“Even more important than the gain in operating results was the progress made during the year in broadening and strengthening the company’s foundation for future growth.”
“If properly developed and wisely employed, machines have the ultimate capability to free man from labor, and to extend indefinitely the range of his intellect. It is our privilege at Teledyne to have achieved a strong position in this field of limitless opportunity.”
“Because of our conviction that air data instruments will be of growing importance as our airways become more crowded, we place a high valuation on the long-term importance of the SMI acquisition.”1
The typical narrative on Teledyne splits the company’s history into 3 specific stages.
The Acquisitive 1960s
The Buyback Maelstrom 1972-1984
The Corporate Simplification 1986 onwards
Such a classification is oversimplified: the 1960s should be split into two subsets.
First, there are the foundational acquisitions in the founder’s area of speciality (electronics, integrated circuits, semiconductors, and complex systems) from 1960 to 1964. Then, a massive military contract in 1965 acted as a catalytic turning point for the company. The share price skyrocketed. Teledyne had the newfound ability to be bolder and make more acquisitions. Finally, there is the second half of the 60s characterized by rampant acquisitions in a plethora of highly diversified markets.
Henry Singleton Summary Stats:
1964 Sales $38,187,127
1963 Sales $31,924,685
1964 Net Income $2,545,388
1963 Net Income $1,280,296
1964 Working Capital $14,220,320
1963 Working Capital $9,262,796
1964 Total Assets $35,039,515
1963 Total Assets $23,901,085
1964 Shareholder’s Equity $13,672,200
1963 Shareholder’s Equity $8,628,957
1964 Average Common Shares Out: 1,050,996
1963 Average Common Shares Out: 849,461
1964 Employees: 2,400
1963 Employees: 1,900
Organized Chaos, Thematic Directions
“During those early to mid-60s days there was really no formal organizational structure even though a considerable number of new acquisitions were being made each month.”2
Often, investors cite Henry’s flexibility in his strategy, which was unconventional at the time, as one reason why Teledyne compounded at over 20% for 30 years. They love this quote:
“I like to steer the boat each day rather than plan ahead way into the future. My only plan, is to keep coming to work every day.”3 Business Week Article 1982.
In Russ Kiernan’s own words “During those early to mid-60s days there was really no formal organizational structure even though a considerable number of new acquisitions were being made each month.”4
It’s important not to misinterpret these statements. Singleton communicated in as few words as possible: over-extrapolating the semantics of his words can be dangerous. A little like Ludwig Wittgenstein, Henry can come across as a sphynx because he was ambivalent about the opinions of others. If Henry didn’t plan his days and the company had little structure, how organized was Teledyne?
It might be logical to conclude that Teledyne was a start-up moving fast and breaking things: the uniform systems would arrive later on in the story. Or that Teledyne was not meticulous, disciplined, or consistent in its operations at the very beginning because the company was growing rapidly. Not quite.
One of the cognitive biases espoused by Daniel Kahneman in Thinking Fast and Slow was the Planning Fallacy. Often when thinking about the future, we see what will go right and rarely what may go wrong. In some ways, it's an extension of the egocentric bias. Singleton understood the futility of trying to control outcomes without knowing the exogenous vicissitudes of the future. That doesn’t mean that Teledyne was messy behind the scenes with underdeveloped business systems, though.
“Whenever a high-level management position had to be filled, that company’s group executive would usually take over company management until a qualified replacement could be found. In many cases, a corporate accounting person would immediately be assigned to new acquisitions in order to maintain continuity and quickly establish uniform corporate financial guidelines.”5
Managers were left to operationally organize their businesses however they saw fit, whilst the financial systems had to be adhered to by all.
“During the 1960s, when Teledyne was acquiring small to medium-size companies at a fairly rapid pace, it was imperative that we instil the Teledyne disciplines as quickly as possible. These ranged from our cash transfer policies to our organizational control system.”6
Roberts' terminology is useful in understanding how Singleton operated and thought about the company:
“Even as he diversified his company, Henry didn’t forget his original direction, and there was continued expansion into both electronic systems and system components for control applications and related activities.”7
Aerospace Annihilation
What’s remarkable about Teledyne is its long-term marriage of economic profits, technological innovation, and fiscal conservatism over decades. As Singleton’s acquired businesses brought novel technology to markets, it consistently increased earnings. These concepts are typically championed by investors and entrepreneurs at opposite ends of the growth-to-value investing spectrum: Henry demonstrated these instruments can be combined into one emphatic orchestra.
Teledyne’s acquisitions of UED, McCormick Selph, SMI, and Radar Relays were the logical expression of Henry’s interest in the broad theme of aerospace. Aerospace was the direction of Teledyne’s additional branches, in 1964, expressed by acquisitions of companies that manufactured instruments, explosives, airborne data systems, and relay switches.
Singleton was a keen student of history. UED made the first application of solid-state circuitry to airborne telemetry in the Sergeant missile program in 1956 and was a leader in advancing the technology since then.
“in 1964 UED designed, qualified, and delivered the pulse code modulation telemetry systems for use in NASA’s micro-meteoroid satellite (Pegasus). This program was followed by the design of an extremely flexible 80-800 channel high and low-level PCM system for use in the NASA Flight Research Center Lunar Landing Research Vehicle, and UED continued to supply a unique d-c amplifier for each Agena missile.”8
This pattern of governmental institutions incubating Teledyne from market dynamics of supply and demand we mentioned in the 1963 write-up (INSERT LINK) enabled Teledyne to test the product using the customer’s resources rather than commit to expensive manufacturing beforehand in the hope of eventually winning the contract. Institutions bore Teledyne’s financial risk.
“We have recently gone through the first successful firing of a new telemetry system for the Army’s medium anti-tank weapon, and follow-on production is anticipated.”
“Also, 1965 will see production of an advanced state-of-the-art pulsed RF amplifier system for use by the AEC on a classified test program requiring substantial follow-on production.”9
But Teledyne was not confined to sponsorship from the government only.
“In support of the manned space flight program we were selected by the Boeing Airplane Company to supply the remote control pumping system for testing the servoactuators on the Saturn V rocket engine.”
“Our ordinance system research and development capability is reflected in a product improvement contract received from The Martin Company. The contract calls for major improvements in the Pershing missile ordinance system hardware. Through the introduction of heliarc welding techniques and the use of stainless steel a new and greatly improved hermetic design was evolved.”10
Not only do we see the important role that private contractors play in the Teledyne story but also another way in which Singleton can climb further inside the components and technological systems his company produces. Up until this point, the most fundamental technology was at the level of transistors and integrated circuits inside semiconductors. Now we see his burgeoning interest in one of the base elements of those circuits and electronic components: metals. Here is a taster of what is to follow in later years:
“Our phasolver discs, utilizing a complex evaporated metal pattern on a close tolerance glass disc to form a high-resolution angular transducer, are in production at Teledyne Optics. Telescopes for NASA’s Orbiting Astronomical Observatory will be pointed and programmed in angle by the phasolvers.”11
Transducers convert energy from an input into a different form for the output. A simple example is a microphone absorbing sound waves that are passed through an amplifier (the transducer) before being released back into the world by the speaker.
Teledyne worked on some James Bond-type stuff too. It produced NASA’s explosive actuators:
“An unusual company that produced products used in many aircraft and space applications was McCormick Selph, run by Frank LaHaye, acquired in 1964. Their primary products were controlled explosive devices used to perform various actions in aircraft, spacecraft, missile and other systems.”12
One might think of technology as a better user experience, sleeker design, or improved size-to-weight ratio. Another central theme in Teledyne’s manufacturing is extreme reliability in mission-critical technology. “To date, there has not been one failure in the 30,000 parts fired [for NASA].”
This isn’t technology where if there is a bug in the coding, the customer has a poor experience or can’t access personal data; people would die, if mistakes happened.
“This operation is highly critical and must be effected without damage to the pod, which remains sealed for the protection of the two-man crew inside. This is the first such explosive system intended for use in tactical aircraft.”13
Servomechanisms, Inc. (SMI) produced air data systems and pressure transducers which provided the basic inputs for air data computers. The onboard computers were essential to NASA’s space programs.
Air data information, a basic requirement for precision flight control of airborne vehicles, was of growing importance as the number of aircraft continued to increase in 1964.
Whilst 1963 saw Teledyne make strides in their commercial computer offerings for people and businesses, 1964 saw the combination of that offering within the broad direction of aerospace too. SMI designed and produced a “lightweight central air data computer for the Douglas A4E Skyhawk attack aircraft. The initial production order for this Navy aircraft is currently nearing completion, and a follow-up order has been received. An additional production order is expected in fiscal 1966 and should extend the program over several years.”14
Some contracts provide stable cashflows for several years in advance. So defense and aerospace industries can be more predictable than other industries wherein supply and demand are dictated to individual economic agents rather than a few large procurement departments.
In a previous post, we alluded to the exclusivity of contracts. Not all contracts are born equal, however. Sometimes a corporation may be the only one chosen. This seems to frequently be the case for cutting-edge technology. At other times, the military may procure two or three suppliers to produce certain products where the company has already developed the technology and processes (so nothing novel is produced). 1964 presented an example of the most lucrative type of contract:
“We were recently awarded a large contract for a new type fitting designed for use in ground support equipment on the Saturn space vehicle. Selection of Teledyne for this program was significant, since it may well become the only fitting to be used in this application.”15
Teledyne Relays was the combination of Radar Relays and Relays. The engineers for this company produced electromechanical relays small enough to be sealed hermetically in a standard TO-5 transistor package.
“Relays are electrically operated switches. These new products were precision components designed to operate reliably under conditions of shock and vibration and came to be used in virtually every major military and aerospace program, as well as in high-end commercial applications. This development made Teledyne Relays one of the most profitable companies.”16
Relays are tools to control high-power electronic systems with low-power signals.
“our precision components division placed special emphasis on advanced rotary and rectilinear switch assemblies for use in liquid oxygen and gaseous oxygen rocket engine fueling systems.”17
“During 1964 Teledyne entered the field of visual information display equipment, through the acquisition of Rader Relay, Inc.” pg 25.
The Government’s Gale
Henry didn’t only march inside technology by replacing the fundamental components underlying the subsystems of acquired companies’ complex systems. Teledyne also manufactured specific cutting-edge technology for government contracts, and new technology was required to connect the new to the old.
In the 1964 report, Singleton described a feed subsystem for a 60-foot Casegrain reflector antenna which was built for the Navy and NASA to track satellites. The feed subsystem is all of the components between the antenna and the receiver’s input terminal.
“The same NASA/Navy system has led to a development program for a complete receiving subsystem to provide compatible operation with the feed subsystem. The receiving subsystem utilizes Teledyne’s monopulse tracking receiver in conjunction with a specially designed down-conversion unit to achieve high stability operation at UHF, L-band, and X-band frequencies. As a part of this unit, Teledyne is developing a step-recovery diode multiplier, the completion of which will materially strengthen our integrated systems capability.”18
In producing a new receiving subsystem, Teledyne developed a new multiplier which enhanced their integrated antenna systems offering. Performing well in one area of the antenna subsystem wasn’t good enough, though.
In 1964, Singleton developed “parametric amplifiers and broadband mixers” that were based on “proprietary design techniques which permit achievement of large gain-bandwidth products and extremely low noise figures.” In other words, Teledyne offered complete receiving systems in “telemetry tracking, satellite communications, and radar target location.”19
In the communications segment, process refinement occurred alongside research and development. Here we see the theoretical specialism of Teledyne brought to fruition by institutional sponsorship.
“For several years Teledyne has pioneered in exploring techniques for microwave passive ranging utilizing a proprietary design concept. Recent studies performed for the Navy have culminated in the completion of an experimental system to verify the operational feasibility of the approach. The experimental equipment is currently undergoing flight test under Navy sponsorship. Completion of this phase of the program is expected to lead to the development of service test models and subsequent production.”20
In the process of providing this extra system that needed to be compatible with Teledyne’s technology, the possibility of a new component was discovered which strengthened Teledyne’s overall offering. Call it the virtuous cycle of increasing returns in government contracts. In the same way, technology begets technology, government contracts beget government contracts:
“as an outgrowth of experience gained on the IHAS program, Teledyne has been awarded a contract to study the avionics system requirements for the Army’s Advanced Aerial Fire Support System (AAFSS).”
Combinatorial Fructification, Act II
Amelco Semiconductor has become a leading manufacturer of highly reliable semiconductor components. This leadership has been gained through superior product designs and the employment of an advanced reliability program. Beginning with the stringent quality requirements we impose upon our suppliers, the reliability program culminates in the careful monitoring, evaluation, and control of our manufacturing process.”21
In 1964, Teledyne continued to offer more computers to the market. Once again, the theme of combinatorial fructification is clear. Teledyne aided in the transition from analog to digital computers wherein “the microelectronic integrated circuit modules utilized in the computer are produced by our Amelco Semiconductor division.”22
The pattern substituting the acquired company’s underlying components with Amelco’s microelectronics was present in Henry’s aerospace expansion too:
“Working with Amelco Semiconductor division of Teledyne, Radar Relay has now improved the AID design to a point which should place us in an excellent competitive position. Our in-house capability in microcircuits and integrated circuitry has helped bring about improved performance characteristics with less size and weight at lower cost.”23
The theme of combination was not only present in the design and manufacturing of Teledyne’s family of digital computers but also in the potential applications that it could be precisely tailored to, as discussed above. Another example of this was the Loran A&C Digital Simulator which was an early flight simulator used for pilots “utilizing a magnetic tape-stored position program. The simulator provides a real-time input to the Loran receiver system under evaluation.”24
On Teledyne Optics
“There were far too many acquisitions of companies for me to discuss each one in detail. Many were joined together and became single Teledyne companies or were absorbed into existing companies, so I have chosen the major ones that contributed to the various important directions the corporation took.”25
If this was the perspective of the meticulous note-taking number two who went on to become Teledyne’s CEO and Chairman then what chance do we stand as students outside the company in understanding Henry’s acquisitions? It’s a question I often ask myself too.
For example, in 1963, according to George Roberts, Teledyne acquired Geotronics Company which was not mentioned in that year’s annual report. Furthermore, Teledyne acquired Kiernan Optics in 1963 which brought Russ Kiernan into the business. Neither Russ nor Kiernan Optics was mentioned in the 1963 annual report despite the formation of Teledyne Optics.
Even the narrative portrayed at different points in Distant Force seems to contradict itself:
“Russ Kiernan, whose company was acquired in 1964, brought optical expertise and helped Teledyne expand into this related field with various other acquisitions.”26
vs
“In 1963, the company entered the field of optics with the acquisition of Kiernan Optics, Russ Kiernan, whom I mentioned earlier, founded it in 1950.”27
Though it is quite feasible that the acquisition was announced or initiated in 1963 and completed in 1964 it still seems ambiguous.
Anti-Fragile Conglomerate Form
“The holding company is often utilized for entirely legitimate purposes, e.g., to permit unified and economical operations of separate units, to diversify investment and risk and to gain certain technical advantages of flexibility and convenience. Many sound and important enterprises are in holding company form.”28
Teledyne was not only a sound and important enterprise but also wouldn’t have existed without the conglomerate form. The word conglomerate typically incites connotations of crony capitalists sitting around the office like Tony Montana in Scarface. However, associations based on form are an outsourcing of thinking. It is the essence of an enterprise that matters.
During this acquisitive maelstrom in the early 1960s, Teledyne utilized operating loss carryforwards that acted as one-off boosts to net income each year. That’s not to suggest that Teledyne was acquiring turnaround situations and rapidly returning them to profit-making establishments. Or that Teledyne purposefully acquired companies with the largest tax loss carry forward to artificially inflate earnings year on year.
George Roberts lists the 14 key questions that Teledyne finders and Henry considered when targeting potential acquisitions. The very first question was:
Is the company profitable?
So Teledyne was not acquiring unprofitable companies and turning them around. The persistent presence of tax loss carryforwards from acquired companies in the early 1960s indicates that companies nearly always operated with large losses before they brought an innovative product, service, or technology to market.
So whilst the conventional wisdom regarding conglomerates presents a greedy chairman siphoning off profits at the expense of shareholders, it's hard to imagine a better corporate form that also enables cash cows to give to other unprofitable companies under the corporate umbrella a viable route to market.
Despite the ways unprofitable companies can be kept alive under the conglomerate structural form, Singleton insisted that each operating company was self-sufficient first so any excess profits could be issued to the corporate level for Henry to allocate. Thus, the benefits of the conglomerate form further enabled the chairman’s exceptional ability at capital allocation to flourish.
Thank you for reading Intelligent Investors!
What I’ve Enjoyed Reading so far this Week:
The role drawdowns play for long-term investors by Chis Mayer, Drawdowns
Ted Weschler Q&A Transcript || 2022 NFM Podcast by Kingswell
How to think about position sizing by Six Bravo, Position Size
A Review of the Story of J. Robert Oppenheimer by The Rational Walk, American Prometheus
An excellent list of investing-related must-reads by Conor Mac, 15 Books to Read Before You Die
Henry Singleton, Teledyne Inc, 1964 Annual Report, pp. 6-7.
George Roberts, Distant Force (2007), pg. 39.
‘Henry Singleton of Teledyne: A Strategy Hooked to Cash is Faltering’, Business Week (May 31, 1982 Edition).
Roberts, Distant…, pg. 39.
Roberts, Distant…, pg. 40.
Roberts, Distant…, pg. 40.
Roberts, Distant…, pg. 46.
Singleton, Teledyne…, pg 12.
Singleton, Teledyne…, pp. 12-15.
Singleton, Teledyne…, pg. 26.
Singleton, Teledyne…, pg. 25.
Roberts, Distant…, pg. 46.
Singleton, Teledyne…, pg. 26.
Singleton, Teledyne…, pg. 15.
Singleton, Teledyne…, pg. 25.
Roberts, Distant…, pg. 35.
Singleton, Teledyne…, pg. 22.
Singleton, Teledyne…, pg. 11.
Singleton, Teledyne…, pg. 11.
Singleton, Teledyne…, pg. 12.
Singleton, Teledyne…, pg. 28.
Singleton, Teledyne…., pg. 11.
Singleton, Teledyne…, pg. 25.
Singleton, Teledyne…, pg. 11.
Roberts, Distant…, pg. 46.
Roberts, Distant…, pg. 26.
Roberts, Distant…, pg. 36.
Benjamin Graham and David Dodd, Security Analysis, 7th Edition (2023), pg. 652.
Henry Singleton is a pioneer of capital allocation. I listened to countless studies about him a few years back and your post reminded me to keep searching for another Teledyne! What do you think comes the closest?