This is Business Breakdowns.
Business Breakdowns is a series of conversations with investors and operators diving deep into a single business.
For each business, we explore its history, its business model, its competitive advantages, and what makes it tick.
We believe every business has lessons and secrets that investors and operators can learn from, and we are here to bring them to you.
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This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
This is Matt Russell, and today we have a special year -end episode of Business Breakdowns.
Running through some of the best ideas featured on the podcast.
The goal of the podcast is to detail whatever business we're covering that day.
But when you think about the best investors, the best business builders, they're constantly borrowing insights from the success stories that are happening around them.
So I gathered some examples that I find myself constantly thinking about.
And I think you will too.
When we did a version of this over the summer, it produced nine times the amount of feedback than a normal episode does.
So I would encourage you again to reach out with follow -ups.
I will answer. Now, you asked me for more examples in each particular case.
So I added some commentary here as to where else these ideas show up, whether it's in the operational side of things or in the investing side of things that I've come across.
This episode does have structure to it.
So we're going to start out with a high -level theme and then go into the lifecycle of a business from establishing a niche with Gartner, building a culture at Live Oak, and an example of refining the operations via the lens of train.
We go through the good and bad of business transformations, told through the stories of Rolls -Royce and D 'Arra Horton, and then we cover what a clean business model or financial model looks like through Inditex.
And lastly, we finish up with some management stories that are maybe less well -known or underappreciated via Motorola and Windmark.
So to kick this off, we'll start with my favorite theme from the year which has stuck with me.
And that is my friend and former colleague, Drew Cohen, from Speedwell Research laying out the hierarchy of consumer preferences as it relates to coupon.
And I'd argue that this is the most overlooked dynamic, whether you are investing in companies or building a company.
So here is Drew laying this out.
But to your question on why coupon was able to be such a late entrance and still succeed so well, ultimately, it comes to the fact that if you think about the consumer hierarchy of preferences, which is what does a consumer really value?
A lot of times when you're making an e -commerce purchase, of course, there's price selection and delivery speed, but they also really care about reliability, consistency, and trust.
And none of these players really were hitting on that because they're these third -party marketplaces.
A lot of times they don't even have the inventory in stock before they go ahead and sell it.
It's going to be a very inconsistent delivery experience.
So whenever you're buying on one of these platforms, you're always wondering in the back of your head if something's going to go wrong, and that creates hesitation.
It creates friction to purchase, whereas coupon, by virtue of the fact that they actually own all of the logistics, they did the first -party inventory route and they were very quick to capitulate anything wrong, any returns in anything.
It built a lot of trust and consistency over time, and so that creates a different sort of purchasing habit.
You have to spend all of this capex just to get to the top of mind positioning in a consumer's head where they're no longer hesitating before they buy.
If you go to an e -commerce site and you're not sure if they're going to be reliable or not, you're in the back of your mind creating contingency plans and thinking of other places that you could potentially purchase this item.
And if there's all these other places you could potentially purchase this item, sometimes these alternatives are going to win out.
And so ultimately, Coupang built this relationship of reliance that no other player was able to do.
Now, we've seen this idea from Drew pop up on many different occasions.
It is notable that we rarely host founders of businesses on the podcast, but in the two occasions we did this year, they both tapped into this idea.
When we talked to David Peacock, the founder of FilterBuy, he described pretty much the exact dynamic as it relates to delivery speed and how important that was to the customer, which came as a surprise to him when it was the air filter business.
And then Greg from Gregory's Coffee, who made it very clear that coffee shops have a surge of demand in the morning time.
So forget about thinking about cups of coffee in a day.
The equation is cups of coffee in those morning hours and making sure you have the infrastructure to flow customers through.
I can remember my own days covering transportation and trying to assess the disruption from digital first players.
And after talking to enough customers or buyers of these systems, I started to appreciate, yes, many of these new platforms had adoption, but no one was loading their software directly.
It was happening through a much bigger transportation management software system like Oracle or SAP.
So the first realization is you need that compatibility.
But then the next question is, do you really have the relationship with the customer?
And one of the most creative examples of getting around that that I often go back to is the trade desk in the earliest days of digital programmatic advertising.
New entrants were basically going around the incumbent agencies that had all this power.
The trade desk worked hand in hand with the agencies, which opened up many doors and won them a lot of business.
In the earliest days, that was a massive risk to investors.
I can remember those conversations.
And that's a case study in and of itself to see how they've gotten around that.
But finally, I would just say it's also just important to cut through some of the nonsense.
Don't be too idealistic about what is going on with some of these sales.
We haven't had advertisers at our events, but I was exploring the idea.
And advertisers will pay a lot for events.
And I can remember having the conversation asking this particular salesperson who is on the other side and trying to understand what they were really looking to get out of it.
And their answer was Frank.
It was, I get paid based on sales and high quality interactions.
And if I'm in the room with those 20 people, that's 20 high quality interactions.
Now, you can protest that idea or just appreciate the idea of incentives and how much that can matter.
Now, I think the hierarchy of consumer preferences taps into the idea of early stage businesses, those that are growing.
And I love going back to see the creative ways that they've gained traction and establish themselves.
I think there's some examples that I just mentioned before.
But one of my favorite examples from this past year is the behemoth today that is Gartner.
And Gartner started as a very niche business.
And here is Alvisi Peggion with a brief story.
Looking at the history of Gartner, it was found in the late 70s by Gideon Gartner, who was originally a consultant for IBM.
So during the first years of Gartner, it made sense for the company to really specialize on advising customers on what IBM products they should be buying or what the features are.
But then over time, as the company started growing, they really branched out into other parts of the vendor ecosystem.
They also branched into marketing and supply chain research.
So this is really the first phase of the company.
In those days, nobody was getting fired for buying IBM, but you still had to know which IBM to buy.
And that IBM economy was big enough to establish a niche.
But the challenge is often how do you evolve the business from those early days, break out of your niche or just start to operate with more efficiency, gain share, maybe complementary business lines or segments.
And I think this is where talent comes into play and then the operational systems really come into play.
You likely know Toyota or Danaher, we've referenced these before and there are operational systems that are put into place and the entire organization revolves around these.
They're very, very streamlined.
And one of my favorite examples from the episodes this year was on train.
It's an HVAC business.
And you can hear Brett Larson from NCS detail how management took the Toyota system and applied it inside of train and changed their approach.
I think it's important to say that that wasn't always the case for train actually to be the share gainer.
So if you backtrack to when train was acquired by Ingersoll Rand, maybe due to lack of cash available prior to being acquired or focus when they're being acquired, they weren't ready for one of those regulatory transitions on the ResE side.
So they had to scramble to get ready.
They ultimately did have the product, but then they missed a loophole that essentially let the old generation product sell for a bit.
And they lost a lot of share.
So what happened was Mike Lamock joined and he previously in his career, he ran a business that was a supplier to Toyota and he really was evangelized with the Toyota production system.
He joined Ingersoll Rand in 2004 and ultimately was CEO in 2010.
He really worked to instill not TPS itself, but their version of it within train.
The first three years or so was focused on getting the data, value stream mapping, just the blocking and tackling of quality and on time delivery and the like.
I mean, culturally, that wasn't easy at all.
So I think of the top 300 employees, more than half had to be replaced and largely externally just to get engagement.
And then the next phase of that, which I think is really critical, was taking that value stream mapping and specifically what they call product growth teams or PGTs.
And essentially what these are, they're cross -functional teams that think of a person from engineering, a person from sales, a person from ops.
They're assigned to a specific product or customer segment within the different business units.
And their dual mandate is take share and expand margins and they are held accountable and compensated on it.
Again, it's all about value stream mapping, what the customer cares about.
It could be a new product instruction, train is religious about innovation, but it could also be tightening the cycle time between when you receive an order and you can get the equipment to them or having inventory placed locally.
And as they piloted that, they saw two to three X, the growth of their peers in those categories that they had PGTs.
So they expanded that out across the entire business.
And I think that's really a key differentiator, that piece of their operating system today.
The idea of cross -functional teams feels so powerful to me.
And I believe that there should be always healthy tension between a sales force and a product management team, but not at the expense of communication between departments.
And if you can bring that communication outside into the customer interactions, it makes a drastic difference.
Again, this is another example of where there is the idealistic thought process around it.
And then there's the realistic thought process.
Sometimes people inside the organization that don't talk to customers don't appreciate what customers actually want and hearing it from the salesperson or from anyone else in the organization that is not the customer, it's not going to land like it will from the customer.
And I think there was something lost from the conglomerate era when the future executives were moved across divisions to ensure they appreciated a full business.
I can speak to my own experience, starting on a trading floor and dealing with investor clients through that role and then eventually transitioning into research.
I just had so much more appreciation for what those clients actually cared about.
It was a harsh reality, but it hammered home this point.
And I think these systems ultimately drive a defensiveness in terms of understanding the customer, understanding the other functions within a business.
And I'll use the word moat here, because that's what it ultimately can build.
And when I put this in the context of physical hard asset businesses, it's very interesting to see the types of moats that that can be created.
And one of the most interesting and fascinating ones from this past year was Vulcan materials.
If you've ever asked me what my favorite episodes are, Vulcan is always on that list.
I just find the business to be so interesting.
Construction aggregates are such an interesting piece of the world, the foundation of the world, if I might say.
And Rob Hansen from Vontobal laid out here what all of this focus on building out the platform did for the business.
This really brings the point home.
Opening a new quarry is very time intensive and it's very capital intensive.
You need to have maybe 50 million dollars if you want one that's close in and it's going to take you 10 to 20 years to get this permitted through the environmental piece.
It's very, very complex and one of the major barriers to entry.
It's a scarce resource, too.
I know I call it the commodity, but it is scarce.
It's got to be close to a population center because this is 10 to call it 20 bucks a ton.
So it doesn't travel very far.
Every 40 miles you travel by truck costs doubles because it's about 25 cents per ton mile.
So you've got to have the logistics and the trucking there.
And then you have to have relationships with some of these downstream contractors, too, because you need to have people to use your product.
So it's a very hard industry to get into and greenfielding.
They do greenfields every maybe one, maybe two a year.
But some of those are just really distribution sites where they mine it and then they put some rail tracks down.
What's interesting, though, is the logistics piece is just so important.
And part of that is because if you're going to transport this stuff, I mentioned by truck, it's 25 cents per ton mile.
If you do it by barge, if you can have a quarry located close to an ocean, it's only one cent per ton mile, whereas then rail, I believe is about 8 to 10 cents per ton mile.
So transportation of this material is hugely important.
I think it's an overlooked piece of the business that is just hugely important.
But in general, the stats around it are that 80 percent is shipped by truck and then the other 25 percent is shipped via barge or rail first and then use a truck.
You always have to use that truck and it's highly expensive, which is why in certain markets you want to have multiple quarries.
And that's why you have this platform approach.
There's a lot of different ways of looking at value in terms of the operational piece to really get the price down as much as they can for their customer.
I think Rob captures a really interesting point there.
Construction aggregates themselves are commodity.
So selling the construction aggregate versus the other supplier who sells the construction aggregate, it's not going to make a difference in terms of the product.
How do you stay in business?
How do you differentiate yourself?
There's two things.
One is the cost dynamic operating at a lower cost, the location, the platform, just the geographical platform focus is what differentiates Vulcan in being able to deliver these when you factor in the transportation costs and how big of a percentage that is to the overall cost of the product.
That makes a massive difference.
So it's important to understand if your product is truly a commodity, then you're going to need to figure out different ways.
Buyers will always try to commoditize what you are selling.
If you're buying something, you want to have a proxy for what's a reasonable value for this and you might price it out relative to competition.
But you do want to try to differentiate your product.
I think we face this oftentimes where we will have blanket opportunities from advertising agencies and everything they want to do is commoditize the inventory.
Let us make it the most simple system ever where everything is an impression.
But guess what? All listeners are not created equal.
All impressions are not equal and you are the most valuable audience in the world.
So it's not something I like to talk about frequently, but it is the truth.
These are just interesting dynamics in terms of differentiating the product.
And the other thing that Rob touches on in that conversation is what else Vulcan has done to improve the operational experience.
And this gets into enforcing the culture throughout an organization in order to serve the client.
And I think it's one of these ideas that I've come to appreciate more over time.
I think, you know, culture is one of these things that you attach yourself early on to.
Then you start to move away, particularly as an investor and focus very heavily on the quantitative things.
But what really makes the differentiation is oftentimes hard to measure, hard to quantify, and that's where culture comes into play.
And one of the best examples of this came from an early episode in the year with my friend Steven Vafir, who talked about Live Oak Bank, which is a fascinating case study in and of itself in terms of how they built a bank around a very specific niche.
But one of the things that really stood out from the conversation was the high touch customer experience and everything that goes into it.
And what I enjoyed most about this was the feedback after the episode.
Not only were people complimenting Live Oak as a customer, people were calling out their individual bankers.
That's just not something that I've ever seen related to any other episode.
So it kind of hammers on Steven's point.
He may have been an N of one in this particular anecdote, but I certainly got much more appreciation after seeing the feedback to the episode.
And so I want to talk about actually culture and how it differentiates.
I mean, if you think about most neo banks or most branchless banks, customer service is lacking.
If you think about a high interest savings account, you don't generally have a great experience, but you're earning more money on your capital.
Live Oak takes a very high touch approach.
So every borrower they actually will fly to and meet face to face, belly to belly, and look at them, go over the business plan, see if they have the eye of the tiger and a plan for success.
And then on the deposit side, they have this well -trained and well -staffed call center.
And so a few months ago, I actually was expecting a wire into my Live Oak account and I was traveling that day and the wire hadn't hit, even though the sender said it had sent.
And so now I'm going through all of the anxiety and early afternoon I call Live Oak.
Within ten seconds, I get a gentleman named Ryan on the phone.
And so I explained to Ryan what happened and he said, that's interesting.
How much was the wire for?
And I told him I said, who is the sending institution?
Hang tight. I'll be back in a few minutes.
So then two minutes later, he gets on the line and he says, look, I just worked with my wire staff to go through every single transaction that hit the bank today and nothing was for that amount.
But do you mind reaching back out to the sender and just making sure that it went through?
So I do that. And of course, it turns out that the sending institution, even though they said it was confirmed, they flagged it at the last minute because that account had never sent money to this account.
And so then all is resolved.
But then a few hours later, right before five o 'clock, I get a call back from Ryan.
And he said, hey, Mr.
Vafir, I know you're traveling today.
I didn't want this to hang over your head overnight.
And so I just wanted to give you an update that the funds have hit your account.
They're readily available.
And is there anything else I can help you with today?
And I said, no. But that is an amazing customer experience.
Again, that experience from Stephen seemed to be shared or there were similar stories coming from other people that dealt with Live Oak.
And it definitely gave me the impression that there is a real culture there in terms of high touch experiences.
And what I would say is AI chat bots are becoming more and more useful or likely to see that transition happen more and more.
It's going to make high touch experiences more of a differentiator, more of a scarce resource.
They come with a cost, but think about it within a business and how important that can be.
Now, we're going to transition a little bit to the idea that a business can be humming in many ways.
The business model is working well, but it doesn't always connect to the financial model.
There's efficiency opportunities or ways that you can shift the financial model and unlock a tremendous amount of value through a variety of different steps.
The first one we're going to talk about is one of my favorite conversations, mostly because I'm a massive fan of Ed Wachenheim.
I've said it many times.
His book that was released in 2016 has one of the best descriptions of just how to approach general markets and valuations and so many great case studies.
And he lived up to all of my highest expectations.
Now, Ed comes with a very unique perspective here because he has been looking at the home builders for 40 years since before I was alive and he has seen the evolution of the business model.
And I think the way that he describes it is ideal because it captures the business itself and how to frame the business and then the financial implications on the back end.
So if you look at the industry at that time, many players tended to have ROEs below 10 percent because they had large investments in land.
When you think about it, a land is not a good investment.
Land might appreciate in value three or four percent per year.
The home builders needed to keep five or six or seven years of land supply relative to the number of houses they're selling in order to have an adequate supply to have time to get the land permitted and developed and then ready to build on.
So they had these large investments in land.
They were real estate companies that happened to build houses.
And that's the way it looked.
Their cash flows mainly went to buy more land and were not available for the shareholders.
So it was not a good business.
We call them stick builders, which is not a favorable name, and they probably deserve to sell low multiples.
I mean, highly leveraged with debt, low ROEs and not very good cash flows.
The turnaround was and the optimistic side was they were growing rapidly.
So they were good investments because their earnings per share were growing double digits at the time because of the gains in market share.
So the best way to look at it if you go back to Horton, for example, 10 years ago, 2013, for every dollar of sales, they had more than one dollar invested in inventory.
That inventory could be divided into houses under construction and land.
And close to two thirds of that would be land.
So they had a very large percentage of their invested capital tied up in land.
Now, we started thinking and occasionally we get proactive, not against management, but in terms of ideas.
And as early as 2005, I was in a meeting with a syntax.
Tim Ella was the CEO of Sentex and I bought Jim Grossfeld, my professor, in on the meeting.
And we started talking about the nature of the business.
My argument and Jim Grossfeld's argument was why do you need all this land on the books?
Why don't you option the land?
You're opting to make some already.
Make this an asset like business.
Take down the land just before you need it and it'll completely change the nature of the business.
One, much less capital intensive.
Therefore, a large percentage of the earnings will come to the shareholder in terms of free cash flow.
You will not need much debt on the balance sheet.
The ROEs will increase dramatically because building homes was a good business.
But owning land, five years supply of land, when land appreciated three or four percent, you had to finance that land, was a bad business.
And Tim Ella fought us.
You don't understand the business.
We've been very successful.
Don't criticize us.
We had a little of an argument, which I actually wrote about the book you referred to that I wrote in 2016.
But what happened was there was one home builder, NVR, that always was land light, had an excellent balance sheet, high ROEs, bought back stock, and typically sold at 16 times earnings.
Matter of fact, the average B ratio of NVR in 2015 to 2019, we go to the pre -COVID period because it was a more normal period, was 16 times earnings.
In the meanwhile, Horton was selling at 12 times earnings.
So the NVR model was a much, much better model.
And what has happened is, and frankly, we were a little proactive in speaking to the management's to do this, the management's have, I would say, got religion and they have gone to the asset light, don't own a lot of land model.
So Horton today, their option land is 75 percent of the total land they control.
And it was about the opposite of that, it was 25 percent, if you go back 10 years ago.
And that has completely changed the balance sheet.
If you go back 10 years ago to 2013, they had $2 .3 billion of net debt in their home building business.
Today, I will say that was September 30th, which was today because that's the end of that fiscal year.
They had $600 million more cash than debt in the home building business, completely different business.
If you go back 10 years ago, the ROE was about 10 percent.
Last year, it was 22 percent.
So the business has transitioned really from being a real estate business to being a manufacturing business.
Horton today is a high volume manufacturer of homes.
It's completely different business than it was in the 1990s.
Now, business transformations are tough.
You heard the train evolution earlier in the episode and how much turnover there was in the business and the employee base.
And I think it's one of the most difficult exercises for investors as well.
Not only do you have to appreciate the change in business model, you need to see it in the numbers, but you also need the rest of the market to understand and appreciate that change as well because the thesis behind so many of these transformations typically includes some element of multiple expansion.
And personally, I think that's one of the most difficult things to get.
I could just be particularly bad at this particular exercise or strategy, but I think it is incredibly challenging, though it does offer fruitful opportunities when done right.
It brings another great example here with Rolls -Royce.
I will point out again, as I did on the episode, this is the aircraft engine manufacturer, no longer the car business, but they shifted their business model to price contracts to include a service element along with the equipment sale.
And that service contract you can think of essentially as insurance.
And while we all admire Buffett's usage of the insurance float to be his investment vehicle, I think we often overlook that it's really fucking hard to underwrite insurance.
The Rolls -Royce stock chart tells a story of a company that was trying to transform into a better model.
But the execution took time.
It seems like they're on the right track now.
Here is Graham Foster from Orbis detailing the most important factors in the shift and some of the dynamics that go into it.
You could say it's just your pricing.
Your assessment of the risk should go into the pricing itself.
Now, in the past, I think Rolls -Royce have fallen over both on the pricing and on their own cost discipline after the pricing is set.
When it comes to pricing, it's just really about getting the value that you should be getting given the service you're providing.
I mean, the service they're providing is extraordinary.
If they can keep those airplanes in the sky flying around for their customers, then the airlines are super happy.
That's their whole business and that's what they want.
And if they can minimize the time when they're doing the overhauls and do that as efficiently as possible and then get the plane back in the air, that's hugely valuable for customers.
They should be paid for the value that they bring historically because I think of their culture going right back to the early days, 1906, with Henry Royce.
Their culture is on engineering quality and engineering excellence and not so much on the commercial side.
And I do wonder sometimes if you go way back to those early days, it was Charles Rolls who was running the business side.
Tragically, he died only 32 years old, six years after the business started in an air show.
He was doing all sort of air stunts.
I think it was one of the Wright Brothers planes, something went wrong with it.
And then, of course, there were lots of other people in the business thinking about the commercial side, but it really became Henry Royce's show.
And so he drove the culture of that business and it was all about the engineering.
And that's a wonderful thing.
That's how they got them to where they are today in terms of that position in the industry and the great products they make.
But they've never really had that culture on the commercial side to drive the value that they deserve for the product that they are building.
Whereas if you look at a GE in the U .S., a bit more commercially minded, they've managed to generate more profit and more margin from that business, both on the cost side and on the revenue side.
Under new management that they have now, that's the direction they're aiming to go.
But I would say that pricing that insurance is absolutely critical.
Staying on the point of the business model, tying it into the financial model is something that's not easy to appreciate unless you're doing it over and over and over again.
And I can say I don't build models daily anymore.
So it's not something that I completely appreciate and really need to go through the numbers oftentimes to understand what is the reality of this business in terms of what it is producing.
This is where modeling can really come into play.
And our episode on Inditex, it was a fascinating conversation for so many different reasons.
I think Alistair tied the numbers to the narrative in one of the most effective ways that I've ever seen.
But his point on the actual financial model I thought was particularly enlightening because of its simplicity.
And I think the cash conversion of earnings is something that really, really can't be overstated, particularly for a business over a long period of time.
Is it meaningful in the short term?
You could see swings.
But once you have that type of visibility and you have an appreciation for what that looks like over the long term, that is where the big C word compounding comes into play.
And here Alistair lays it out in terms of Inditex.
It's a free cash flow machine.
It's a brilliant free cash flow business.
Almost all of the profit is converted into free cash flow.
The payout ratio, which is probably the best measure of that, is just under 90 percent.
And that's a very important number because your payout ratio is what you are pretty confident that you're going to be able to pay out.
Cutting a dividend is a no no in financial markets.
You'll be crucified if you cut your dividend.
So you tend to pitch your payout ratio at a level, which means that you are guaranteed to pay your dividend.
And they're pitching it at 90 percent, which is a pretty strong demonstration of how confident they are that they can generate cash flow from their earnings.
Now, why is it so strong?
It's so strong, I think, for a couple of reasons.
The first is there's no financial trickery.
This is a company where what they tell you on the P &L is what you get in cash.
I love these sorts of businesses.
They don't make adjustments.
The model is probably the easiest companies I've ever had to model because I'm not having to restate numbers the year before.
I'm not having to make adjustments for stock space compensation or for intangibles or whatever it might be.
It's a very straightforward P &L and they don't play around with it.
So that's one of the reasons.
There's no financial trickery.
The other reason is working capital.
And it's quite interesting because most clothing retailers don't have this position.
They have a strongly negative working capital position.
In other words, they receive money from their customers much faster than they have to pay their suppliers or absorb in holding onto stock.
And I want to zoom into one of those lines, which is the inventory line, the stock that they're holding onto.
This is a real problem for companies where if you have long inventory days, if you're having to hold on to your inventory for a very long time, it just absorbs cash and it can be quite a drag to free cash regeneration.
In the case of Inditex, they hold typically 80 days plus or minus of stock.
So they're holding, let's say, two or three months of stock.
Now, if I compare that to just one other major retailer, H &M, H &M is holding over 100 days of stock.
So they're holding, let's say, 50 % more stock as a percentage of their business than Inditex is, or at least they're holding it for 50 % longer than Inditex is.
So that means that relative to peers, Inditex is much more cash generative, thanks to this low stock level.
And why does it have a low stock level?
It comes back to everything we talked about before.
They're buying in their stock last minute, they're making sure their stock is going to the right store and it's being sold quickly.
So that is really feeding through to the financials.
Better cash conversion does unlock multiple expansion.
In very simple terms, if you convert 100 % of your earnings into cash flow, that is worth more than a business that only converts 50 % of earnings into cash flow.
And it might be because it's tied up in an inventory or something else, but you can understand why a PE multiple is going to be different if that E is converting into cash flow.
I got this very wrong with the railroads 10 years ago.
And I will tell you there is nothing less fun than both underestimating earnings growth and getting multiple expansion right in your face.
So to close out the episode, I am going to share two management anecdotes that I found particularly interesting.
And I would say if I'm entering a business, whether it's as an investor or to work in that business, the one thing that matters to me more and more is that the management team and the quality of the management team is strong.
It's hard to overstate how meaningful that can be.
And I know there's famous quotes that we want to find businesses that are so great and idiot could operate them that it's great, but there's not that many great businesses out there and great management teams make a massive difference.
To start, I just want to share one of the more fascinating stories that I had never heard of part of the episode on Motorola.
And that is the story of Greg Brown, who is the CEO and who has survived some of the most challenging things that you could possibly throw at a CEO and that is activist campaigns.
And by working with those activists, he has produced quite stellar returns at Motorola.
So major shout out to Greg.
I think there could be a book written about his approach to working just with the investor base and particularly the activist investor base.
Here is Joe Shaposhnik telling that story of Greg and his success taking over the business.
Greg has been at Motorola for 20 plus years and had run, I believe, two out of the three major divisions, the networks and the land mobile radio business prior to becoming chief operating officer and CEO of this new Motorola or what they call now Motorola solutions.
One of the keys to his success was focusing this business on this undiscovered crown jewel that most couldn't see because it was buried within a segment of a segment.
Just as Carl Icahn was ramping down his pressure on the company.
Interestingly, a new activist emerged and Greg had a grapple with a second activist, the new activist which came into the story and I think 2011 or 2012, they were focused on optimizing Motorola's cash rich balance sheet.
They had a ton of cash and very little debt at the time improving the company's cost structure.
So it was clear that they were probably a thousand basis points or so bloated relative to where they should be.
And so what Greg did was sell off the second business, which was a cable set top box networks business that took place early on in the 2012 timeframe or so and managed to get Motorola focused in on this single business, the land mobile radio business, which is the most attractive of all of the assets
that they had back then.
And they were purchased about a third of the company's market cap over the first five year period at a multiple that was very low because after the split, the story was pretty misunderstood.
And I think the stock traded that kind of a low teens earnings multiple.
They were buying back stock at very, very attractive valuations at the time.
And they focused on optimizing the real estate footprint of the company and getting this business slimmed down.
He was pretty successful in executing on either his ideas or the ideas that the investors brought to him.
And I think that that really helped him gain a lot of confidence with investors.
And eventually the challenges from the investor base quieted down and the activists left the story in 2016 and sold their shares.
And he was left to continue to build this business.
And then the next leg of the story was the entrance of Silver Lake who came in in 2016, 2017 and helped them grow into adjacent areas.
And those adjacent areas were video surveillance and command center software.
There's not much more that needs to be said on Greg Brown, but it's a very interesting example of both focusing operationally on a new segment of the business or really zeroing in on something that the market doesn't understand.
And then at the same time, listening to investors who want to see shareholder value unlocked.
And I think it's a very interesting story that I would love to know more about just in terms of managing those things.
And Greg has given a few interviews, but would love to learn more from him.
The last thing I'll leave you with is just this idea of operating differently.
And one of the conversations that we had earlier this year was with Brett Hefis, the CEO of Windmark.
And what really stood out about the opportunity to talk to Brett was that Windmark really does not do investor relations.
They are very focused on the operational side of the business.
Now, this one has been a long term compounder.
And over many years, they have grown an interesting franchise model that is built differently from many of the other franchise franchisee relationships.
You don't see massive franchisees that are growing significantly and own a ton of these stores.
And Brett got into that throughout our conversation.
But I did want to understand just the approach to investor relations and dealing with shareholders.
And I think Brett gave a very fair answer here.
And what I would say is when you operate differently, they're going to get a lot of pushback.
But I always admire those that do it.
And I think consistent throughout the conversation was that everything that Brett thinks about and that Windmark thinks about is long term.
We're a very unique company.
One of the characteristics from a shareholder perspective, investor relations perspective, I think we're unique because 20 shareholders own 74 percent of the company.
So it doesn't take us a lot to really understand.
We wouldn't have to spend $40 million like Disney did or Peltz did to try to organize that.
We would call up two of the top 20 work for the company.
So we'd pick up the phone and call 18.
Maybe there's three or four index funds that wouldn't return the call.
But we'd get to everybody else.
So I think that makes it the decision to do it the way we do it effective.
I just really believe that if you're a shareholder, where do you want me spending my time?
Do you want me on a conference call with analysts or trying to pitch our stock or at an analyst day?
Or do you want me worried about finding the next market, being with a franchisee and helping them out?
And I've never met a shareholder that doesn't want me spending my time on the core operations.
We talk a lot about capital allocation in these formats because people are interested in it.
It doesn't take up any time in my day.
We have the policy in place.
We move forward. So I think for us, we're easy to get a hold of.
Someone wants to call us a shareholder, a prospective shareholder.
They call Tony, they call me.
We talk to him. So it's just worked for us that way.
And I just like keeping it simple.
I've learned from someone who is really talented at this.
I listened very carefully in terms of how he did it.
It works and I'm not going to change it.
There's just no reason to change it.
Because it's not like we suffered from a low valuation.
They think we can have a different argument if that were the case.
Thank you for listening.
I hope you enjoyed these highlights from some of the episodes this year and how they all tied together.
Again, please send feedback.
Matt at JoinColossus .com is my email.
There's plenty of links in the show notes for other ways to reach us.
We love ideas. We love feedback.
We're going to be testing out new formats.
So everything is welcome.
And if you have more examples of things that I discussed in this episode, I love hearing about those.
We can find ways to feature them, whether they're guests on the podcast or just talking about them more.
That's always something we're looking to do.
There's more to come in 2025.
So stay tuned. To find more episodes of Breakdowns ranging from Costco to Visa to Moderna, or to sign up for our weekly summary, check out JoinColossus .com.
That's J -O -I -N -C -O -L -O -S -S -U -S .com.
