Leon Cooperman: Henry Singleton – A Case Study In Financial Brilliance
[buffett]
Buffett considers that Henry Singleton of Teledyne has the best operating and capital deployment record in American Business. When I asked if he did not consider Tom Murphy of Capital Cities to be equally outstanding,Buffett smiled and said, “Well, Murphplays a simpler game,”but added that part of the great business ability is to get into simple games. Singleton’s return on assets, calculated in the way that Buffett likes to do it (Inventory plusfixed assets), is unique. All four major industry groups in Teledyne are in fully competitive areas; none has a special protected niche; and yet all four earn 50 percent on assets. The company earns $250 million after tax, with very conservative accounting.
Singleton bought 130 businesses for “Chinese paper,”as it used to be called, when his stock was riding high. Then when the market, and his stock, fell he reversed field and the last eight years hasn’t acquired a single company; on the contrary, by buying his stock back he has shrunk his capital from 40 million shares to 12 million.
According to Buffett, if one took the top 100 business school graduates and made a composite of their triumphs, their record would not be asgood as that of Singleton, who incidentally was trained as a scientist, not an MBA. The failure of business schools to study men like Singleton is a crime, he says. Instead, they insist on holding up as models executives cut from a McKinsey & Companycookie cutter.
Excerpt from Pages 24 & 25 of The Money Masters
Author: John Train, Publisher: Harper & Row, Published: 1980
Exhibit 5: The Strategic Positioning of Teledyne
Strategy One – Growth Through Acquisition –1961-1969
Strategy Two – Intensively Manage Your Business –1970-1981
Strategy Three –Repurchase Your Undervalued Equity –1972-1984
Strategy Four – Stocks Preferable to Bonds for the Taxable Investor –1976-1982
Strategy Five – Simplify the Corporate Structure and Focus Management –1986-1992
Exhibit 10: Let’s Take a Closer Look at the 5/1984 Tender
5/9/84 close
$155 ¾ x 20.3mm shares = $3.16 B Market Cap
Buyback = 8.7mm shares x $200 = $1.74 B
New Shares Outstanding = 11.6mm (42.9% reduction)
90 Days Later
Stock Price $300 x 11.6mm shares = $3.48 B Market Cap
So despite having $1.74 B less assets, the company’s market cap rose by $320mm! In that period, the overall market was largely unchanged.
I would also note that Dr. Singleton used cash in the offer and not debt. He avoided getting caught with high cost fixed rate paper at a time when interest rates were set to decline.
Exhibit 11
“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.
As for the stocks we picked to invest in, the purpose is to makeas 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.”
February 20, 1978 Issue of Forbes Magazine
Quote of Dr. Henry Singleton
[klarman]
See full PDF below.
