PDF Summary:The Outsiders: Eight Unconventional CEOs, by William N. Thorndike

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The author investigated CEOs like Henry Singleton who had outlier performance compared to the rest of their industry and the market. He found 8 CEOs whose companies showed remarkable financial performance over the course of decades. Furthermore, he found uncannily strong patterns among the outsider CEOs that distinguished them from typical CEOs. These CEOs and their management practices are the subject of The Outsiders.

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When Smith died in 1966, Murphy became CEO of Capital Cities. Murphy in turn promoted Dan Burke, a Harvard MBA he had hired 5 years earlier, to COO. They had a clean division of labor—Burke would focus on the day-to-day operations, while Murphy was responsible for capital allocations and acquisitions. In essence, Burke generated the free cash flow, and Murphy spent it.

At the time, Capital Cities had revenues of $28 million. Over the next few years, Murphy made large acquisitions.

• In 1967, Murphy bought a Houston ABC affiliate for $22 million, then the largest acquisition in broadcast history.
• In 1968, he bought Fairchild Communications, a trade magazine publisher, for $42 million.
• In 1970, he bought broadcaster Triangle Communications for $120 million.

At the time, the FCC allowed a company to own a maximum of five VHF TV stations, and Capital Cities had reached this maximum. Thus they turned to newspaper publishing, which had a similar business model as broadcasting. Once again, he had an appetite for acquisitions, buying newspapers for values in the high 8-figures in the 1970s. In 1980, he entered cable television by buying Cablecom for $139...

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Singleton took advantage of these dynamics. In 8 years ending in 1969, he purchased 130 companies in a wide range of industries, including specialty metals and insurance. Most companies were purchased using Teledyne stock.

In 1967, Singleton acquired Vasco Metals and promoted its president (and Singleton’s former roommate at the Naval Academy) George Roberts to president of Teledyne. As with Burke at Capital Cities, Roberts became the operating manager of Teledyne, freeing up Singleton to focus on strategy and capital allocation.

In 1969, Teledyne’s stock began falling in P/E ratio, and acquisition prices began rising. Realizing that Teledyne’s stock would no longer be profitable for acquisitions, he laid off his acquisition team and never made another material acquisition. Instead, they turned their focus to increasing margins at business units. Through the 1970s and 1980s, Teledyne saw remarkably high return on assets of 20% or greater.

This generated remarkable free cash flow, which was used by Singleton in a series of aggressive share repurchases. At the time, the conventional wisdom held that repurchases were done only by weak companies that lacked investment...

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In turn, his strategy for General Dynamics had three key ideas:

1. The company would only stay in businesses where it could be #1 and #2 (a famous Jack Welch idea).
2. The company would leave commodity businesses with low returns.
3. The company would stick to its strengths. Namely, it would leave commercial businesses and stick to defense and government contracts.

In his three years as CEO, Anders implemented a rigorous focus on margins and generating more cash:

• He found that the mindset of the company was to make bigger, faster weapons to grow revenue, with little care for shareholders and financial performance. He moved to instill a new mindset of financial performance, emphasizing cash return on capital.
• He made large personnel adjustments. He replaced 21 of the top 25 executives, reduced headcount by 60%, and cut corporate staff by 80%.
• He promoted Jim Mellor, a business unit head known for enforcing results, to COO.
• He and Mellor tightened operations by reducing inventory and capital equipment. They found a systemic problem of excess inventory (for instance, having dozens of F-16 plane canopies in a facility that made just one plane a...

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• The cable industry was growing extremely quickly, with subscribers growing 20-fold over a matter of years in the late 1960s and early 1970s.

In 1970, one of his clients at McKinsey, General Instrument, made an offer to him to run Jerrold, its cable television equipment division. Within two years, he was made an offer by TCI to join as CEO.

TCI was founded in 1956 by Bob Magness and had gone public in 1970. In 1973, when Malone joined, it had 600,000 subscribers and was the #4 cable company in the US. It had taken on a troubling amount of debt—17 times revenue—and was dangerously close to bankruptcy.

1973-1977: Stabilization

Malone’s first priority was to keep TCI out of bankruptcy. He instituted a new lean culture focused on financial discipline, estimating that growing subscribers by 10% per year while maintaining margins would keep them out of bankruptcy. He maintained frugality at headquarters, keeping just a single receptionist and grouping multiple executives in the same motel room when traveling.

Characteristic of outsider CEOs, Malone had a COO, J.C. Sparkman, who enforced budgeting and cash flow benchmarks at the operating divisions. Managers who...

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In 1971, Graham took the Washington Post Company public to raise money for acquisitions. She started by buying the Trenton Times, which was a #2 paper in a competitive market and showed mediocre performance. This would teach her discipline in acquisitions going forward.

In 1974, a relative unknown began buying stock in the Post, ending with 13% ownership. His name was Warren Buffett. While her board counseled her to avoid the unknown, she met with him and found his advice indispensable, and she invited him to join the board. He would prove to be vital throughout Graham’s tenure, advising her around capital allocations.

In 1975, the Post faced a worker’s strike from the paper printers. Determined not to give in, Graham hastily hired a crew to man newspapers, publishing for 139 days before the printers conceded. Winning many favorable concessions, Graham made big improvements to the Post’s margins.

Around this time, Buffett advised Graham to repurchase Post shares, given their low prices. She repurchased 40% of Post shares, an unusual move that her competitors didn’t follow.

In 1981, the other major newspaper in Washington, the Washington Star, shut down. The Post became a...

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Unlike other outsider CEOs, Stiritz had been an insider at the company for over a decade. But he brought an unconventional plan that deviated from competitors. He knew that the consumer brands had attractive economics (high margins, low capital requirements), and focusing on this core would propel Ralston to new heights of profitability. When he became CEO in 1981, he implemented his plan decisively.

First, he sold the non-core businesses such as Jack in the Box, the hockey team, and the agricultural operations.

Then he made two large acquisitions—Continental Baking (including Twinkies and Wonder Bread) and Energizer Battery, totaling over $2.2 billion and 30% of Ralston’s market capitalization. Both businesses had languished under their previous owners, due to neglect or insufficient skillset. Ralston quickly improved its performance by improving marketing (launching the Energizer bunny campaign), improving distribution, launching new product lines, and reducing costs. Over their lifetime at the company, Energizer would generate 21% annualized returns, and Continental 13%.

Over the 1980s, he continued executing the plan, adding acquisitions that would strengthen...

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Diversification into Beverages

By the late 1960s, he figured that theater growth would likely plateau at some point, so he began looking to diversify into other businesses. His ultimate goal was to have three legs in the company, each a strong business that wasn’t correlated with the others.

In 1968, he entered beverage bottling by purchasing American Beverage Company (ABC), the largest independent Pepsi bottler, for 20% of his company’s enterprise value. His work in theater concessions had given him an appreciation for the attractive market dynamics of beverage bottling:

• Beverage companies formed an oligopoly, representing high returns on capital and strong long-term prospects.
• Pepsi bottlers tended to be fragmented, compared to the larger Coca-Cola bottlers. Furthermore, since they served the #2 brand (Pepsi), they tended to have lower valuations. Thus, Smith could buy up bottlers for lower prices.
• ABC could serve as a platform company, to which new acquisitions of bottlers would be added to increase scale and profits.

Over the next decade, Smith purchased more bottling companies. Increasing scale allowed for ever more efficient operations, such...

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In 1954, Graham finally offered Buffett a job, and Buffett continued researching underpriced public companies, which were often cheap, low-quality companies (Buffett called them “cigar butts”). When Graham closed his firm in 1956 to focus on other interests, Buffett started his own fund in Omaha, raising $105,000 (a bit under $1 million today). Over the next decade, Buffett continued investing by Graham’s value philosophy, achieving an average 30% annual return even without using debt.

Buffett Refines His Investing Style

But in the mid-1960s, Buffett began deviating from the value method, instead investing in high-quality companies that had a strong competitive profile and long-term prospects. His early investments in this style included Disney and American Express.

In 1965, Buffett purchased the textile company Berkshire Hathaway, a 100-year-old family business, through a hostile takeover. The company was only worth $18 million in enterprise value and was in a commodity business, but Buffett saw it as a platform to build his investments around. After installing a new CEO, who optimized operations, Berkshire Hathaway had $14 million of profit.

Buffett used this...

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1. Consider decentralizing your management. How can you reduce staff at corporate headquarters?
2. Retain earnings only if you have projects that clear your hurdle rate. Otherwise, consider a buyback or paying dividends (always being mindful of taxes).
3. If prices are high, consider selling businesses or stock.
4. Close struggling business units if they are unable to produce acceptable returns.

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• They enforced a company culture of frugality, returns, and low ego.
• The CEO Tillerson rarely interacted with Wall Street or industry conferences, avoiding the spotlight to focus on the business

Relevance for Everyone

What if you’re not a CEO of a large public company? Are the decisions relevant to everyday managers and business owners?

The author argues yes—what’s shown here is a rational approach to capital allocation: figure out the value of all the options available to you, then choose the most profitable ones, ignoring conventional wisdom and what your competitors are doing.

Here’s a realistic example. Imagine you own a single-location bakery, and you have more demand than you can service. You consider two possible options: 1) expanding your current store, 2) opening a second store in a new location.

Using the checklist of the outsider CEOs, work through the following steps:

• Determine your personal hurdle rate for investments. Say it’s a 20% annual return on investment.
• Calculate the costs of both options.
  • 1) Expanding your current store might cost $50,000 for a new oven and $50,000 for renovations, for a total upfront cost of...