#328 Tom Murphy Buffetts favorite manager



In this episode, the host, recovering from an illness, extols the virtues of the Eight Sleep mattress, which he credits with improving his sleep quality and aiding his recovery. He highlights endorsements from prominent figures like Elon Musk and Mark Zuckerberg and mentions a special holiday sale. The conversation shifts to a discussion of the book "The Outsiders" by William Thorndike, focusing on the first chapter about Tom Murphy and his remarkable tenure as CEO of Capital Cities Broadcasting. The host details Murphy's business philosophy, emphasizing cost control, operational efficiency, and a decentralized management approach that led to Capital Cities outperforming CBS. Murphy's partnership with Dan Burke, their selective acquisition strategy, and their unconventional approach to capital allocation are also explored. The host mentions his own use of Readwise to organize his extensive notes and highlights from the books he reads and introduces Founders Notes, a valuable resource for founders seeking to apply historical insights to their businesses.

Summary Notes

Personal Health and Productivity

  • Speaker A, Mateo, experienced illness possibly due to excessive travel and poor sleep.
  • The use of a temperature-controlled mattress, eight sleep, improved his sleep quality and recovery from sickness.
  • Notable individuals like Elon Musk and Mark Zuckerberg have endorsed the eight sleep mattress.
  • Mateo emphasizes the importance of product quality by sharing that the absence of a good product is noticeable.
  • A special offer for eight sleep is mentioned, highlighting a significant discount during a holiday sale.

"I just got over either Covid or the flu. I had been traveling way too much and I've been sleeping terribly and it finally caught up to me."

This quote explains that Mateo's health suffered due to excessive travel and poor sleep, leading to illness.

"Before I had an eight sleep, I never had the ability to change the temperature of my bed before. And I had no idea how much that affects and improves the quality of my sleep."

Mateo discusses the benefits of the eight sleep mattress, particularly the temperature control feature that has significantly improved his sleep quality.

Business Management and Strategy

  • Warren Buffett praises Tom Murphy and Dan Burke as an exceptional management duo.
  • Buffett often uses the analogy of a rowboat and the Q E two to demonstrate the impact of management on long-term returns.
  • Tom Murphy's Capital Cities Broadcasting significantly outperformed CBS over 30 years.
  • The book "The Outsiders" by William Thorndyke is mentioned, focusing on unconventional CEOs and their effective strategies.
  • Ted Turner's autobiography acknowledges the business acumen of Murphy and Burke.
  • Warren Buffett and Charlie Munger frequently reference Tom Murphy in shareholder letters and meetings.
  • Buffett shares valuable advice received from Murphy on anger management and decision-making.
  • Tom Murphy emphasized cost control and efficiency, using the example of a $3 million decision for a $20,000 hire.

"Warren Buffett said 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."

Buffett's quote highlights the exceptional management skills of Murphy and Burke, positioning them as possibly the best in the world.

"When Murphy became the CEO of Capital Cities in 1966, CBS was the dominant media business in the country... But by the time Murphy sold his company to Disney 30 years later, Capital Cities was three times as valuable as CBS."

This quote outlines the remarkable growth of Capital Cities under Murphy's leadership, overtaking CBS in value.

"You can always tell someone to go to hell tomorrow... But don't spout off in a moment of anger."

Buffett shares Murphy's advice on anger management, suggesting a prudent approach to interpersonal conflicts.

"Cost control is something you and I are going to talk about a lot today. It's central to understanding Tom Murphy's incredible performance."

The importance of cost control in business management is emphasized as a key factor in Murphy's success.

Corporate Strategy and Execution

  • CBS's strategy in the 1960s and 1970s involved diversifying into unrelated businesses, which included acquisitions like a toy business and the New York Yankees.
  • Bill Paley, the founder of CBS, led the company's expansion and diversification.
  • CBS developed a costly corporate structure and displayed indifference to unnecessary costs.
  • Charlie Munger criticized lavish spending on offices, aligning with the theme of cost efficiency.
  • Tom Murphy and Dan Burke focused on making Capital Cities more valuable, not just larger.
  • Murphy's strategy involved focusing on the media business, improving operations, using leverage wisely, paying down debt, and repurchasing shares.

"The answer lies in fundamentally different management approaches."

This quote introduces the contrast between the management strategies of CBS and Capital Cities, setting the stage for a discussion on effective corporate strategy.

"Murphy's goal was to make his company more valuable... The goal is to not have the longest train, but to arrive at the station first using the least fuel."

Murphy's philosophy on business growth is explained, emphasizing efficiency and value over size and extravagance.

"Murphy and Burke rejected diversification and instead created an unusually streamlined conglomerate that focused laser-like on the media business that it knew well."

The quote outlines the focused and disciplined approach of Murphy and Burke in building a successful media conglomerate.

"The behavior of peer companies will be mindlessly imitated."

This quote, related to Warren Buffett's observations, criticizes the tendency of companies to follow trends without strategic thought, contrasting with Murphy's approach.

Key Theme: Tom Murphy's Contrarian Approach to Business Growth and Management

  • Tom Murphy, under Capital Cities, exemplified a successful roll-up strategy by acquiring businesses, improving operations, and avoiding rapid diversification.
  • Unlike many companies that failed due to excessive debt and poor integration of acquisitions, Murphy's approach was methodical and focused on operational expertise.
  • Murphy's strategy included slow movement, significant operational improvements, and a few large, high-probability acquisitions.
  • Capital Cities was notable for combining operational excellence with astute capital allocation.
  • Murphy's business philosophy emphasized many small daily decisions coupled with a few major ones.

"They're going to diversify into unlimited businesses... Obviously, he's setting that up for you and I to tell us that Murphy did the opposite. He did none of those things."

  • This quote highlights how Murphy's approach was contrary to the common practice of diversifying into numerous businesses, which often led to failure for other companies.

"A lot of these companies collapsed under the burden of too much debt."

  • This quote explains a common pitfall for companies attempting roll-ups, which Murphy avoided by managing debt carefully and not overextending.

"Capital cities under Murphy was an extremely successful example of what we would now call a roll up."

  • This quote summarizes the success of Murphy's strategy at Capital Cities, which became a model for successful roll-ups.

"Capital City's combined excellence in both operations and capital allocation to an unusual degree."

  • This quote underscores the dual focus of Capital Cities on both operational efficiency and smart capital allocation, which was rare and contributed to its success.

Key Theme: Murphy's Early Career and Turnaround of a Struggling TV Station

  • Murphy started at Lever Brothers but left to run a struggling TV station in Albany after meeting Frank Smith.
  • With no prior broadcast or management experience, Murphy successfully turned the station into a profitable entity by improving programming and cutting costs.
  • Warren Buffett admired Murphy's cost management philosophy, which included considering the long-term costs of hiring an additional employee.

"So he graduates from Harvard Business School, and he gets a job... Murphy had agreed to leave his job in New York City and relocate to Albany to run the tv station."

  • This quote illustrates Murphy's bold decision-making early in his career, leaving a stable job to manage a TV station with no prior experience.

"Tom is going to turn around this station... by improving programming and then aggressively managing costs."

  • This quote details Murphy's approach to turning the TV station around, highlighting his focus on programming quality and cost management.

"Warren Buffett says that Tom Murphy was one of his heroes, that Tom Murphy made him a better person."

  • This quote reflects the deep respect and influence Murphy had on Warren Buffett, emphasizing Murphy's impact beyond business success.

Key Theme: The Partnership of Tom Murphy and Dan Burke

  • Murphy and Burke formed a dynamic partnership at Capital Cities, with Murphy focusing on acquisitions and capital allocation and Burke on operations.
  • They had complementary skill sets and a clear division of labor, leading to the company's growth and success.
  • After Frank Smith's death, Murphy became CEO and appointed Burke as president and COO.
  • Their partnership was based on mutual respect and a shared philosophy of lean, decentralized operations.

"Dan Burke and Tom Murphy are going to be this dynamic duo... for the next 30 years."

  • This quote highlights the long-term and successful partnership between Murphy and Burke, which was central to Capital Cities' success.

"Murphy spends time training Burke... then Murphy moves back to New York to work with Smith to build the company through acquisition."

  • This quote shows the development of Burke under Murphy's mentorship and their strategic focus on growing the company through acquisitions.

"Murphy becomes CEO... Murphy's first move as CEO, he's like, okay, I'm going to elevate Burke to the role of president and chief operating officer."

  • This quote describes Murphy's rise to CEO and his strategic decision to promote Burke, ensuring the continuation of their effective partnership.

Key Theme: Strategic Acquisitions and Capital Allocation

  • Murphy and Burke expanded Capital Cities by acquiring additional radio and TV stations, and later, newspapers and cable television businesses.
  • They focused on advertising-driven businesses with high margins and strong competitive barriers, staying within their realm of expertise.
  • The FCC's relaxation of station ownership rules allowed Murphy to make a masterstroke acquisition of the ABC network.
  • Capital Cities' acquisition of ABC was a bold move, representing over 100% of the company's enterprise value at the time.

"The third tv station is important because this is when Murphy hires a young 30 year old... to run the Albany station that is Dan Burke."

  • This quote shows the strategic importance of the third TV station acquisition, which led to the hiring of Dan Burke, a key figure in the company's future.

"Smith unexpectedly dies in 1966... Murphy becomes CEO."

  • This quote marks a pivotal moment in Capital Cities' history, with Murphy assuming leadership and setting the stage for future growth.

"The Wall Street Journal reported on this transaction with the headline, the minnow swallows the whale."

  • This quote captures the surprise and significance of Capital Cities' acquisition of ABC, a much larger company, emphasizing the boldness of Murphy's strategy.

"Under Burke's oversight, the staff that oversaw ABC's tv station group dropped from 60 to eight people."

  • This quote demonstrates the operational efficiency brought by Capital Cities to ABC, significantly reducing staff and increasing margins rapidly.

Leading by Example: Tom Murphy's Management Style

  • Tom Murphy exemplified leading by example, focusing on integration and smaller acquisitions post-ABC deal.
  • Under Murphy's leadership, Capital Cities did not pursue further large-scale acquisitions after the ABC deal.
  • Murphy's management style resulted in significant shareholder value; a dollar invested in 1966 was worth $204 by the time Capital Cities was sold to Disney.

"Is there any other way?"

This quote by Tom Murphy encapsulates his belief in leading by example as the most effective management approach.

Resource Allocation: The Outsider CEO

  • The book highlights resource allocation as a major theme, with outsider CEOs like Murphy taking an unconventional approach.
  • These CEOs favored flat organizations and minimal corporate staff, termed "dehydrated corporate staffs."
  • Outsider CEOs believed in extraordinary autonomy for operating managers, emphasizing cost consciousness and exploitation of sales potential.

"Decentralization is the cornerstone of our philosophy. Our goal is to hire the best people we can and give them the responsibility and authority they need to perform their jobs. We expect our managers to be forever cost conscious."

This quote from Capital Cities' annual report reflects the company's commitment to decentralization and entrusting managers with significant autonomy and responsibility.

Cost Consciousness and Frugality

  • Murphy and Dan Burke focused on cost control, believing it to be a defense against the unpredictability of revenue in advertising-supported businesses.
  • They adopted a frugal ethos similar to historical figures like Andrew Carnegie and Henry Clay Frick.
  • Cost consciousness was deeply embedded in the company culture, with anecdotes such as Murphy's directive to only paint the sides of a TV station that faced the road.

"Murphy and Burke realized early on that while you couldn't control your revenues, you can control your costs."

This quote highlights the fundamental belief of Murphy and Burke that diligent cost management is crucial to business success.

Operational Efficiency and Economic Focus

  • Capital Cities' culture emphasized economic efficiency, with minimal meetings and a focus on detailed reviews of expenditures.
  • Managers were expected to outperform their peers, with profitability and margins as key indicators.
  • The company invested in market share growth, understanding its importance for advertising revenue.

"The profit margin that your company operated at was viewed as a form of report card to HQ."

This quote signifies the importance placed on profit margins as a measure of a manager's performance within Capital Cities.

Unconventional Hiring Practices and Low Turnover

  • Murphy and Burke preferred hiring based on intelligence, ability, and drive rather than industry experience.
  • They gave young managers like Bob Iger significant responsibilities early in their careers.
  • Capital Cities had low employee turnover, attributed to the autonomy and authority provided to employees.

"We had been fortunate enough to have it ourselves and we knew it could work."

Murphy's quote reflects the belief in giving young managers opportunities based on his and Burke's own experiences.

Capital Allocation Strategies

  • Murphy's approach to capital allocation was characterized by eschewing diversification, minor dividends, and infrequent stock issuance.
  • He used internal cash flow and debt strategically for acquisitions and share repurchases.
  • Murphy was patient and selective with acquisitions, focusing on making good deals rather than frequent ones.

"I get paid not just to make deals, but to make good deals."

This quote from Murphy underlines his discerning and strategic approach to capital allocation and acquisitions.

Acquisition Strategy of Tom Murphy

  • Tom Murphy focused on large acquisitions, each representing 25% or more of the company's market cap at the time they were made.
  • Murphy was adept at identifying and developing relationships with owners of desirable properties over years.
  • His negotiating style was straightforward: he would ask the seller's valuation, accept if fair, counter with his best price if high, and walk away if rejected.
  • Murphy avoided auctions, often bidding significantly lower than the winning bid.
  • He believed in a direct approach without prolonged negotiations.

O was the result of a handful of large acquisition decisions. Just a handful. These acquisitions each represented 25% or more of the company's market cap at the time they were made.

This quote highlights the significance of the acquisitions in the company's growth and Murphy's strategy of making substantial, impactful deals.

Murphy was a master at prospecting for deals. He knew what he wanted to buy and he would spend years developing relationships with the owners of these desirable properties.

This quote underscores Murphy's long-term vision and relationship-building as key to his acquisition strategy.

He had a very unusual negotiating style. He would often ask the seller what they thought their property was worth, and if he thought their offer was fair, he would take it.

Murphy's unique negotiating style is described, emphasizing his willingness to accept a fair price without haggling.

Share Repurchasing and Shareholder Value

  • Murphy invested significantly in share repurchasing, spending over 1.8 billion dollars.
  • The share repurchases resulted in a substantial return for shareholders, with a 22.4% return over 19 years.
  • Murphy expressed a retrospective wish to have bought back more shares, indicating the success of the strategy.

Outside of acquisitions, the second largest amount he spent was actually share repurchasing. He bought back over 1.8 billion.

This quote details the scale of Murphy's investment in share repurchasing, showing its importance in his financial strategy.

That investment alone generated an excellent return for shareholders, 22.4% over 19 years.

The quote provides concrete figures on the return generated by share repurchasing, highlighting its effectiveness.

Corporate Culture at Capital Cities

  • Capital Cities had a unique corporate culture as exemplified by a story about a bartender's investment in the company.
  • The bartender's reason for investing was the indistinguishable hierarchy at corporate events, suggesting an egalitarian work environment.

He told me a story about a bartender at one of the management retreats who made a handsome return by buying capital city stock in the early 1970s.

This anecdote illustrates the reach of Capital Cities' reputation, influencing even a bartender to invest.

Capital Cities was the only company where you couldn't tell who the bosses were.

The quote reflects the distinctive corporate culture at Capital Cities that valued a level of equality among employees and management.

Contemporary Analog to Capital Cities

  • Transdime, an aerospace components manufacturer, is presented as a modern counterpart to Capital Cities.
  • Like Capital Cities, Transdime focuses on specialized businesses with exceptional economic characteristics and operates with a decentralized structure.
  • There's a recommendation for a podcast series by William Thorndyke that explores Transdime in detail.

A contemporary analog for capital cities can be found in Transdime, a little known publicly traded aerospace components manufacturer.

This quote introduces Transdime as a company with similar business strategies to Capital Cities, suggesting a potential case study for those interested in Capital Cities' approach.

Resource Recommendations and Personal Projects

  • The speaker expresses difficulty in finding biographies or company histories on Thomas Murphy and Capital Cities.
  • The book about Capital Cities was highly recommended by Warren Buffett and sold at Berkshire annual meetings.
  • The speaker encourages listeners to inform him if they find relevant resources on Murphy or Capital Cities.
  • The speaker promotes Founders Notes, a notebook for founders created in collaboration with Readwise.
  • Founders Notes is a product that allows users to access the speaker's extensive notes and highlights from his readings.
  • The speaker believes Founders Notes is particularly valuable for already successful founders and is subscription-based.

I can't find any biographies on Thomas Murphy. I can't find a company history on capital cities, which seems like I have to be making some kind of massive mistake.

This quote conveys the speaker's frustration at the lack of available literature on Murphy and Capital Cities, indicating a gap in historical business resources.

If you have not already subscribed to founders notes, you can go to foundersnotes.com and sign up for what I think is the world's most valuable notebook for founders.

The speaker promotes his own product, Founders Notes, emphasizing its potential value to entrepreneurs and founders seeking historical business insights.

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