Podcast Review | #431 How Henry Singleton Worked by Founders w/ David Senra

How Henry Singleton Worked by Founders w/ David Senra

Charlie Munger called Henry Singleton the "smartest single human being he had ever known", and estimated his raw intelligence as being in the top one thousandth of one per cent. Buffett went further again, describing it as a crime that business schools did not study him. This Founders episode draws on two books to explain how Singleton actually ran Teledyne – a company he founded in 1960 at the age of 43, having never started a business before, and then compounded at 20.4% per annum for close to 30 years.

The operating model is the part that surprised us. Teledyne ran with fewer than 50 people at head office supporting roughly 40,000 employees, with no human resources department and no investor relations function at all. This was a case study in decentralisation at its finest. The group was deliberately broken into ~130 small business units, on the logic that smaller units give managers tighter control and make them genuinely responsible for their own results. In one year, 129 of those 130 units were profitable.

Managers were paid on the 'Teledyne return', being the average of net income and cash flow. If managers were good at what they did and produced results, there was significant autonomy. He believed that if business unit managers knew their businesses intimately from A to Z, there was no problem they couldn't solve. Singleton was frugal to the point of legend. Even after he had retired and was living on his substantial ranch, he still signed every cheque so as to know exactly what his costs were.

Everything at Teledyne was centred around repatriating cash flow back to head office for Singleton to allocate. When he judged his own multiple to be materially above that of an acquisition target, he would use his shares to acquire and capture the multiple arbitrage. When he saw his own stock as too cheap, he bought it, and between 1972 and 1984 repurchased roughly 90% of Teledyne's shares across eight tender offers. He was affectionately known as the Babe Ruth of repurchases, generating a 42% compound return across those tenders.

For those of us who spend our days assessing management teams and boards, the takeaway is that decentralisation, a cash-based incentive metric and a willingness to ignore the market are largely one and the same, being key inputs in the successful allocation of capital. A good quote from the man himself below…

"If anyone wants to follow Teledyne, they should get used to the fact that our quarterly earnings will jiggle. Our accounting is set to maximise cash flow, not reported earnings." – Henry Singleton

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