The King of Cash: The Inside Story of Laurence Tisch

“profit. That worked out to a paltry 2.5 percent return on assets, about what the money would earn in a passbook savings account, and 10 percentage points below what Tisch viewed as a minimum acceptable level. Loew’s had the perfect investment profile: lots of hidden value hampered by poor management. But a stock isn’t a lot- tery ticket; it’s a business. Once an investor like Tisch gets his foot in the door, he aims to see it run like a business and will happily do it himself, if necessary.”

“In Larry Tisch’s view, ego was the number'One stumbling block for effective management. “The manager wants the company to grow and grow even if it isn’t making any more money as a result,” he said. “He wants a bigger plane and a bigger office. That may not be at all the same thing that’s best for his shareholders.” The number'two menace for managers? Surrounding oneself with yes men.”

“The Laurel-in-the-Pines deal, Larry Tisch’s first big deal, encom- passed two themes that would characterize practically all of his invest- ment decisions. First, he showed an unshakable confidence in his own instincts and a willingness to defy conventional wisdom that didn’t make sense. Second, he showed his inclination to avoid overpriced investments—such as Florida hotels—and their accompanying higher downside risk. The family resisted the temptation to be swept up in the speculative fever in Florida. Instead, they went into a far more conservative deal—one that left plenty of room for error—on terms that gave them a few years to make a go of it before committing to an outright purchase.”

“The Tisch investment strategy was to acquire bargain-priced stock of publicly traded companies that held assets far more valuable than the average investor perceived. Some companies’ stock was cheap de- spite potentially valuable assets, because management hadn’t figured out how to transform those assets into ever-rising profits. In those sit- uations, the Tisches weren’t shy. They became activists. CBS was no”

“He was a genius not of planning and design but of swift decisiveness driven by instinctively good common sense. Asked whether he ever had anything like a five-year plan for achieving certain goals, he replied, “I don’t have a one-day plan.””

“After the Tisches’ first year in the Traymore, Gravatt agreed to sell them the hotel for $4,350,000. The deal called for a total down pay- ment of $700,000, including the $500,000 he’d already received. The $200,000 balance was a fraction of the first year’s expected profit. Adding to the transaction’s appeal was the tax benefit of a $420,000 annual depreciation allowance the buyers could take over 12 years. Identifying potential tax benefits in such deals would become a hall- mark of Tisch’s approach to minimizing investment risk. Such bene- fits would become even more useful in later years as he diversified his holdings (the most stunning example of this was CBS, where Tisch essentially recouped his entire initial investment and still held more than 18 percent of the company). A favorable tax treatment often could convert what might seem a gamble—buying a distressed busi- ness—into an investment in which the worst-case scenario was break- ing even.”

“In Tisch’s view, however, CBS no longer could afford a spare-no- expense approach to the network’s quality. “Survival was the issue,” Tisch said, “not the comfort of management.” CBS was throwing money into a pit where it had no chance to grow and return a reward to the all-important owners. There was no greater corporate sin.”

“Tisch took the candy store approach. How much money was left over that didn’t have to be reinvested in the store to keep the cuS' tomers coming and the money rolling in? He called it free cash flow. “Profits that have to be reinvested in more capital outlays may not re- ally be profits at all,” he said. Companies routinely list as an asset money spent on upgrading factories and equipment—sO'Called capital spending. They call it reinvesting profit. The rationale is that if the owner decides to sell the candy store, the expanded shop will fetch that much more because it’s bigger and better. But Tisch believed such expenses were part of the cost of generating sales.”

“of investments. Larry Tisch started his business career by buying up hotels and plowing the profits into a seemingly unrelated collection of businesses: movie theaters (Loew’s), insurance (CNA), cigarettes (Kent), watches (Bulova), ships, oil rigs, and finally broadcasting when he became head of CBS. The common thread that Tisch de- tected was an untapped potential to generate tons of cash. He had no all-encompassing corporate profile in mind as he built his holdings. For Larry Tisch, the game was business and the cash at the end of the day was how you kept score.”

“What worked for Tisch wasn’t having a plan but having a clear set of principles for determining when to buy an asset and when to sell, whether it was a business, a commodity, or a security. He looked for bargain-priced assets whose values were depressed only temporarily typically, because of mismanagement. His overriding requirement was that he would put no more into an investment than he could reason- ably expect to get out of it under a worst-case scenario. Once he owned an underperforming asset, he aggressively rooted out the cause of its stagnation and made the changes necessary to turn the tide, often by gaining ownership control and taking over management him- self. A key element was Tisch’s ability to quickly determine whether an investment met all his requirements and to act fast.”

“It wasn’t the first time he had more than made up for the lack of a plan by having acute radar for a rare investment opportunity, a ready load of cash, and the unshakable self-confidence to move swiftly. Those were the qualities that, in the span of 20 years, transformed Tisch the hotelier into Tisch the conglomerateur—all the while prov- ing himself one of Wall Street’s smartest smart-money investors and one of corporate America’s most sought-after board members.”

“To Tisch, the purpose of every business was to generate decent profits for its owners. That article of faith went without saying, and it applied to the mom-and-pop candy store on the corner as well as to his own sprawling conglomerate. This nugget of common sense had served him well in all his business ventures. But from the time Tisch first emerged CBS”

““There’s nobody in this business at ABC, NBC, or CBS who doesn’t know one thing,’’ Tisch said. “The show is the thing. But by the same token, if you carry that to extremes, it’s like the guy who drowned in an average of 12 inches of water. Sure the show is the thing. Everybody knows that; but do you sit around having the money pour out in waste while you go around saying the show is the thing?””

“networks. Small wonder. For years, it was a tradition at the networks to keep the news divisions from showing profits for fear of eroding their aura of public service.”

“celebrity. Of almost no interest to many of these people was whether their work enriched the shareholders of the companies that ran the networks. Small wonder. For years, it was a tradition at the networks”

“In a good year, CBS might earn $150 million. “It’s nothing,” Tisch said. “If you don’t run it as a business, our fixed costs in a down year could destroy us, because when we start the season, say September 10, if our programs don’t work, there’s no cost to cut. I can lay off six peo- pie or eight people, but it’s not like a manufacturing plant where you have a cost of goods. Our costs are all preordained. It’s fascinating. It’s a very interesting business for that reason. There’s no leeway once you make the mistake.””

“ments. The most fundamental of those standards was that every dollar spent in the course of doing business was viewed as an investment ex- pected to yield at least as good a return as that of no-risk government bonds.”

“At NYU’s School of Commerce, Larry Tisch met and studied under the legendary Marcus Nadler, whose ideas about the international money markets and the role of central banks would later influence Tisch and a group of devoted followers. Perhaps the most famous member of the group was investor Henry Kaufman, who spent 26 years at Salomon Brothers. “Nadler had an extraordinary ability to simplify complex financial practices,” said Kaufman, who studied under Nadler several years after Tisch. “He did not have a pet theory, but he was an anti-inflationist.” Perhaps Nadler’s greatest quality was his step-by-step approach to problem solving, a hallmark of Tisch’s future business strategy. Nadler developed an enormous following of former students. His classes on current economic and financial problems frequently were attended by former students, many of whom joined the Money Marke- teers, a group that met several times a year for dinner and to hear Nadler speak. Nadler was a major influence in formulating Tisch’s views on money supply fluctuations and the implications for inflation, interest rates, and the economy.”

“The Tiscbes believed a welbrun, renovated Laurel-in-the-Pines could easily generate $100,000 a year in profit. It was a strong, rep- utable business. At a purchase price of $375,000, the downside risk ap- peared minimal. Even if they had to settle for just $100,000 a year, the hotel would pay for itself quickly and remain the resort’s most salable property. With a little effort, the profit potential was even greater.”

“The cash was piling up fast, and the pile—now measurable in mil- lions—was outgrowing their immediate personal and business needs, an entrepreneur’s dream come true. A1 Tisch, however, wanted to”

“For Larry, the destruction of Laurel-in-the-Pines was no cause for tears. Indeed, one of his strengths as a businessman was emotional de- tachment from investments. “You just don’t fall in love with your as- sets,” son Andrew said. That detachment allowed the Tisches to build equity fast. They traded hotel properties much the way a Wall Street money manager works the stock market. They bought or leased or built. They added value. They sold them. Sometimes they leased them back. “By the late 1960s, we had 13 hotels,” Andrew noted. In 1994, “we still have 13 hotels, though not all the same hotels. We leased them, sold back leases, managed them. Each deal has been a profitable deal unto itself. We never had to be somewhere. Even in the hotel business, we’ve just been trading assets.””

“investment strategy. They bought low, ignoring the majority view that values would sink even further in a postwar resumption of eco- nomic decay. They managed costs carefully, but spent wisely on amenities that attracted business. They lived modestly. They didn’t get emotionally attached to their businesses, and they shifted out quickly when they saw a more compelling investment opportunity or, in this case, an opportunity to get out of waning resorts.”

“The Tisch investment formula was coming into sharp focus: Avoid risk, which included avoiding debt. Exploit hidden tax benefits. Buy low, or don’t buy at all. If the price is too high, rent it; owning the cash flow is good enough. Hire top-quality professional managers, and”

“keep the chain of command short for speed of notification when things go wrong.”

“Word of repeated successes travels fast within any industry. The hotel business is no exception. The Tisches already were building a reputation as highly effective managers with deep pockets. It made them automatic targets for pitches by owners of poorly performing ho- tels who wanted to either sell or lease them to someone who could do a better job operating them and would improve their resale value. The”

“The Tisch family now was worth about $30 million, more money than the entire family would ever need. No longer did Bob and Larry feel compelled to check out every proposal that met their requirement for a 12 percent pretax return on their investment. Larry Tisch was carving out a reputation as a persuasive negotiator—the kind who”

“frequently gets what he wants by virtue of holding so many of the marbles. Fortified by the self-confidence that comes from sitting atop a mountain of cash, Tisch was an overwhelming adversary not just because of his financial strength, but because of his ability to rapidly grasp the complex details of any transaction and identify the weak- nesses in a seller’s pitch about value.”

“Larry Tisch’s attraction to the stock market, in 1958, didn’t mean his appetite for risk had grown. In fact, central to Tisch’s game was discovering, in a deal or a company, hidden value that no one else ap- predated—and gaining the upper hand early in the game. Such an opportunity had been evolving since 1952, when the federal govern- ment laid the groundwork for breaking up the movie giants that owned both studios and theaters.”

“Companies routinely list as an asset —”

““More and more, a big company has to go on spending money just to maintain its existing earnings stream. Isn’t that really an expense, rather than something that should be considered as a true increase in value?” Tisch said. “In what we call ‘smokestack America’ there often isn’t any accumulated free cash after capital outlays. The companies in many cases aren’t really making money.””

“It was right out of Graham and Dodd, as was the notion of evaluat' ing a company’s underlying assets. Tisch liked insurance companies and banks, for example, because their asset values—in the form of cash, stocks, bonds, mortgages, and real estate—were simple to assess and fairly easy to access. A steel company is different; its value depends”

“On to Wall Street and New Investment Horizons 49 A Foothold at Loew’s By the end of 1958, Nathan Cummings’s group had acquired 235,000 shares from dissident Loew’s Inc. directors at $22 each. Buy' ing with him were his brother Maxwell Cummings, a reahestate op' erator and developer in Montreal, and Paul Nathanson, a Canadian film distributor. The move ended the threat of a proxy fight by a db rector, Louis A. Green, who had clashed with management over what he viewed as mismanagement of the MetrO'Goldwyn'Mayer movie'producing unit. Other sellers included two other dissident directors—Joseph Torm linson and Jerome A. Newman. Tomlinson, a year earlier, had threat' ened a proxy fight over management’s plan to spin off Loew’s Inc.’s Canadian and U.S. movie theaters and its WMGM radio station, leaving MGM as an independent studio—a plan the courts had ap- proved. Cummings’s aim was to ensure that the plan could be com' pleted. He wanted to end up with MGM after the spinoff. By 1959, the Tisches had accumulated $69 million in hotel profit. Buying Loew’s shares ultimately would require tapping about 15 pen cent of that cash. That March, Loew’s Theatres was formally sepa' rated from Loew’s Inc.—soon to be renamed MetrO'Goldwyn'Mayer. Existing shareholders got a half share in each of the two new com' panies for each preTreakup share held. Tisch called Cummings and said, “What do I do now?” Cummings offered to buy Tisch’s MGM shares. “So I sold him my MGM stock and I still owned the Loew’s Theatre stock, and at that time the price of the stock was $14. I knew enough to know that $14 for a company without debt and $10 or $12 [per share] in cash plus 100 theaters and a radio station was awfully reasonable—plus the of' fice building in New York and other office buildings. So I just kept buying the stock at $14. The stock was always $14.” Tisch wasn’t playing the market. Loew’s was an asset play made at' tractive by a persistently low, stable stock price.”

“ing tender offer.” Just keep buying shares in the market without making any announcements, except those that the Securities and Exchange Commission requires. The tactic prevents the stock price from running up too quickly and allows the buyer to acquire shares in the early stages at better prices than at the end. Once the buyer reaches the desired ownership goal, the average cost per share is less than the market price. The goal is modest. It isn’t necessarily to own 100 percent of a company, but to own just enough shares to control its management, perhaps with the support of other large shareholders.”

“That’s what Larry Tisch meant when he said he thinks of stocks as businesses. For Tisch, buying a stock is buying a business. It becomes his business. To make sure that the business is sufficiently profitable, Tisch was an owner who liked having some say in who ran the com- pany and in setting policy, goals, and strategy.”

“casting was twofold: It was oligopolistic an”

“inflation'proof.”

“tion of the $6.14 billion it would be worth by mid' 1993. The family never sought to buy even a majority of the stock. After all, it was a New York Stock Exchange traded issue. As such, it gave them the flex- ibility to sell shares as needed to raise money for other opportunities, and to buy them back when the price was low. Besides, the goal was to manage the investment for a high return, not to own everything. The Tisches weren’t megalomaniacs.”

“with $50 million of convention business. The deal, for more than $16 million, included a 35-year leaseback to the Tisches. Effectively, the Tisches were perfecting the art of having their cake and eating it too: they retrieved much of the cash invested to build the Americana and rented the resort back, along with its annual revenue of $12 million.”

“The Tisch family now had an estimated net worth of $65 million; its enterprises generated annual profit of more than $6 million. By May 1960, the Tisches had gained management control of Loew’s, named five new directors, and let it be known the company had $50 million”

“available for acquisitions.”