Royal Little: Ignorance isn't bliss when you're an investor

Another story from Textron founder Royal Little (1896-1989), author of "How to Lose $100,000,000 and Other Valuable Advice." In spite of his wealth of mistake stories, Little was one of the most successful US businessmen of the mid-1900s.

MEDICAL OPINION AND REVIEW


During this period of rapid expansion, we noticed that the stocks of publishing businesses were selling at an unusually high multiple, and, although we had had no experience whatseoever in the publishing business, we thought it might improve our multiple of we bought a couple of businesses in the field.


The first one that was brought to our attention was Medical Opinion and Review, which was owned by two individuals. They had built a very profitable operation providing the doctors in the country with up-to-date information on all medical research and other medical information in summary form so that the doctors could get this information without having to read all the complicated medical journals and other sources.


They built up pretax earnings of $1 million, but since they had no fixed assets and only receivables from the drug manufacturers who were supporting the operation with their advertisements, the company had very little net worth. In October 1969, we made arrangements with the owners to buy their stock for $4.5 million in cash, or approximately nine times aftertax earnings. The sellers had to pay capital gains taxes on the transaction, but they both ended up as millionaires. We had hoped, of course, that they would work as hard in the future as they had in the past and that our investment would prove to be a successful one.


Unfortunately, the partner who did the editorial work providing the important information for the publication decided that he wanted to retire. The other partner, who handled the distribution and solicitation of advertising, was left without a competent editor. As a result the advertisers discontinued using the publication to reach doctors and Medical Opinion and Review suddenly became a loser instead of a winner.


Since our experience in the past had been primarily with manufacturing operations, we had no one in the organization competent to rehabilitate that division. After that disaster, we practically gave the business back to the remaining former owner and took our loss.

ADVICE #1: Don't get involved in the publishing business if your principal business has been manufacturing - particularly if you have made the former owners wealthy.

ADVICE #2: (This second bit of advice applies to all types of acquisitions.) Be very careful not to buy businesses that have earnings but no net worth. If the earnings evaporate, you have no escape route to recover any portion of your investment.

Royal Little: a "simple lesson" about expanding capacity

Another story from Textron founder Royal Little (1896-1989), author of "How to Lose $100,000,000 and Other Valuable Advice." In spite of his wealth of mistake stories, Little was one of the most successful US businessmen of the mid-1900s.

Here he discussed some of his struggles with his company Atlantic Rayon Corporation in the aftermath of the Great Depression.

Atlantic Rayon Corporation, 1940

With all our expansion of dyeing and throwing capacity and optimism and enthusiasm for the future, what happened in 1940: Sales were approximately $7,500,000 and we lost $19,000. What a business! Here we had struggled successfully for many years without a loss through 1937 and then in 1938 and 1940 after all our expansion and optimism we lost money. It certainly looked as though there must be some better way of making a return on stockholders' equity than in the yarn processing business. That year's report stated:

The greatest contributing factor to the company's unsatisfactory results for the year was the low level of prices for throwing during its last nine months. Processing charges which the company obtained during and after the second quarter averaged 36% below those for similar services in the first quarter.

Since we had increased our plant capacity to service the New England textile companies' thrown yarn requirements, we made the false assumption that prices for the services would hold up even though increased capacity meant that we had to take business away from competitors, and we foolishly assumed that this extra competition would not create price cutting. Obviously, if one wants to expand one's position in an industry it is far safer to buy a competitor's business and not increase overall capacity. It took me many years to learn that simple lesson. At the end of December 1940, after eighteen years in business, we had built up the net worth of the company to only $1,765,000. No wonder we were getting discouraged.

Royal Little: getting sweet-talked out of $830,000

Another story from Textron founder Royal Little (1896-1989), author of "How to Lose $100,000,000 and Other Valuable Advice." In spite of his wealth of mistake stories, Little was one of the most successful US businessmen of the mid-1900s.

In this story, he recalls a mistake he made involving his investment company, Narragansett Capital.

AQUARIUS CORPORATION 

Aquarius was a company that a group of investors financed in Albuquerque, New Mexico. They...had a wonderful-sounding plan to convert the job shop printing plant that they had taken over into a highly sophisticated operation that would do quality color work for large industrial users throughout the Soluthwest.

In addition, the states of New Mexico and Arizona, which had to go as far as San Francisco or Chicago to get good color reproduction work for all their tourist folders and other promotional materials, were excellent prospects. This type of business ran into very substantial volume and we were told that once the plant was equipped with new machinery bought with our money, there would be no question about their getting continuing orders from the contacts they had made in the area.

The principal investor, who was president of the company, was really a spellbinder in his presentation. I personally went out to New Mexico to see the plant, which had excellent floor space and was well located, and met the group of key personnel that had been assembled, some of whom had experience in this type of operation, in other parts of the country. I remember saying to the promoted, "How in the world do you get a group of people who have had wide experience to work for you for lower salaries than they were getting in Chicago or New York?" He said, "Roy, this is a wonderful part of the world to live in. These people will work out here for two-thirds of the pay they were getting in other parts of the country. We have a great opportunity to build a most important printing business here and all of this group have put up some money to show their confidence in the venture. I can assure you, Roy, that this could be one of the finest investments that Narragansett ever made."

When this investment was brought to the board for consideration, my son, who had met the principal and thought he was too much of a promoter, tried to persuade me to take it easy and not rush the board into approving this transaction. In my usual manner (once I was sold on something, I insisted on getting the board to act on it that day), without having any consultant like Arthur D. Little, Inc., investigate the situation and check with the states of Arizona and New Mexico to see if, in fact, they were prepared to give millions of dollars in printing business to this new company, I rushed ahead. Believe it or not, without further investigation we made a total investment of $830,000....

Within one year, the venture went broke and Narragansett took a complete loss.

ADVICE: don't let a super salesman con you into making an investment. This company was formed and named at the height of popularity of the musical "Hair." Just the fact that someone would name his company after the principal musical hit of that show should have been warning enough.

[pp. 224-225]

Excerpted from How to Lose $100,000,000 and Other Valuable Advice, by Royal Little, (c) 1979 by Royal Little and the Harvard University Graduate School of Business Administration.

Royal Little: the $1 million net worth mistake

Another story from Textron founder Royal Little (1896-1989), author of "How to Lose $100,000,000 and Other Valuable Advice." In spite of his wealth of mistake stories, Little was one of the most successful US businessmen of the mid-1900s.

CAMCAR

Camcar Screw and Manufacturing Corporation was privately owned by Bob Campbell, Ray Carlson, and Bob's brother, who was head of sales. Their principal operations were in Rockford, Illinois, and the company had been very successful in supplying small metal fasteners of various types to the automobile and aircraft industries and to other users of such parts. They showed me their balance sheet whith a complete disclosure of net worth as they had computed it in the past, and, of course, we had their sales and earnings for many years to determine the steadiness of their past earnings record. We bought Camcar on October 1, 1955.

The contract was drawn by the lawyers, without our auditors being present, on the basis of determining the net worth under sound accounting principles, but when the joint audit was made at closing both their auditors and ours added $1 million to the net worth figures that had been shown to me. They claimed that the company had been incorrect in the past in writing off over $1 million worth of dies and tools, which both auditors claimed should have been capitalized. While we had assumed the net worth would be as shown to us during negotiations, Textron had to put up $1 million more than we had anticipated.

In spite of this mistake on my part, Camcar has been an excellent acquisition for Textron.

ADVICE: Never let your lawyers prepare a purchase and sales agreement for an acquisition without having auditors representing both sides present to prevent a misunderstanding of this sort.

[pp. 152-153]

Excerpted from How to Lose $100,000,000 and Other Valuable Advice, by Royal Little, (c) 1979 by Royal Little and the Harvard University Graduate School of Business Administration.

Royal Little: not going the last $500K to buy a great company

Another story from Textron founder Royal Little (1896-1989), author of "How to Lose $100,000,000 and Other Valuable Advice."


This is from a section called "Lost Opportunities":

In addition to losing money for Textron through mistakes, I lost millions for the shareholders by not paying the asking price on several most attractive acquisitions. There must have been at least a dozen cases where the seller and I were a few hundred thousand dollars apart, where I would not budge and refused to meet the seller's price....

JOSTEN

The outstanding case of where I got stubborn and would not meet the offering price concerned Josten. Josten was a competitor of Balfour in making rings for students in schools and colleges. Balfour originally was the leader in this industry, but Josten [as of 1978] now far exceeds them in volume and profits. The offering price was $13,000,000, and I finally came up to $12,500,000 but wouldn't go the last half million dollars. As a result of this lost opportunity, this mistake on my part undoubtedly cost the Textron stockholders over $30,000,000 in lost values. Dan Gainey, who controlled the company and was at the time treasurer of the Republican Party, then made a public offering. In 1976, sales were $163,700,000, net profit after taxes $9,525,600, net worth was $43,000,000, and their 5,040,000 common shares at $25 had an aggregate market value of $126,000,000.

Josten would have been an ideal acquisition for Textron since it fitted our basic concept if being a leader in a relatively small industry. Today Josten is the undisputed leader in the school ring business, and their performance is so superb that their shares are selling at a price/earnings multiple of 12, whereas Textron stock has recently been selling at only 6 times. In retrospect, of the many situations that Textron missed by being too conservative in the price we were willing to pay, the outstanding examples would have to [include] Josten.

ADVICE: If you have an opportunity to purchase a company as outstanding as Josten, don't let a mere $500,000 stand in the way. If a business such as Josten's with its tremendous future potential is worth $12,500,000 it certainly is worth $13,000,000. Refusing to meet the firm offering price in this case was one of the worst mistakes I ever made at Textron.


[pp. 187-188]

Excerpted from How to Lose $100,000,000 and Other Valuable Advice, by Royal Little, (c) 1979 by Royal Little and the Harvard University Graduate School of Business Administration.

The $250 taxi ride (in 2011 dollars, $530)

I was working for GTE in 1984 and I had my first business trip--to Santa Cruz, CA, to attend a training class. (Yeah, I know, nice trip.) The trip got terrifically screwed up. The first thing I remember was seeing a picket line in front of Boston Logan's Terminal E. The sign said, "Continental's experienced pilots are on strike." Then there was snow in Denver, hours of delay, and of course I missed my connection to San Jose. They sent me to San Francisco, where I tried to rent a car. But it was past 11pm, and due to the Democratic Party Convention then going on, there were no rental cars to be had. I had a fistful of cash that the company had advanced me. So I convinced a cabbie to drive me to Santa Cruz. It cost $250: everything I had. We drove down the Pacific Coast Highway, but I couldn't see the ocean due to the darkness and fog. The rest of the trip my boss had to buy my dinners and ferry me around. When I got home, the accounting department thought I had a typo on the expense report. "You have a decimal place wrong." Uh, no. I was worried that I was in trouble, but my boss told me I had done the right thing. I had gotten to the class in time. Then I got a call to meet with Mike, my boss's boss.

The next day I sat down with Mike in his office. I thought I would get chewed out - but instead he congratulated me. "I think you did the right thing. And you didn't have anyone to ask, did you? So you did the best you could, and I'm sure you learned something. Nothing good can happen unless we try things, and not everything works out," he said.

Then he turned to his bookcase, and reached to the bottom shelf, where there were a bunch of copies of the same book. He slid one out and handed it to me.

"Read this. You can't have great successes without your share of mistakes." I looked at the cover. "How to Lose $100,000,000 and Other Valuable Advice" was the title. I put it in my bookcase and didn't pull it out until, oh, more than 20 years later.

Textron Founder Royal Little stumbles by overruling his management

Royal Little (1896-1989) is one of the inspirations for this site. He was most famous for founding the conglomerate Textron (still going strong in 2011), but his most meaningful contribution for me was his autobiography, "How to Lose $100,000,000 and Other Valuable Advice." It's out of print now - but perhaps if someone who owns the copyright (it may very well be Harvard Business Press - but when I checked with them a few years ago they didn't think they did) falls in love with this site they'll reprint it. (I offer to write the Foreword!)

Little's book is an autobiography in mistakes. It's a wonderful upending of expectations - an exceptionally successful leader writing about everything he did wrong. It's a terribly human book, funny and sympathetic in a way that no chest-puffing "CEO memoir" ever could be.

Here's one of the stories from the book:

Homelite Four-Cycle Engine

In those days the only other well-known outboard motor company was Champion. Allan Abbott [head of Homelite, a Textron subsidiary] spent some time with them and tested some of their motors but decided against buying the company which, incidentally, had a negative net worth at the time.

A lightweight four-cycle engine was originally developed for the small Crossley car, which was to have been made right after World War II. Somehow or other the engine got to Twin Coach where its development was carried on further by Lou Fageol. Finally Twin Coach decided they couldn't handle it, so Lou Fageol and a partner, Crofton, took it over and carried on the development.

Lon Casler somehow heard of Lou Fageol and got enthused about their engine. In addition to the four-cycle outboard, Lou apparently had a design for an inboard-outboard motor and may have had a patent; and, of course, Homelite made a deal that involved a purchase and some royalties. This was done at my insistence with Allan Abbott objecting and predicting failure - but I was determined to get into outboards.... Incidentally, Lon Casler was Textron's acquisition vice-president and a tower of strength to me.

The lightweight four-cycle outboard engine had many advantages: it was much quieter than two-cycle engines, it eliminated the regular outboard's exhaust problem (it wasn't a "stink pot"), and the engine could be run efficiently at any speed. The owners loved them but it cost so much more than the two-cycle engine that the market was very limited.

The deal was made in 1957, but after about three months, Homelite concluded the project should be killed. But I decided that Homelite should continue - at least for another year - which was against their better judgment. Among our reasons for asking Homelite to continue was the fact that the engine had been featured on the cover of Textron's annual report. How's that for an excuse to continue a loser?

When we all agreed to let Homelite abandon the outboard business, Dick Fisher, who was the founder and principal owner of the Boston Whaler Company, was reluctant to see the engine go out of production, so he formed a new company, which bought it for some cash and some notes.

So the Homelite four-cycle engine was a hell of a development which lost a lot of money for a lot of people. Allan Abbott tells me it cost Textron at least $5 million.

Advice: Don't force a division president to take on a product that he's not sold on. He will undoubtedly know more of its potential than you ever will.

pp. 183-184

(c) 1979 Royal Little and the Harvard University Graduate School of Business Administration