Book Summary: The Outsiders

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

Author: William Thorndike

Key takeaways: This is one few books recommended by Warren Buffett, and touches on one of the most skills of a CEO–capital allocation. I have read the book twice and will probably 10 or so more times before I die. Anyway, per Thorndike, CEOs need to do two things well–(a) run their operations efficiently, and (b) deploy the cash generated. CEOs have five choices for deploying capital:

1. investing in existing operations
2. acquiring other companies
3. issuing dividends
4. paying down debt
5. repurchasing stock

…and three ways of raising capital:

1. tapping internal cash flow
2. issuing debt
3. raising equity

The book focuses on a select few individuals who understood that:

• capital allocation is a CEO’s most important job
• per share value is what counts
• cash flow, not EPS is what matters
• decentralized organizations release entrepreneurial energy and also keep costs and “rancor” down (there is a fundamental humility in decentralization–it’s an admissions that headquarters does not have all the answers and that much of the value is created by local managers in the field; this also gives so much autonomy to the local managers that they can’t imagine leaving)
• independent thinking is very important
• sometimes the best investment opportunity is your own stock
• with acquisitions, patience is a virtue as is occasional boldness

As it were, the CEOs described below were analytical, humble, frugal and understated. They were also first-time CEOs with little to no prior management experience, except in one case, were new to their industries, developed their custom C/F based metrics, never paid dividend and and never provided guidance. In the foxes vs. hedgehogs analogy, were definite foxes. Most importantly, they were blindly contrarian, and stayed away from the mysterious corporate force dubbed  institutional imperative by Warren Buffett. They were very active during the times of most uncertainty and were very active during the extended economic malaise period of 1974-1982 period.

(My note: these CEOs were extremely talented and had found notable success before becoming CEOs, and thus mundane business problems did not faze them and they had confidence to be the iconoclasts they were).

Tom Murphy at Capital Cities Broadcasting: Murphy’s formula was focus on industries with attractive economic characteristics, selectively use leverage to improve operations, pay down debt and repeat (what one would call a roll-up).

Henry Singleton at Teledyne: He famously kept an open schedule (pragmatic opportunism vs. a detailed strategic plan), and generally eschewed investor relations and business press. He saw himself as an investor, and designed organizations so that it allowed him to focus on capital allocation, not operations. Singleton also had unusually high ownership of Teledyne (13%).

Bill Anders at General Dynamics: after inheriting a company in a tailspin, he focused on cash returns on capital, and bid on projects only when the returns were compelling and probability of winning was high. In the first two years, they used the working capital to wring cash, and then set out to divest non-core assets). Anders systematically shrunk the company to focus on shareholder returns.

John Malone at TCI: Malone brought EBITDA in common use. In additional to the five uses of capital, Malone added a sixth item: investment in JVs, though because of these JVs, TCI was notoriously hard to analyze. Mathematicians often get their insights when they take variables to the extremes, and Malone was no different–TCI was the largest operator with lowest programming costs, least maintained facilities, most complex structure and highest returns.

Katharine Graham at WaPo: Not much to add to this very well-known story.

Bill Stiritz at Ralston Purina: Sold businesses that would have required large capital outlays to focus on businesses built on brands.

Dick Smith at General Cinema: famously spent little time with investors (Buffett estimates that the average CEO spends 20% (!) of his/her time with investors).

Warren Buffett at Berkshire Hathaway: duh.