Book review : The Outsiders – By William Thorndike

Eight Unconventional CEOs and Their radically rational Blueprint for Success
( #1 on Warren Buffets recommended reading list in Annual shareholder letter 2012) 
The Outsiders is a very Interesting read and a must recommendation for Analysts researching corporates  and for CEOs or promoters who actively take decision of Capital allocation. each of these CEOS deliver 20%+ CAGR return for investor for periods exceeding 15 years. 
The book chronicles 8 CEOs who were ready to swim against the tide and follow what was RIGHT and shun the POPULAR . Four of the Eight Companies belonged to the Media sector – A sector which has been more popular in India for wealth destruction.   All of them had strong disdain for herd behavior – something which is easy to say but hard to follow.  The CEOs showed unanimity in taking right capital allocation decisions , avoided smoothening of quarterly financials and used right metrics of cash flow and IRR to evaluate themselves as against reported earnings.   Cash flow focus seems to be low among Indian media companies and largely focus is on earnings. Also these CEOs avoided paying taxes and used the right/best instruments to reduce tax incidence – something i believe Indian Media companies are adept at.  

Some quotes i liked from the book: 
2 basic  approaches to buy back – “Straw” –  Open Market  Buy back spread across a few qtrs with a max cap price – generally used to signal under valuation.  ( HT Media did this some time back) 
Other is “Suction hose”  – Bolder approach  Buy backs  done often via tender offers within very short periods of time.   ( Jagran Prakashan recently did this) 
Singleton – If everyone doing them, there must be something wrong with them. 
Kapnick of Capital Dynamics –  initiated 3 special dividends totaling about 50% of the company and because of the size – they were deemed as return of capital – thus being tax efficient as against regular dividends.  
Most CEOs grade themselves on size and growth …very few really focus on shareholder returns.  
Chabraja ( General Dynamics CEO after Kapnick)-  What drove me was the realization that the stock was trading at a significant premium to our historic norm: 23 times next year projected earnings versus an historic average of 16 times. so what do you do with a high – price stock? Use it to acquire a premium asset in a related field at a lower multiple and benefit from the arbitrage.   — Most Indian CEOs/ Promoters perennially believe their stock is under priced and are rarely able to do such transactions.  
Characteristics of Cable business as explained by Malone :  Highly predictable, utility like revenues , favorable tax characteristics , and the fact that it is growing like a weed. 

“…. it is better to pay interest than taxes . Malone showed strong disdain fro taxes. 
Edifice complex :  There is an apparent inverse correlation between the construction of elaborate new headquarter buildings and investor returns.    ( In India it is more synonymous with buying private jets ) 
He believed that the best strategy for a cable company was to use all available tools to minimize reported earnings and taxes, and fund internal growth and acquisitions with pretax cash flows. 

Disdain for consultants : Graham – CEO of Washington post :    Ironically , in the 1980s , the management consulting firm McKinsey advised the company to halt its buy back program.  Donald graham reckons this high priced McKinsey wisdom cost POST shareholders hundreds of millions of dollars of value , calling it the “most expensive consulting assignment ever. 


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