Thread by @NeckarValue

Lessons from Tom Murphy who led the Capital Cities/ABC roll-up and was profiled in the book the Outsiders. Over his 29 years leading the company, Murphy achieved a 19.9% IRR/204x return.

Based on a 1994 Forbes profile and this interview from 2000
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Broadcast TV stations: a wonderful business. Secular growth, scaled very well, limited competition, no price controls.

"There are not many great businesses that come along in a lifetime."

"It’s a lot clearer now, when I look back, that it was a wonderful business to be in."

The value of having a great teacher: Frank Smith taught Murphy how to think about deals, then gave him responsibility to negotiate and learn.

"Frank was a great boss. He would always explain exactly what he was doing and why. Working for him was a terrific learning experience."

The Capital Cities roll-up formula:
-Cost discipline
-Invest in key revenue drivers
-Hire great people, leave them alone (autonomy), incentivize with equity (but review expenses in detail against the annual budget)
-Disciplined capital allocation: acquisitions or buybacks

After Smith's death, Murphy and Dan Burke continued the playbook: Murphy allocated capital, Burke managed operations.

"We just kept buying assets, intelligently leveraging the company, improving operations, and then we'd go on and take a bite out of something else."

"Dan and I were really partners. Dan never had to check with me. Whatever he decided would be fine with me and vice versa. We just always knew how the other guy was going to think."

Burke explained: "my job was to create the free cash flow and Murphy's was to spend it."

Cost discipline:
"We almost went bankrupt twice. As a result, we ran the operation with a very limited number of people. That barebones culture stayed with us."

Famously, when paint was peeling off the HQ, Murphy only painted the two sides of the building that faced the road.

Autonomy for the managers:

"Decentralization is the cornerstone of our philosophy. Our goal is to hire the best people we can and give them the responsibility and authority. We expect our managers to be forever cost conscious and to recognize sales potential."

Retaining talent with autonomy and compensation:

"The reason you're scared to leave is because the system we have corrupts you with autonomy and authority. After you live that way, you're very fearful that someplace else wouldn't be the same."

On culture:
"We told our employees: we hire the smartest people we can find and no more of them than necessary. We would be highly decentralized and give them a lot of responsibility. We’d give them a ticket on the horse race, which means we’d give them options."

On culture #2:
"We told employees that the one thing they could not do was anything that would embarrass the company. They could not do anything that was improper or unethical
because there would be no second chance."

Other operators were satisfied with lower margins, leaving upside in acquisitions:

"By being sensible about our business, we continued to grow the company and buy businesses from other people who didn’t see the potential profitability that we saw."

This became clear in their last major deal, the acquisition of ABC:
"I could hear an audible gasp from the ABC people when the results of some of our television stations went up."
ABC's station group was proud of 33% operating margins, Cap Cities' margins were over 50%.

Burke went over every station budget line by line: corporate TV station staff went from 60 to 8. Executives started taking cabs instead of limos. The HQ building was sold, locations were consolidated. And profitability skyrocketed.

It wasn't all cost cutting: "Our experience as station operators has been that the station that's number one in news ends up being number one in entertainment." So they invested heavily to lead in evening news.

Better to be lucky than smart: "We bought ABC to run the TV stations and make more money, which we did."

They also acquired ESPN which turned into a huge success: “Tom, someday that’s going to be worth as much as one of your big television stations.” “OK. I hope you’re right.”

The ABC deal was ambitious. Murphy asked Buffett for advice: "Warren said two things. One, your lifestyles are going to change. And two, the merged company will be in play the day after the merger is completed."

How do you proactively defend yourself against a hostile takeover?

Buffett: "Well, you could get a 500-pound gorilla."

Meaning: a large, long-term investor who would give management their proxy. Meaning Berkshire.

Capital Cities/ABC was sold to Disney in 1995. In addition to acquiring broadcast and cable TV assets, Disney also got a promising young ABC executive named Bob Iger. He was Murphy's designated successor as Burke had retired.
"He seems sent by central casting for the job."

Murphy's advice to youngsters: do something you like - but try to do it in a promising business.

"There’s no substitute for being in good businesses, and there are not many of them."
"Get in front of a business. Find something that you can improve on in an area."

Stick to what works:
"I stayed in businesses I could understand, which were not capital intensive."
"I always put a premium on hiring the smartest people we could find. There’s no substitute for people with brains who are willing to work hard."

When you love what you do:
"I love the action. Every day you get a scorecard on how you did the day before. You're winning and losing every day! I like competition. I like winning.
I don't like losing, but the only thing that would be worse is not being in the game."