Stiritz: Poker-Player Odds on Back-of-Envelope LBOs

"men now felt as if they had come of age. I have always known that other men could run a business as well as I could, perhaps better, so long as the figures and the forecasts came to me. I have never gone about worrying over what someone might be doing to my business, unless I found something that looked wrong, and that always comes out in the figures. Now I was pleased to let Kemsley's executive directors get on with it, while I began to figure what would improve the company and what we should do next. I had time to do some figuring on the backs of envelopes."

"Not everyone seemed to understand my love of budgets and balance sheets. They didn't seem to comprehend that, simply by checking figures, I could share in the guidance and excitement of a great number of operations, sometimes at the distance of an ocean or a continent. What I was watching was the flow of cash from one part of the organisation to another, testing it as if it were oil or life-blood, gauging that one area or section was not being starved of it, another part was not being overfed."

"One of the great advantages of budgets is that to achieve something near to accuracy of forecasting, one must completely analyse the details of costs. It is re- markable then what you find out when you set down on paper what your costs are for every single item necessary in the operation of the company. Managers have often told me that they had never known the real facts—or all the facts—about their operation until they looked into their expenses in preparing a budget. In this activity many extravagances are uncovered and many opportuni- ties to effect savings which can be used elsewhere are brought to light. Unless costs and revenues are predeter- mined and set down so that from one month to another the results are always being brought as near as can be to the estimates, a balanced judgement will not be brought to bear on the operations. And it is just as important to inquire why one figure happens to be so far below the budget of costs as why another figure is so far above it."

"Stiritz himself likened capital allocation to poker, in which the key skills were an ability to calculate odds, read personalities, and make large bets when the odds were overwhelmingly in your favor. He was an active acquirer who was also comfortable selling or spinning off businesses that he felt were mature or underappreciated by Wall Street."

"“When the opportunity to buy Energizer came up, a small group of us met at 1:00 PM and got the seller’s books. We performed a back of the envelope LBO model, met again at 4:00 PM and decided to bid $1.4 billion. Simple as that. We knew what we needed to focus on. No massive studies and no bankers.”5 Again, Stiritz’s approach (similar to those of Tom Murphy, John Malone, Katharine Graham, and others) featured a single sheet of paper and an intense focus on key assumptions, not a forty-page set of projections."

"Stiritz believed buyback returns represented a handy benchmark for other internal capital investment decisions, particularly acquisitions. As his longtime lieutenant, Pat Mulcahy, said, “The hurdle we always used for investment decisions was the share repurchase return. If an acquisition, with some certainty, could beat that return, it was worth doing.”3 Conversely, if a potential acquisition’s returns didn’t meaningfully exceed the buyback return, Stiritz passed."