ze, some not ous as though industries are 0 keep price characteriza anybody who ate business, trust defense es who need ‘ean obtain it sult counsel, cies and thelr tion practices heir practices tobe and still urposes. rs eaish of late, ‘winner, with ng {We eannot atonal capital | corporations “Tpersonally mmpanies ike begin taking: ot likely, not because Japa o purchase up ponds without capital gains ly for governs (ex., World end to compo= 1% of the yen= ve individuals caly bball tutions), this woes the yem= ves, but ean fnance minis tax break to nso, foreign: led with the: nts tradition: debtors few York City the yen-bond might offend eked out the ‘We ean only ers here, Not maybe if New f your federal here. But do nbodia? Now: IARY 20, 1978 The Sphinx Speaks Teledyne’s lofty Henry Singleton is not given to justifying his actions. But here, with unusual frankness, he expl s why he is buying the stocks of other conglomerates—and tells how he and George Roberts run their remarkable creation. Sy ROBERT J. FLAHERTY War's Hexny SINGLETON up to? Garls B. (Tex) Thomton of Litton In lustries would like to know. So would T folind Berner of Curtiss-Wright and Timey Reichhold of Reichhold Chemi- leh, So would a large segment of Wall Siret. Through insurance company sub- Silares, Sinleton's Teledyne has ace Inted large blocks of cheap stock in lingomerates and nonblue chip indus buh Is he aiming for some mammoth fgsitions? Will he try to take these st way to build Teledyne tlexly a $2.2-billion company, into a fi Higer onc? Fortune magazine recently speculated lt Singleton would—and so did the Wal Street Journal. But in an interview ih Fonaes late last month, Chairman Shleton vowed that takeovers were tury fer from his mind. Ina long, far Iging talk he articulated his highly in tiulstic management — philosophy li explained why his insurance compa- iishad been buying so much conglom- Inte stock, Said he "Thore are tremendous values in the Sook market, but in buying stocks, not nie companies. Buying companies lads to raise the purchase price too Tigh. Don't be misled by the few shares Fnling ta low multiple of6 or 7. Ifyou Iytoacquire those companies the mult Wis more like 12 or 14. And manage Iumt will say: Ifyou don't pay it, some foe eke will” And they are’ right Suncone else does. So, it's no acquisi- bis fr us while they're overpriced. 1 Sunt pay 15 times earings. That would gan Fd only be making a return of 65 He. Team do that in T-bills “Astor the stocks we picked to invest the purpose is (0 make as good a fram as we can. We don't have. any Bhar atentions. We do not view them Bfiture acquisitions. Those who don't Blieve me are free not todo so, but they lll be as wrong in the future as they finebeen about other things concerning Tiedsne in the past. Thits Henry Singleton for you. Ace Ising companies like crazy arly in the FREES, FEBRUARY 20, 1978 game. When others are eagerly looking for acquisitions, he abstains. Now when nobody wants to buy stocks as such, he jumps in. Where other insurance comps nies buy blue chips almost exclusively Singleton buys value wherever he per ceives it. Henry Singleton has a tende cy to watch the thundering herd, then trot of in his own direction, Funny thing: More often than not, Singleton is correct. He isa rugged individualist, late 20th-century style Singleton, who grew up on a Texas ranch, recalls his childhood dream of building a great corporation—and be coming a great businessman, Doing the hard work needed to make dream reali ty, he learmed selence and discipline at the U.S. Naval Academy, eamed three degrees at the Massachusetts Institute of Techno research working in General Electric laboratories, and management, first at Hughes Air craft, later at Litton Industries For some men, a great dream is mere- ly a stimulus to action; once having achieved real success they drop the dream and enjoy what they have, Not Henry Singleton. For him the dream was the thing. When FORBES fist inter Viewed him in 1986, Teledyne was al: ready a modest suecess: Although the company was only five years old, sales were $86 million, profits $5.4 million, But this was just prelude, Last year Tele- ddyne’s net income was $194 million and Its return on equity 379 fora giant company. Then, as now, Teledyne was a close knit company. President George Roberts was Singleton's Naval Academy. room: mate. Board members are close friends and associates: George Kozmetsky, a Te ledyne cofounder and now dean of the University of Texas business school Claude Shannon, an MIT classmate of Singleton’s and now a professor at MIT; venture capitalist Arthur Rock, an early backer; Robert Jackson, formerly chair man of Ryan Aeronautical, now part of Teledyne. Robert Hanisee of Los Angeles-based Growell, Weedon & Co. is one of the few investment analysts who follow Teledyne Jeamed about ave showing closely. Says Hanisee: “Most analysts are missing one of the great investment sto- ries of our generation because they con centrate on Teledyne’s minor tions, such as not paying a cash dividend or having conglomerates in its insurance portialio, and averlook completely its as set-management capabilities.” What does the analyst mean—asset management capabilities? Just this: Sin- sleton stopped making acquisitions in 1968, thus avoiding the big. bloodbath that brought a number of conglomerators down in the Seventies. Anticipating the liquidity squeeze that afflicted U.S. busi ness in IS7L, he husbanded cash and used it to reduce debt and buy in 65% of his own stock at a huge discount from underlying values, The market kept tell ing Singleton that he was wrong, be- cause Teledyne stock kept dropping, but he didn’t stop until he had reduced the company’s common capitalization from 38 million shares to L1.§ million, In 1976 the market finally awakened to what vas happenings Teledyne shares jumped from 20 to almost 80 inthe space fof a few months. The reason soon be- ‘came appatent: Teledyne earned $10.36 a share that year, nearly 100% gain over the year before, and last year did 815.86, flly diluted. ‘This is for « com: pany which only earned $1.58 in 1969, All this would ave been impossible without good underlying business, but asset management played a major role too. Had Singleton used his cash only t0 reduce debt instead of to reduce the common capitalization, earnings _per share would probably have heen only 3 rel of what they actually were in 1977, If earnings tripled ftom operations, they rose another sevenfold from "asset management This year Singleton wants to use his ‘ash to call his convertible preferred. By year-end, Teledyne should be a rare bird: a conglomerate. whose earnings have absolutely zero dilution, Here's what trendwatcher Singleton don't see anything that is very disturbing, which is why Tam very ‘optimistic about the economy for atleast the next few years. Tan’ see that the sees ahead, 33Inevitable decline of Western Demoe iis about to happen, There are power filtrnds which suggest that the inevita He can he postponed for a long while— Ai least further than one man can see. Things are so good here in America that I tacentrate our Teledyne investments tid capital spending here and look to Serve foreign markets by export For those who think American indus: try “ean no longer compete” and who Shun investment here, there is food for iought in what Singleton says, Single: fm clearly believes there isn't: much rong with American business that an iision of better management might not ileviate. For example, Teledyne divides is business into 130 profit centers; only ioe ofthe 190—a smallish semicondue- ber usiness—lost money last year. Says utomotive industry products which te ‘quired a combination of steel and rubber such as engine mountings, But the man- agement suffered from being a privately held seat-ofthe-pants, capitalshort op- eration in an old plant with old equip- ment, Teledyne poured in capital to ‘modernize and expand, and the son went ton to do the rest. Sales soared from $30 million in 1969 to over $80 million last year. Tiny-sized Merla Manufacturing, acquited for only $80,000 with sales of ‘only $30,000 monthly, did $7 million last year and should do $15 milion this year Teledyne is a large producer of some specialty metals, with sales of $508 mil lion, One of those Teledyne metal com- panies, Allvac, which” vacuum-melts metals, has grown from $1.5-million siles in 1964 to over $40 million, 4... ‘Teledyne is like a living plant, with our companies the different branches and each putting out new branches and growing so no one business is too significant’... Bacon, “Teledyne i Uke ving Bi th ou cares he diflrent es wen a SR lege oe ee Be ose vi ink Tay 20 Bre od br though Wihoat 2s Be cost since 100) Teledyncs Bc conc fom #12 talento 2 ii taser woth aan ne nto 7 Be Taedgne bie become, Sige BE oom tbers ine go ste. ere es Be cise the oo ting Bit tery oe ofthe 20 one ee ber eed Bive wiopets to Robo ob ince sf iterates ae con Bie Felcgne bot romntaly Be om ocr cmptnestes. Ie ine cit” Sinatern smart Boe tdenty. nyo ot BI oh, tatsgs of do aeng thn cto" Biever io extn, olay pice icc gotta few Sages ve al acta stow rs some examples TDYotthre ing writ es 310 lion in as Bs cyt in 195, dies Feo to vcr $0 millon. TOY Water cay 9 le lar sn fui 1965, and it $190 milion - Brmch Rubbers grow rey oan poms BR eee bees scar Be cine. 5 Sie wed won Be ray tans sling we FRBES, FEBRUARY 20, 1978 Wah Chang, the world’s largest pro- ducer of rare metals zirconium and ha ‘umn —essential for making nuclear reac- tors—has grovn from under $30 million and elose to bankruptey before acquisi- tion in 1967 to over $100 million in 1977, In 1964 three smal electronics compa nies moved into one plant, liquidated theie entire product lines and turned to producing a new product suggested by a chief engineer of one of the outfits. The product: hermetically sealed miniature Felays. This reborn company is now Te ledyne Relays and it made more in prof its last year than the parent paid for its three component companies “Marvin Blitz, who was Teledyne Re- lays’ president, is now applying his ta: cents to Teledyne Semiconductors—last year’s single loser (under $1 million on $15-million sales). George Roberts con- sidered making Semiconductors a strict ly in-house producer for other Teledyne divisions. Blitz, however, wants to ex: pnd, Says Roberts: "He's all fired up. We've got to give him a chance.” So Teledyne will stick in this rough bus ness, where many big, smart companies have had their heads handed to them. "TY Amoo i Teledyne profit center 1t-makes industrial sewing machines. Tt hhasnt grown much from $8 million in the ten years Teledyne has owned it, Rob- certs i trying his fourth president there Teledyne's Acoustic Research fell be- hhind the competition in high-fidelity speakers. The unit has a new president and a new product line for 1978. If that hails? Roberts will try someone else. there isa certain toughness about all that, isn't toughness what efficiency is all about? And isn’t toughness kinder in the Jong run than misplaced softhearted. ness? Take Teledyne’s Packard-Bell ac- ‘quisition. It couldn't make a profit in the hhome-TV-set business against Japanese competition, By amputating the TV-set ‘operation, Teledyne executives swved the rest of the Packard-Bell business, which is now bigger without TV sets than Packard-Bell was with them. "The closest Teledyne came to disaster was in 1974 with Argonaut insurance, ‘one of the six financial companies. that represented Teledyne's last major diver sifieation. Argonaut expanded into mal practice insurance just at a time when soltheaded juries and cynical lawyers were pushing malpractice awards to ri iculous heights, Out went the insur ance group's old management and in came Treasurer Jerrold Jerome, now a vice president and group executive. After a huge pretax writeoff, $104 mil lion, Jerry Jerome's team proved that the ‘Argonaut was stil viable, At the height of the seare, however, Singleton had ‘centralized the insurance-company port folios and built up short-term securities as a means of dealing with whatever disaster might befall When the ccame to reinvest, he handled the job himself$900 million now in bonds, ‘$600 million in equities. He chose not to index but to concentrate in depressed ‘conglomerates and second:-rank industr- al companies. Will those investments pay off The jury’ is still out, but the episode once again shows Singleton’s habit of jmoring conventio Singleton were less of an individual- tthe would certainly fret about the fact that Teledyne stock sells at less than four times the $18 or so (before gains from equity accounting) it could easily earn in 1978. The market is pricing Teledyne like a laggard—ignoring its uniqueness and that of the two men who nin it Tnstead of apologizing to the financial ‘community for the way he runs the com pany, itis typical that Singleton excor fates the way the financial community judges companies. “IF anyone wants to follow Teledyne,” he says, “they should got used to the fact that our quarterly ‘earnings will jiggle. They will reflect the real world, Our accounting is set to max mize cash flow, not reported earnings. Smoothing reported earnings just has to take a backseat,” Thus does he dispose of 1974, when the insurance. writeots dropped Teledyne’ earnings to half the level of the year before! ‘Then Heary Singleton says something typical. It isan excellent summary of is philosophy as well asa realistic explana- tion of the conglomerate stock buying which has intrigued and puzzled the nancial world; “I define my job as having the freedom to do what seems to me to be in the best interest ofthe company at any time.” Singleton will win no awards for humility, but who can avo‘d standing fn awe at his impressive record? = 35