#328 Tom Murphy (Buffett’s favorite manager) | Founders

Intro

In this episode of the “Founders” podcast, the host interviews Tom Murphy, the former CEO of Capital Cities. Murphy, along with his partner Dan Burke, is praised by Warren Buffett as the greatest two-person combination in management history. They built Capital Cities from a small broadcasting company into a multi-billion dollar media conglomerate through strategic management and efficient operation of various media properties. The episode delves into Murphy’s management philosophy, his approach to cost control, and his successful acquisition strategies.

Main Takeaways

Management Success and Endorsement

• Tom Murphy and Dan Burke were praised by Warren Buffett as the greatest two-person combination in management history.
• Murphy’s company, Capital Cities, was able to overcome CBS in the media industry through strategic management and long-term planning.
• Capital Cities outperformed CBS over three decades due to fundamentally different management approaches.
• Many high-profile founders, including Elon Musk and Mark Zuckerberg, publicly endorse 8-Sleep.

Strategic Management and Efficiency

• Tom Murphy and Dan Burke built Capital Cities from a small broadcasting company into a multi-billion dollar media conglomerate through strategic management and efficient operation of TV, radio stations, newspapers, and magazines.
• Murphy’s obsession with cost control and efficiency led him to evaluate hiring decisions as a $3 million decision, factoring in lifetime expenses and even toilet paper costs.
• Capital Cities rejected diversification and regularly repurchased shares.
• Capital Cities’ goal was to make the company more valuable, not just larger.

Successful Acquisitions and Negotiation

• Murphy’s success was due to his streamlined approach and rejection of following peer companies’ fashion.
• Murphy’s approach to the roll-up was different; he moved slowly and developed real operational expertise.
• Tom Murphy helped Warren Buffett become a better person by giving him advice on hiring.
• Murphy was a master at prospecting for deals and had a unique negotiating style, often asking the seller for their best price and walking away if it didn’t work out.

Culture of Cost Control and Decentralization

• Capital Cities’ culture emphasized flat organizations and decentralized decision-making.
• Extreme decentralization kept costs and ranker down.
• Frugality was central to the company ethos.
• Low turnover was a key part of Capital Cities’ culture, leading to high employee retention rates.

Capital Allocation and Share Repurchasing

• CEO Tom Murphy had a highly differentiated approach to capital allocation, using internal cash flow and debt to fund acquisitions and rarely issuing stock.
• Share repurchasing was the second largest area of spending for Capital Cities, generating excellent returns for shareholders.
• Capital Cities was a unique company with a decentralized corporate structure where it was hard to tell who the bosses were.

Summary

Tom Murphy’s Strategic Management and Efficiency

Tom Murphy and Dan Burke’s strategic management and efficiency were key factors in the success of Capital Cities. They focused on industries they knew well, such as TV, radio stations, newspapers, and magazines, and rejected diversification. Murphy’s obsession with cost control and efficiency led to unique hiring evaluations and a focus on making the company more valuable rather than just larger. Their streamlined approach and rejection of following peer companies’ fashion set them apart from their competitors.

Successful Acquisitions and Negotiation

Murphy’s success in acquisitions was rooted in his patient and deliberate approach. Instead of acquiring rapidly and underestimating integration difficulties, he moved slowly and developed real operational expertise. His unique negotiating style, asking sellers for their best price and walking away if it didn’t work out, helped him secure favorable deals. Murphy’s advice on hiring also had a positive impact on Warren Buffett’s personal growth.

Culture of Cost Control and Decentralization

Capital Cities’ culture emphasized cost control, decentralization, and frugality. The extreme decentralization of decision-making kept costs low and allowed for more profitable operations. The company had a flat organizational structure, high employee retention rates, and a focus on hiring the best people and leaving them alone. Frugality was a central ethos, and cost control was seen as a competitive advantage.

Capital Allocation and Share Repurchasing

Tom Murphy’s highly differentiated approach to capital allocation played a significant role in Capital Cities’ success. He used internal cash flow and debt to fund acquisitions, rarely issuing stock. Share repurchasing was a major focus, generating excellent returns for shareholders. The company’s decentralized corporate structure made it hard to identify the bosses, contributing to its unique culture.

Conclusion

Tom Murphy’s strategic management, focus on cost control and efficiency, successful acquisitions, and unique approach to capital allocation made Capital Cities a multi-billion dollar media conglomerate. His partnership with Dan Burke and their rejection of peer company fashion set them apart in the industry. The company’s culture of decentralization, frugality, and employee retention further contributed to its success. Tom Murphy’s story serves as an inspiration for founders looking to build successful companies through strategic management and efficient operations.