Sunday, February 5, 2017

Review of Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It by George A. Roberts

You have probably heard of Teledyne. It is one of the companies profiled in The Outsiders, and then I have mentioned it in the past in the contexts of James Ling and also share repurchases.

The man behind it was Henry Singleton. His right hand man was his West Point classmate George Roberts, who wrote Distant Force as a memoir of the company.

Teledyne was a roll-up of electronics, aerospace, and other technological businesses starting in 1960, which was after Ling started his roll-up strategy. Roberts says that Singleton studied Ling, which is interesting since he did avoid Ling's acquisition mistakes, and is now considered a genius "Outsider" (while Ling who went bankrupt is obviously not).

In his review of The Outsiders, youngmoney said, "The Outsiders is popular because it's inspiring rather than because it's informative. The book doesn't provide nearly enough detail for readers to determine why the capital allocation decisions it chronicles were successful". 

Roberts has nothing but praise in the book for everyone he worked with at Teledyne. The company's subsidiaries were criminally prosecuted multiple times for various infractions during his tenure but he mentions no names. The book is a litany of what happened at the company but has almost nothing on why it happened. This may be because Singleton left everyone in the dark about his motives and intentions. (Maybe that is the real success secret to take away from the book?)

There is a CD-ROM in the back with "Teledyne annual reports," but these are all marketing brochures and company newsletters, not the annual financial reports. Sure, the compounded annual growth of Teledyne stock and shareholder equity was phenomenal, there is really not much in this book that would be useful for reverse engineering what Singleton did.

The streak of acquisitions happened during the 1960s, which was a bull market with high P/Es. The big years for share repurchases were 1972-1976, which is when the Schiller P/E got down below 10. (The lowest it got during 2009 was 15x.) Yet Roberts does not give any interesting financial ratios to explain the capital allocation decisions.

For example, why buyback stock instead of continuing the roll-up strategy during the bear market? Not that the decision was wrong, but what was the rationale? Also, what was the story with the insurance company acquisitions? No book value multiples are given. Why didn't they buy any Geico? What did Teledyne management think of Berkshire Hathaway and Buffett? (We know that Buffett does really respect Singleton.)

Singleton made some very astute moves into and out of bonds but... what was his method for timing interest rate cycles?

Another question that should have been addressed regards the economics of conglomerates. In 1999, less than 40 years after starting, Teledyne split into three companies. Prior to that there had been three other spinoffs. It is not clear why the company parted with so many subsidiaries. Were they better off together or not? Buffett The Collector at least has a rationale for never selling anything and therefore a philosophy of conglomeration.

During the 1970s Singleton favored splitting the stock and also paying meaningless 3% "stock dividends" [pdf], which of course Buffett would regard as totally foolish. It looks as though Buffett's philosophical framework for investing, whatever you think of it, does tower over Singleton's, and his over Ling's. 


1 comment:

James said...

Thanks for the mention.

I get the impression that Teledyne was a glorified Ponzi in the '60s--it acquired companies that traded at lower P/Es, which let it manufacture earnings growth, which gave it a higher P/E, which allowed it to acquire more lower-P/E companies, and so on. Like stock buybacks, it's a form of "great capital allocation" that involves transferring wealth from some pockets to others.

Good to Great claims that Teledyne stock underperformed the market by a wide margin after Singleton retired--IIRC, it was flat while the S&P tripled or something like that.