Wednesday, January 28, 2015

Review of Ling: The Rise, Fall and Return of a Texas Titan (1972) by Stanley H Brown

Few remember 1960s conglomerate managers James Ling, subject of Ling: The Rise, Fall and Return of a Texas Titan, but if things had worked out better for him, he would probably be profiled in The Outsiders. The story is:

"In 1947 he founded his own Dallas electrical contracting business, Ling Electric Company, where he lived in the rear of the shop. After incorporating and taking his company public in 1955, Ling found innovative ways to market his stock, including door-to-door soliciting and selling from a booth at the State Fair of Texas. In 1956 Ling bought L.M. Electronics and transformed it into the conglomerate Ling-Temco-Vought."
The book is worthwhile as a case study because Ling must have been the first guy to frenetically tinker with his capital structure the way Malone or the other Outsiders do today. The book is from 1972 and the author is really taken with the novelty of all the acquisitions, capital structure changes, and spinoffs.

(Henry Singleton and Teledyne aren't until later. Singleton and Kozmetsky started working together in 1960, the IPO was in 1961, and the acquisition spree is the latter half of the decade. The Teledyne stock buybacks were between 1972 and 1976; the bear market.)

Anyway, the Amazon summary foreshadows what happens to Ling. "The trouble with financial games is that they are easier to play than focusing on sound management and products, and they are surely more fun to watch." A valuable lesson for our time, perhaps?

Now, Ling was actually a bad capital allocator, even objectively speaking, because he had the bizarre goal of being high in the Fortune 500 (ranked by sales), so he made bad acquisitions just to grow revenue. This goal is difficult to understand, so I think we have to remember that back in the 60s, being at the helm of a company with big revenue would have been (in terms of status) like commanding a huge army in a bygone time or running a major activist hedge fund today.

And obviously there are lots of really crappy businesses that always trade at low P/S (commodity businesses), so if you're just trying to grow sales, you will end up with a portfolio of commodity businesses that will tank in the next recession. (It might have been different if Ling had bought bad business model companies out of bankruptcy.)

Just like the Outsiders, Ling had all his money in the stock. "Owner operator"!

4/5 because it is a cautionary tale. Ling experienced adulation for maybe twenty years until the subtle flaws in his strategy brought the whole thing crashing down.

When we say someone followed a "flawed" strategy, it sounds like he is dumb or a bad guy, but it just means that the strategy hits an environment that it is not adapted for. Someday I will write the review of Why Most Things Fail and talk about that, but the same concept is in Nature: An Economic History which I mention in the Conquer the Crash review.

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