Today’s Chapter is based on the book “Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It” by George A. Roberts. The book goes over the reasons for Henry Singleton’s success as the CEO of the Teledyne Corporation.
Henry Singleton is considered to be one of the best CEOs to have ever lived. As Warren Buffett once said, “Henry is a manager that all investors, CEOs, would-be CEOs, and MBA students should study. In the end, he was 100 percent rational, and there are very few CEOs about whom I can make that statement.”
Here’s what I have learned:
Decentralization
“In other words, don’t hire a dog and try to do the barking.”
— Tom Murphy
As Charlie Munger once said, “I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.” In that sense, Henry Singleton was similar to Munger; he was always eager to learn from those who succeeded before him.
In fact, Singleton’s concept of decentralization came to him after he read the book “My Years at General Motors” by Alfred Sloan which we have discussed in a previous Chapter. Sloan, during his years as the CEO of General Motors, implemented a theory called “decentralisation with co-ordinated control”. He was a believer of a decentralization policy because, for one, it provided an opportunity for individuals to shine through with their initiatives as if they were running businesses of their own and it provided the company the ability to pay them accordingly to their success.
As a matter of fact, Sloan mentions that the Bonus Plan implemented by GM is strictly related to the policy of decentralization since it gave the executives the opportunity to be paid according to their accomplishments. This allowed them to attract and retain managerial talent.
Secondly, Sloan believed that decentralization allowed for better capital allocation for the company as it allowed GM to evaluate the rate of return of each divisions separately. Notably, he wrote that:
“[It] Increases the morale of the organization by placing each operation on its own foundation, making it feel that it is a part of the Corporation, assuming its own responsibility and contributing its share to the final result. As to its bearing on financial control: . . .
[It] Develops statistics correctly reflecting the relation between the net return and the invested capital of each operating division—the true measure of efficiency—irrespective of the number of other divisions contributing thereto and the capital employed within such divisions. As to its bearing on strategic investment: . . .
[It] Enables the Corporation to direct the placing of additional capital where it will result in the greatest benefit to the Corporation as a whole.“
— Alfred Sloan
However, despite these advantages, Sloan also understood the importance of having common policies to retain some control over the divisions. In fact, he developed a system of coordination that involved setting the overall goals and standards for the company such as implementing GM’s business concept and product policy that would differentiate itself from the others automobile manufacturers. This became vital as it is these policies that allowed GM to outshine Ford throughout the transformative years of the automobile industry in the 1930s.
Nonetheless, Sloan believed that the key part of management is to find the right balance between giving complete freedom to the divisions through decentralization and still having control over them.
Similarly, Singleton’s policy at Teledyne was to keep their operating units small and responsible for its own success. Teledyne’s executive management wanted their companies to operate with full autonomy. Singleton placed a big burden on the shoulders of their company presidents, as he once said, "We depend on them. We have to trust them. We succeed or fail according to what they do."
As a matter of fact, Singleton did not like to micromanage his companies from afar and expected his companies presidents to know far more than him about their products, markets, competition, etc. As Singleton once said, "Why bother them if they are doing their job?"
As such, considering much of the work was done in the individual companies, Teledyne’s head office was rather lean, with only around 150 persons as part of their corporate staff. The head office’s responsibility was solely to monitor the operations of the companies to be aware of their needs and performance, and to detect any business or financial or management problems before they become critical.
While Alfred Sloan would evaluate each of its departments’ performance through a rate or return, Singleton introduced the concept of the “Teledyne Return”, which emphasises generating profits and net cash flows. In fact, Singleton was very strict about his companies making profits, to the point that, internally, his companies were called “profit centers” as they were expected to show profit or to be changed in some way to do so.
The executive team at Teledyne would provide Singleton a five-year financial ranking of all the Teledyne companies, and based on the concept of the “Teledyne Return”, Singleton would be able to evaluate his companies based on the choices of investment and based on the decisions the company managers made. With all this information at hand, it was easy for Singleton to establish an incentive system to honour the companies and their managers who performed exceptionally well.
In fact, Teledyne had a Triple Crown awards given to those that achieved an all-time record in three categories: Sales, Net Income and Net Cash Flow. Companies that achieved outstanding results in two of these three categories would received the Double Crown Awards. This certainly encouraged managers to perform.
Considering Teledyne’s decentralization policy, Singleton understood that talented people were key to his success. As Isadore Sharp from Four Seasons once said, “Four Seasons is the sum of its people—many, many good people.” As such, Singleton always made sure to surround himself with enough talented people who were creative, good managers and doers:
“We have what is called a "management inventory." We work our heads off to increase our own capability at collecting and promoting the right people. 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, 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.”
— Henry Singleton
Singleton succeeded in doing so in two ways:
Firstly, whenever he was making acquisition of companies, Singleton was keen in keeping their owners or managers into Teledyne, considering they were the most knowledgeable about their fields, their markets and their production technologies. While keeping the owners would have been ideal, some of them were selling their companies because they wanted to retire. In those case, Teledyne would often ask their sons or relative who knew the business to take over and to manage it. This is a perfect reminder of how, sometimes, in an acquisition, the most important asset you are acquiring is the people.
Secondly, Singleton would use financial incentives in order to attract and retain outstanding key personnel to his company. He would use stock options as a way to bring into the company many highly qualified technical and management personnel. This is eerily similar to Alfred Sloan’s Bonus Plan implemented by GM which gave opportunities for executives to be paid according to their accomplishments.
Diversification
“Diversification is protection against ignorance.”
— Warren Buffett
During his youth, Henry Singleton always expressed his desire to someday establish and run a great corporation similar to General Electric, US Steel or AT&T. And as such, he was a student and an observer of the progress and growth of large corporations of his time. As we have mentioned previously, his concept of decentralization most likely came from observing Alfred Sloan’s work at General Motors.
Through learning from other successful entrepreneurs, Singleton realized that one way of growing a company was through successful acquisitions. And as such, considering Teledyne’s companies were always prioritizing the generation of cash flow, Teledyne had a growing wealth that Singleton could use in acquiring more companies, either through cash purchases or by equity arrangements.
However, while Singleton first started Teledyne as a digital semiconductor electronics company, he built it into a diversified powerhouse through selective acquisitions. For Singleton, it was important for him to acquire companies in diverse industries, as diversification was an insurance against catastrophe.
"Teledyne is like a living plant, with our companies the different branches and each putting out new branches and growing so that no one business is too significant."
— Henry Singleton
As a master of capital allocation, Singleton had very clear standards to be followed while considering if a company was a good candidate to be acquired and to be part of the Teledyne family. Jim Nisbet, who spent most of his career at Teledyne in the acquisition side of the business, listed the following criteria:
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 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?
Would this company be a good fit within the Teledyne organization and its goals?
This concept of growing a company through acquisitions reminds me of the way Wayne Huizenga built Blockbuster into the largest video rental company in the world. Huizenga, realized that by being in the video rental business industry, Blockbuster’s concept could be easily copied since there was nothing proprietary. As such, Huizenga believed that in order to dominate the market, he had to roll out the concept quickly and achieve a level of scale that would make Blockbuster difficult to dislodge due to economies of scale.
On this subject, Huizenga once said, "We better hurry up and develop this thing before somebody else figures out that what everybody is saying isn't right. And so, you know, we had to move quick.”
As such, Huizenga did what he did best: he went on a acquisition spree in order to have fast growth. He understood that the key to Blockbuster’s success would be growth—at nearly any cost in order to “build enough mass in markets to support advertising and create a loyal base of Blockbuster card-carrying customers.”
Capital Allocation
“Henry Singleton has the best operating and capital deployment record in American business . . . if one took the 100 top business school graduates and made a composite of their triumphs, their record would not be as good as Singleton’s.”
— Warren Buffett
In the case of Teledyne, what made Henry Singleton so great as a businessman was his capital allocation skills. As we have learned previously, Singleton mainly used acquisitions of companies in order to grow Teledyne. However, Singleton’s capital allocation skills truly shined when by 1970, Singleton realised that direct acquisitions of private companies were no longer attractive in terms of return due to the inflated prices, the size of Teledyne and the increase in competitors.
By consequence, he realised it would be much better to use Teledyne’s cash flow by purchasing public companies via the organisation of financial companies, by buying back Teledyne’s shares and by spinning offs subsidiaries.
Firstly, Singleton decided to purchase insurance companies into his Teledyne empire, yet, the main purpose of this was to use the “float” in order to purchase public companies. Because of the nature of the public market, Singleton was able to purchase profitable companies that were well-managed at valuation that was much more reasonable compared to the private market.
Singleton, in an interview with Forbes magazine in 1978, explains why he preferred purchasing part of companies’ stocks in the public market instead of an entire company on the private market:
“There are tremendous values in the stock market, but in buying stocks, not entire companies. Buying companies tends to raise the purchase 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 are right. Someone else does. So it's no acquisitions for us while they are overpriced. I won't pay 15 times earnings. That would mean I'd only be making a return of 6 or 7 percent. I can do that in T-bills. We don't have to make any major acquisitions. We have other things we are busy doing.”
— Henry Singleton
Using insurance companies’ float to invest in public companies is eerily similar to what Warren Buffett has done at Berkshire Hathaway. Here’s how Buffett describes float and how to take advantage of it: “To begin with, the float is money we hold but don’t own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money.”
This concept of using borrowed money or other people’s credit in order to invest reminds me of how Daniel Ludwig built his shipbuilding and shipping company. What is impressive about Ludwig was his ability for finding opportunities by using borrowed money to finance his lucrative projects. As a matter of fact, during the mid-1930s, he used a scheme of using other people’s credit to build his fortune in shipping oil.
He would first go to an oil company and obtain a long-term charter to haul their petroleum. Once that was done, he would go to a bank and, by using the charter as collateral, he would obtain a loan to obtain a ship to haul the petroleum. As such, instead of paying Ludwig directly, the oil company would make the charter payments directly to the bank which would deduct the loan payment and put the remainder in Ludwig’s bank account.
“The beauty of the scheme was that it allowed D.K. to build or renovate tankers without having to put up collateral or use his own credit. The oil companies were satisfied, because they were getting their petroleum hauled at bargain rates. The banks were satisfied, because oil companies were a much better credit risk than a small shipper like Ludwig. And D.K. was more than satisfied. As long as he took care to fulfill his charter contracts, he had a small but steady income, and, more important, by the time the contract expired he was the owner of a paid-up ship without having invested any of his own money.”
— Jerry Shields
Another incident when Ludwig was able to take advantage of borrowed money was right after World War I, when large numbers of vessels built during the war were considered surplus and were offered for sale at a bargain by the US Government to private investors at the condition that they were to be renovated and maintained in good condition for regular use and for future national emergencies.
As such, many smart shippers took this as an opportunity to purchase government-owned vessels, at a price that was much less than what it would have cost to build the vessels from scratch. Often, these speculators would do the minimum required renovation work and quickly sell the ships for a quick profit. But more importantly for Ludwig and his partners, the Shipping Board only required investors to put up 10% of the purchase price and the rest could be paid over time.
“Thus, by investing less than $50,000, Hall, Ludwig, and Leahy could buy three ships, remodel and sell them, use part of the proceeds to pay off the purchase price and renovation costs, and pocket the rest. If they managed to sell the three vessels for $1 million (a reasonable expectation at the time), they would reap over half a million dollars' profit on an investment of only $50,000.”
— Jerry Shield
Secondly, Henry Singleton was an early pioneer in repurchasing stocks in his own company in order to improve shareholder value. As a matter of fact, during the bear market of the early 1970s, Teledyne was suddenly trading at a P/E ratio if around 9 or 10 compared to the highs of P/E 30 to 70 in the 1960s. Knowing that his own company was trading at a bargain, Singleton went on to use Teledyne’s cash reserve to repurchase its own shares.
Stock buybacks is a great way to increase shareholder value as it reduces the number of shares and by consequence, increases the company’s earnings per share (”EPS”):
Unlike other large corporations who were paying cash dividends to their shareholders, Teledyne never paid any dividends for a large portion of its existence. The reason being that Singleton had a strong conviction that the cash was better employed in growing Teledyne’s business through acquisitions or through stock buybacks rather than returning the cash to shareholders.
It is fair to say that Singleton’s results are unmatched in terms of value creation to his shareholders; “An investor who invested in Teledyne stock in 1966 was rewarded with an annual return of 17.9 percent over 25 years, or a return of 53 times his invested capital. That compares to 6.7 times for the S&P 500, 9.0 times for General Electric, and 7.1 times for other comparable conglomerates.”
One of my favourite anecdote in the book is also a perfect example of Henry Singleton’s genius in capital allocation. When asked how he was able to identify Apple as a future winner among various early computer start-ups, Singleton responded with the following:
"I figured most of these millions of expected potential computer customers would at first be intimidated by computers. But, could anyone be intimidated by a computer named Apple? (…) Beside, all the others, except Apple, if they failed, would just walk away. Apple's founders, I noted, had mortgaged their homes to the hilt and borrowed heavily from their parents, their brothers, sisters, aunts and uncles, and grandparents and cousins, and they plowed every cent into the company. They just had to make good!"
— Henry Singleton
Beyond the Book
Read "Henry Singleton on Strategic Planning — Stay Flexible" by Farnam Street
Watch "Warren and Charlie Appreciate Henry Singleton | Teledyne| 2015" on YouTube
Watch "Warren Buffett On The Wonders Of Float (1998 Q27 am)" on YouTube