The contrarian conglomerate king who pioneered the use of share buybacks.
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This is a companion discussion topic for the original entry at https://commoncog.com/c/cases/henry-singleton-conglomerate
This is a companion discussion topic for the original entry at https://commoncog.com/c/cases/henry-singleton-conglomerate
I’ve learnt something remarkably interesting, from an email from @solohbet.
Many decades ago (around 1976), I wrote a term paper during my MBA pursuit on financial ratio analysis, which I’ve long lost a copy of. Nevertheless, Teledyne measured their divisions’ performance using an ingenious formula using 24-month moving averages, which largely prevent year-end manipulation and easing off the gas by executives who have made their bogies and saving good news for next year. The second piece, and in the same vein to prevent games, credited only half of reported income before taxes (EBT) plus half of cash flow. It looked something like this:
(1/2 of EBT + 1/2 of Cash Flow)/ Stockholder’s Equity, each element being the 24 mo. moving average. It might have made a great Xmrit chart.
Bruce can’t find the source for this, but he’s sure on the details of the formula, and so I’m including it here in the comments (at least until I can find a public source). This is fascinating — and it ties in with the Incentive Design piece that you’ll notice pops up again and again when it comes to conglomerates.
Bruce did find this link — but it doesn’t talk about the 24 month MA.
The Teledyne return was an average of net cash flow and profit. The book gives the following example:
- Reported profit: $1,000,000
- Reported cash flow: $500,000
- Teledyne return: $750,000 = ($1,000,000 + $500,000)/2
The company’s thinking was this: Your profit was $1,000,000, but you received only $500,000 in cash. We’ll credit you fully for profits booked and received as cash. We’ll give you credit for some of the profit booked but not yet collected.
This single metric forced company presidents to focus on profit and cash flow simultaneously. It also allowed Teledyne corporate to standardize its comparison of operating company results.
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I’m a little annoyed at myself for this — @solohbet gave me a link to https://www.hvst.com/posts/dr-henry-singleton-and-teledyne-wm4T112d which I think beats Commoncog’s case on Singleton in some ways.
I’ll see if there’s some way to quote or integrate this other piece into the case.
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Another fascinating yet not often discussed topic is the concept of charging the subsidiaries for capital, at least for purposes of compensation. “If he has low margins, it is hard to get capital from Henry and me.” Berkshire does this, to the point of studying Teledyne: https://www.youtube.com/watch?v=DtskUZ-vGjE
What other companies openly talk about the opportunity cost of capital?
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@TylerD I bought The Warren Buffett CEO hoping to get more detail on how Buffett charges for the cost of capital (e.g. when a manager wants to keep capital in the business for expansion, or even borrow money internally from HQ). Sadly, it has very little on the topic. I know from listening to various Berkshire shareholder meetings that there’s no one method — Buffett seems to deal with the decision on a case-by-case basis. But I’m very curious as to what principles he uses to make such decisions, especially given he has said on countless occasions he has an explicit hurdle rate for capital allocation.
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@Gilbert_Lee pointed out the following two additional clip in response to “how Buffett charges for the cost of capital”:
He also said that Mark Leonard of Constellation Software has talked about their approach to charging for the cost of capital before, but it’s in some AGM recording for which no transcript is readily available. I hope he manages to dig it up — I don’t mind putting it through some AI transcription.
Edited to add: the following bit of the Acquired episode interview with Jim Weber, of Brooks Running (which is a Berkshire subsidiary) comes to mind. It’s pretty funny:
Acquired’s David: I’m curious. I hadn’t even thought about Strava and the amount of data that you’re able to see from that. What does the digital side of running in the future look like for Brooks and for the industry?
Jim: It’s interesting because quantified self and those tools have been ubiquitous. They’re out there. The Apple Watch is a damn great product. What’s interesting about that is both Under Armour and ASICS have spent hundreds of millions of dollars on digital apps. I think they’ve really struggled a long time.
David: Runkeeper and MapMyRun both.
Jim. Exactly. I wanted to buy every one of those and Warren wanted me to do the multiple on EBITA. There was no EBITA. Let’s just say it’s hard to do acquisitions sometimes. (Audience laughs)
David: At least one of them was a completely free product, I think, right?
Jim: Oh, man. They don’t make money. Under Armour is trying to sort through that now. They’re starting to shrink, so as Adidas. Those tools are really powerful for data, but how do you monetize it? We haven’t gotten there yet, but we’re building a Brooks Run Club. Finally, we’ve launched.
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