2024-01-20

Henry Singleton and Teledyne Pt.2

Henry Singleton graduated from MIT in 1950 and began working at Litton Industries, where he built the first inertial guidance system. After climbing the corporate ladder to become the general manager, he resigned in 1960 and, at the age of 43, founded Teledyne. Between 1961 and 1969, Singleton embarked on an ambitious acquisition spree, purchasing 130 companies across various industries, including aviation electronics, specialty metals, and insurance. Notably, the competitive landscape was favorable as there was minimal private equity involvement, and the acquired companies often had substantially lower P/E ratios than Teledyne's own.

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Singleton adhered to several principles during this period:

  1. He predominantly used Teledyne's stock for acquisitions.
  2. Rather than tackling turnaround situations, he focused on profitable companies.
  3. Rather than tackling turnaround situations, he focused on profitable companies.
  4. The strategy involved specialization in high-margin products, particularly those sold by the ounce rather than the ton.
  5. Singleton avoided purchasing companies with P/E ratios above 12.
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The acquisition spree came to a halt in 1969 as Teledyne's P/E ratio declined, and acquisition prices rose. Singleton's strategic approach and principles played a key role in the success of Teledyne during this era.

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As you can see, he still issued shares in these ten years, but while the shares only grew 14 times, his EPS grew 65 times. Like Tom Murphy, Singleton bet heavily on decentralization instead of 'integrations' and 'synergy.' He broke the companies into their smallest parts and drove accountability and managerial responsibility as far down the company as possible. 'Managers who made their numbers did well; those who did not moved on.'

He also, like Murphy, focused on cash flow instead of reported earnings.

Teledyne Return

Singleton and CFO Jerry Jerome built Teledyne's return to keep incentives high and focus on cash generation. These are the steps:

  • Averaging Cash Flow and Net Income for each business unit.
  • Emphasis on Cash Generation:

    • After 1969, they:

  • Improved margins.
  • Reduced working capital.

    • Result: Huge cash generation and a high return on assets (20%).

    When a division did not meet Teledyne standards and there was no turnaround in sight, they simply exited the industry. In 1972, Singleton initiated a tender and continued to buy back shares for the next 12 years, which was highly unusual for that time. In total, he repurchased more than 90% of the company's shares. Buybacks need to be strategically used; you cannot just repurchase whenever you want. In total, he brought back $2.5 billion in sizes ranging from 4% to 66% of book value, all at remarkably low P/E ratios while revenues and net income continued to grow. Teledyne issued stock over a P/E of 25 and repurchased below 8

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    In a bold contrarian move, he also increased the total equity allocation in the insurance portfolio from 10% to 77% in six years, investing 70% of the assets in only five companies, with 25% allocated to one specific company. He invested in companies he knew well (Curtiss-Wright, Texaco, Aetna) with record-low P/E ratios.

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    When Teledyne’s operating results started to decline, he began to spin off Argonaut and Unitrin to reduce complexity and unlock the full value of the company's operations. Fayez Sarofim stated, 'There was a time to conglomerate and a time to deconglomerate.' In 1997, not knowing what to do with his capital at high P/Es, he started to pay a dividend. Singleton retired as chairman in 1991.

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    Another important point for CEOs is time management. They can focus on the management of operations, capital allocation, and investor relations. Henry Singleton said, 'I don’t reserve any day-to-day responsibilities for myself, so I don’t get into any particular rut. I do not define my job in rigid terms but in terms of having the freedom to do whatever seems to be in the best interests of the company at any time.

    '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 is to keep coming to work. . . . I like to steer the boat each day rather than plan ahead way into the future.'"

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    Types of Buybacks:

    Straw:

  • Uses a small percentage of excess cash.
  • Repurchase of shares and then gradually over a period of quarters.
  • Buys stock on the open market.
  • Careful and conservative.

    • Suction Hose: (preferred)

  • Less frequent and much larger repurchases.
  • Tender offers.
  • Occasionally funded with debt.
  • Singleton, at one time, bought back all offered shares in a tender (20%), all paid with fixed-rate debt. Singleton was a contrarian at heart; when many companies announced share buybacks in 1997, he told Leon Cooperman, "If everyone’s doing them, there must be something wrong with them."

    • Here are some commonalitys between Singelton and Buffet

  • The CEO as investor. Both Buffett and Singleton designed organizations that allowed them to focus on capital allocation, not operations. Both viewed themselves primarily as investors, not managers.
  • Decentralized operations, centralized investment decisions. Both ran highly decentralized organizations with very few employees at corporate and few, if any, intervening layers between operating companies and top management. Both made all major capital allocation decisions for their companies.
  • Investment philosophy. Both Buffett and Singleton focused their investments in industries they knew well, and were comfortable with concentrated portfolios of public securities.
  • Approach to investor relations. Neither offered quarterly guidance to analysts or attended conferences. Both provided informative annual reports with detailed business unit information.
  • Dividends. Teledyne, alone among conglomerates, didn’t pay a dividend for its first twenty-six years. Berkshire has never paid a dividend.
  • Stock splits. Teledyne was the highest-priced issue on the NYSE for much of the 1970s and 1980s. Buffett has never split Berkshire’s A shares (which now trade at over $120,000 a share).
  • Significant CEO ownership. Both Singleton and Buffett had significant ownership stakes in their companies (13 percent for Singleton and 30-plus percent for Buffet). They thought like owners because they were owners.
  • Insurance subsidiaries. Both Singleton and Buffett recognized the potential to invest insurance company “float” to create shareholder value, and for both companies, insurance was the largest and most important business.
  • The restaurant analogy. Phil Fisher, a famous investor, once compared companies to restaurants—over time through a combination of policies and decisions (analogous to cuisine, prices, and ambiance), they self-select for a certain clientele. By this standard, both Buffett and Singleton intentionally ran highly unusual restaurants that over time attracted like-minded, longterm-oriented customer/shareholders.

    • Like i said before much of this is taken from the book The Outsiders.

    Thanks,

    Finn