First published on ValueWalk.com.
Exemplary business owners or CEO’s are a rare breed, but they do exist and Fundstrat recently set out to find them.
Five CEOs immediately stood out to Fundstrat’s researchers: John Malone, Randal Kirk, Ed Breen, Elon Musk, and Scott L. Thompson. These five have all shown exceptional returns both on a cumulative basis and on a weighted average compound annual growth rate basis.
Of these five, John Malone is the clear outlier. Over a span of 40 years, Malone has achieved a weighted average CAGR of approximately 23% compared to 11% for the S&P 500 through the appropriate use of leverage, buybacks, and artful corporate structuring.
Investors underestimate the importance of a key CEO
Last month, I covered a survey of Berkshire Hathaway’s operating managers from the Stanford School of Business’ Corporate Governance Research Initiative. The survey questioned approximately 80 managers of Berkshire subsidiaries. The managers had an average tenure of 12 years, and because they’d been in the position for so long, always planned for the long-term, which ultimately improved business performance.
Fundstrat’s research points out that since 2004, an average of 53 CEO’s, or 11%, are new to S&P 500 companies each year. As a result, investors have, on average, 50 opportunities every year to identify potential inflection points in a corporation’s fate based on management change.
Between 2004 and 2014 there have been 580 CEO departures from S&P 500 companies. Assuming that each new CEO brings several changes to the business he/she is taking over, it’s easy to see why so many businesses struggle to execute a clear, consistent long-term strategy.
Still, Fundstrat has picked out five “Captain Ahab” CEO’s who have been able to achieve outsized returns over their careers. The report goes on to dissect the factors that helped each investor outperform over their careers.
Following the Malone Returns
John Malone has been able to generate impressive returns consistently for more than four decades, and for this reason, the media mogul gets the bulk of the coverage in the Fundstrat report.
Malone started his career at Bell Labs/AT&T and eventually found himself as one of the company’s largest shareholders. He then went on the helped to build TCI into a cable industry giant eventually selling the business to AT&T for stock during 1999 achieving a total return on investment of 93,200% or 30.3% CAGR. Liberty Media was spun out of AT&T in August 2001 leaving Malone in full charge. In the 14 years since the Liberty Media spin, it’s estimated that Malone’s assets have returned 238% cumulatively and 9.1% CAGR.
While the majority of Malone’s gains came during the first part of his career, before the creation of Liberty, his pioneering use of spin-offs and tracking stocks to maximise tax efficiency, management incentives and leverage while managing Liberty shouldn’t be overlooked.
There are 19 key corporate events, excluding mergers, which have helped Malone unlock Liberty’s value over the years all of which are shown below. What’s more, Fundstrat has reconstructed Liberty’s stock form a series of assets and tickers into one entity, to show how much value Malone’s corporate tinkering has created since Liberty Media first became independent.
Fundstrat points out that there are ten key tenets of “Malonism” that have characterised his value creation over the years. The central pillar of these tenets seems to be “pay as little tax as possible.” As Fundstrat points out, “the art/science of tax minimization exists deep within the Liberty DNA.” The top five commandments of “Malonism” are as follows:
- Tax efficiency: Tax department often the largest at Liberty
- Capital structure optimization: Uses leverage, particularly on subscription businesses; “Better to pay interest than tax.” Relucant around equity issuance unless accretive deals; Strategic buybacks; No cash dividends
- Long-term: Not worried about near-term acquisition impacts and near-term ROI
- Scale leverage: Builds and leverages scale for better pricing and strategic equity stakes
- Cash flow focused: Pioneered EBITDA measure; focus on free cash flow; EPS irrelevant.
Following Randal Kirk’s returns
Compared to John Malone, Randal Kirk is relatively unknown outside biotech circles. Nevertheless, Kirk’s record of value creation remains highly impressive.
Kirk founded and sold his first medical device company, General Injectibles and Vaccines, after 15 years for $145 million for a total return of 1,449%. In the 17 years that have passed since Kirk sold General Injectables, he has founded or actively invested in several companies that have later been acquired by larger competitors, including Scios (SCIO), New River Pharmaceuticals (NPRH), and Clinical Data (CLDA). Today, Kirk’s holding company, Thrid Security Investments is currently invested in 15 publicly traded equities, the largest of which is Interxon (XON).
The third “Captain Ahab” CEO picked out in Fundstrat’s report is Ed Breen, who is currently the lead director on Comcast’s board and CEO of Dupont.
Breen’s career started at General Instruments (GIC), where he spent 21 years rising through the ranks when the company split in three Breen severed as the CEO of the set-top box unit for two years until selling it to Motorola in 1999. While Breen was in charge, GIC’s 474% on a cumulative basis to the close of the sale.
After GIC Breen took over as CEO of Tyco. Through dramatic house cleanings, balance sheet restructurings, divestitures, and spin-offs Breen achieved a 407% return for Tyco’s investors on a cumulative basis during his ten year period as CEO.
When it comes to innovation, there are few CEO’s that can stand up to Elon Musk. At the age of 12 Musk began creating value through innovations in technology. He has sold two companies he co-founded — Zip2 and PayPal— and has helped create groundbreaking innovations in the auto, energy/utility, and aerospace industries.
Because one of Musk’s key ventures, SpaceX is still private, his exact returns are difficult to calculate. Still, the present value of publicly traded Musk ventures shows that Musk has returned 1,424% since inception to date.
Scott L. Thompson
The last outlier CEO highlighted in Fundstrat’s report is Scott Thompson, who has recently been appointed CEO of Tempur Sealy, through the efforts of activist investor H Partners.
Scott Tompson has a short, but highly impressive record of unlocking value for investors. Tompson helped found Group 1 Automotive, which has since grown into the third-largest dealership group in the US. In 2008, Tompson was appointed as CEO of Dollar Thrifty Group, at the time the stock was trading at around $1. Through efforts including cost cuts, “re-franchising” and “risk fleet” car management, Thompson not only saved the company but also pushed it to industry leading margins. With its eventual sale to Hertz, Dollar Thrifty’s stock rose over 80-fold during Thompson’s tenure.