public reputation for generosity. “If you expect something in return for your charity, it isn’t charity,” he told friends.”
— William C. Rempel
An Outsider
“I learned then not to invest in a business that I didn’t run.”
— Kirk Kerkorian
In the book “The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success”, William Thorndike explains that the key factor in evaluation the success of a CEO is through their capital allocation skills and their ability to take a long-term approach in business decisions with the main goal of increasing long-term value per shares.
As such, Thorndike identified in his book the traits, the characteristics and the methods shared by eight CEOs who mastered the art of capital allocation and who have provided tremendous return to its shareholders. The list of CEOs, who he calls Outsiders, notably includes Warren Buffett from Berkshire Hathaway and Henry Singleton from Teledyne. All of them understood the following:
Capital Allocation is a CEO’s most important job
Decentralized organizations release entrepreneurial spirit and keep costs down
Increase in per share value is what matters and not overall growth or size
Sometimes the best investment opportunity is your own stock
With acquisitions, patience is a virtue
In my opinion, Kirk Kerkorian could be considered an Outsider based on the fact that he shared multiple of the traits listed above. For example, Kerkorian was a prone believer of delegating management decisions to competent individuals he hired to manage his companies. More importantly, for this to work properly, he made sure to not interfere in the decisions made by the staff he put in charge. As Steve Jobs once said, “You’re not grabbing the pencil out of the twenty-five-year-old’s hand to do it better than they are. If you’re smart, you’re hiring twenty-five-year-olds who are smarter than you.” This is similar to the way Warren Buffett would run Berkshire Hathaway’s acquired subsidiaries.
“He not only trusted and relied on Cramer’s judgment, but he had also come to appreciate how much more he could accomplish by delegating management decisions.”
— William C. Rempel
“Kirk left [Jim] Aubrey alone to run and rescue MGM. As delegator-in-chief, he was mindful of results, not process. And like Shoofey at the Flamingo and the International, Kirk trusted Aubrey to manage the details at MGM. That meant no muddied chain of command, no interference from above.”
— William C. Rempel
““Sidney, I’d do anything for you,” Kirk replied. “You know that, but my deal with Aubrey is he’s got total control. It’s Aubrey’s call. I’ve got no say in it.””
— William C. Rempel
Furthermore, Kerkorian was extremely shareholder friendly while running his businesses. In fact, he would refuse to take a hefty compensation from the company as he deemed it unfair to the shareholders. Similarly, when he wanted to sell his shares in a company, he would prefer to have it bought back to the company through share buybacks to avoid hostile takeovers and to increase shareholders returns. In fact, share buybacks are a great way to increase shareholders value.
“Kirk always refused such compensation. He felt that as a major stockholder he should benefit only from his investment, that taking a fee for helping to manage his own investment was, well, inappropriate—and unfair to stockholders. He didn’t accept “comped” rooms or free meals at his hotels, either. He had always insisted on paying his own way with personal funds out of his Tracinda accounts.”
— William C. Rempel
“Kirk made it a rule never to accept complimentary food, drink, or other gifts from any company in which he was invested. He had the money. He paid his own way.”
— William C. Rempel
“His 25 percent ownership, if dumped on the market, could have depressed stock prices. Sold as a block it could have posed a threat to management—the same people who united to block his takeover. Kirk figured he could get his best deal by offering to sell his shares back to the company. It would not only boost stock prices but also consolidate the power of the existing board and its management team.“
— William C. Rempel
Finally, Kirk Kerkorian was a successful capital allocator. This can be illustrated by the way he turned MGM around by selling off its unprofitable movie studio businesses and made it into a hotel and casino giant. When he first purchased MGM, it was in a dire financial state, and most investors did not see the hidden value the company could offer. Not for Kerkorian, he knew exactly how powerful a brand name can be, as we have seen with Bill Gates and Microsoft. He understood how powerful the MGM brand is, often calling it the “three magic letters”.
“Kirk saw in a tired old MGM with its run of box office losers was something beyond the view of most investors. He saw hidden value. With a market price wallowing around $25 a share, investors were missing hundreds of millions in existing value, not even considering any turnaround potential. Kirk and Bautzer figured the company’s actual value to be closer to $400 million, or about $69 a share. What they saw was MGM’s vast library of classic films—Gone With the Wind, Singin’ in the Rain, The Wizard of Oz. The company owned music publishers, a record company, overseas studios, and tens of millions of dollars in real estate. And then there was the priceless cache of its legendary name. For many, MGM spelled class—as in old Hollywood glamour, gowns and tuxedos, klieg lights and red carpets. What was Leo the Lion worth? No one had ever imagined putting a price on the MGM logo. Not until Kirk Kerkorian.”
— William C. Rempel
“Kirk saw value in the MGM brand itself—even as most investors continued to miss the lure of his “three magic letters.””
— William C. Rempel
Once he obtained control of the company, Kerkorian started a grand scheme to save MGM. To stop the company from hemorrhaging cash, he ordered Jim Aubrey to impose a strict budget and to sell off any valuable MGM assets in order to retire as much debt as possible.
“Under the Kerkorian-Benninger-Aubrey scheme to save MGM, much of the back lot located on the pricey West Side of metropolitan Los Angeles was going on the block. The land itself was worth tens of millions to developers. To use it for costly warehousing to preserve the old stern-wheeler from Showboat or the racing chariots from Ben-Hur or The Unsinkable Molly Brown’s brass bed or Civil War cannons from Gone With the Wind . . . or Greta Garbo’s hats . . . or Dorothy’s old ruby slippers—well, that penciled out very badly in a cost-benefit analysis. The stuff had to go. Soundstages had to go. Andy Hardy’s hometown, Scarlett O’Hara’s Tara plantation, the streets of Old New York, and Tarzan’s jungle all had to go.”
— William C. Rempel
“Under Aubrey’s continued cold-blooded economizing, Kirk still got precisely what he wanted for MGM. The financial hemorrhaging slowed. Strict budget and spending limits were established and aggressively enforced. Aubrey kept selling off MGM assets, but in the process he was also retiring debt.”
— William C. Rempel
Furthermore, Kerkorian realised how difficult it was for MGM to survive in making movies in the entertainment industry. And as such, he decided to combine MGM’s brand name with the leisure industry he was experienced in. He would build a new Las Vegas hotel and casino under the MGM Brand and fill it with references from MGM’s vast movie library. He did this with the belief that the MGM’s Grand Hotel would also bolster the studio’s profitability.
“How could the studio survive and thrive making movies in an entertainment market dominated by free consumer programs on television? How could it hedge its bets? Where could it go for a more reliable, steady, and growing stream of revenue? Kirk had an idea: modified diversification of sorts. Combine the movie side of the entertainment business with the gaming side. This could be achieved if MGM borrowed about $75 million and built its own grand new Las Vegas hotel and casino. Fill it with movie memorabilia. Name the rooms, restaurants, and menu items after the stars.“
— William C. Rempel
“He would preside, one wag suggested, as the new “king of the green felt jungle.” Aubrey put it in business management terms: “We’ve reached the conclusion that it’s silly to rely on the motion picture business as the only business that a corporation of this size should be in.” MGM, the film studio, was going to build the hotel, own it, and operate it as a subsidiary.”
— William C. Rempel
Beyond the Book
Read "Humility Kills Pride" by the Daily Stoic
Read "Why Lazy and Smart People Make the Best Leaders" by Farnam Street
Read "Berkshire Hathaway's 2013 Annual Report"