Some people, particularly those that are in the early stages of their career, may ask: who was Tom Murphy? He is the sort of person that industry hall of fames write about in this way:
“He began his broadcasting career as the first employee of a bankrupt television station in Albany, New York. Acquisition by acquisition, he built the company.”
“Tom, who became President of Cap Cities, gradually built the company into a telecommunications empire. In 1985 he engineered the purchase of ABC with the backing of his long-time friend Warren Buffett (Trades, Portfolio), and the company became Cap Cities/ABC. He describes it as ‘the minnow that ate the whale’. Ten years later, Tom sold Cap Cities/ABC to Disney for approximately $19 billion.”
In 1985, Fortune wrote: “Under Murphy and Burke, Capital Cities has turned in an exceptional performance in its principal businesses: broadcasting, which produced 51% of the company’s 1984 operating profits, and publishing (48%). Without much show of effort, Capital Cities’ per-share earnings growth since 1974 has averaged 22% annually, compounded. Return on shareholders’ equity, a key measure of performance, averaged a splendid 19.2% during the period.”
Warren Buffett (Trades, Portfolio) is one of Tom Murphy’s biggest admirers. For Warren Buffett (Trades, Portfolio) to say this is high praise indeed: “Tom Murphy and Dan Burke were probably the greatest two-person combination in management that the world has ever seen, or maybe ever will see.”
Similarly, Warren Buffett (Trades, Portfolio) once told Lawrence Cunningham, the author of the book Berkshire Beyond Buffett: “Most of what I learned about management, I learned from Murph. I kick myself, because I should have applied it much earlier.” He has also said it as directly as possible: “I think (Murphy) is the top manager in the U.S.”
When you study what Warren Buffet has said and written about managing a business, in many cases you are learning indirectly from Tom Murphy. That is a good thing since Tom Murphy did not say or write very much in comparison to Buffett. Like many great operators and managers Tom Murphy mostly let his business results speak for themselves, and did not spend any significant time seeking to be noticed by the public.
1. “There’s no substitute for being a good business, and there are not many of them.” “There are not many great businesses that come along in a lifetime.” Warren Buffett (Trades, Portfolio) and Tom Murphy see eye-to-eye on this point, with the Berkshire chairman famously saying: “When a management team with a reputation for brilliance joins a business with poor fundamental economics, it is the reputation of the business that remains intact.” Without a moat, any business will inevitably see the price of their company’s products reduced to a point equal to the opportunity cost of capital – even if the business has managers who have great operational skills. Yes, you definitely want great managers and occasionally you might find one as talented as Tom Murphy or Ajit Jain. But that does not mean you should invest in a business without a moat if you think it has great management.
The forces of competition are relentless, and the ability to copy the operational effectiveness of a competitor is a constant problem for businesses that do not have a moat. Tom Murphy is making the point above that businesses which have a moat are rarer than most people imagine. In other words, a good moat is truly hard to find. And contrary to what Peter Thiel would have you believe, moats come in all sizes with varying strengths and weaknesses.
The width and depth of a given moat shifts constantly. There is no binary phase transition between moat and no moat. I do find it a bit ironic given the Buffett/Berkshire connection that Tom Murphy once said: “I loved the business I was in, and I loved going to work every morning. If it had been the railroad business, it would not have been as much fun.”
2. “The goal is not to have the longest train, but to arrive at the station first using the least fuel.” This quote is a great setup to contrast the management style of Tom Murphy with William Paley, who ran the competing CBS television network. Tom Murphy was not a fan of a business getting bigger for its own sake or diversifying into unrelated businesses to achieve “synergy” or diversification. Unlike William Paley, Tom Murphy did not buy businesses like a baseball team or a toy company. When Tom Murphy bought a business it was to generate additional benefits for the core media business.
As we discussed, Tom Murphy thought that a business with a moat is very hard to find and for this reason alone he preferred to put capital to work in the business where he had the greatest advantage. When Tom Murphy allocated capital he preferred a focused approach rather than diversification, since he was investing in a business he knew very well and that had very attractive characteristics.
3. “We just kept opportunistically buying assets, intelligently leveraging the company, improving operations and then we’d … take a bite of something else.” One of the great skills that any investor or businessperson can have is a talent for capital allocation. And Tom Murphy, like Warren Buffett (Trades, Portfolio), was a master at capital allocation. When Tom Murphy bought a business he used debt or cash generated by the business rather that diluting equity by issuing stock. In this way, he acted a lot like John Malone or Craig McCaw as they rolled up business after business so as to benefit from demand and supply-side economies of scale.
William Thorndike, the author of the popular business book The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, believes that the best CEOs have an “investor’s mind set.” When they consider a business decision like an acquisition or the purchase of capital equipment, “they viewed it as investment and when it had attractive returns they did a lot of it.”
continue reading: http://25iq.com/2015/01/11/a-dozen-things-ive-learned-from-tom-murphy-about-capital-allocation-and-management/
