Manager Minute One

“The meek with teeth shell inherit the earth” [sic]


KISS=Keep It Simple Stupid?




Leucadia National Corporation – LUK. A “paid for” commercial. Addendum IV - December 1st 2000.


Leucadia National is known to many as the mini Berkshire Hathaway. It may not have had the same level of success as Citicorp Vultures [CV] but then again CV have far fewer rules to adhere to. I still have Leucadia’s 1991 3rd Quarter Financial Report that was the start of my “love affair” with the company and its management. The fact that I was responsible for pulling the plug on a deal that would eventually cost Leucadia about $6 million and another $20 million conservatively in lost opportunities, did not stop their top man from recommending me for an assignment eight or so years later.


In many ways, the diverse nature of my assignments may have allowed me to think more laterally, crossways, some would argue. Some CEOs who I have worked with may have a point in ascribing my biting style to being self induced, although there have been occasions where I was afforded the luxury of sitting back while others went about sharpening my ax.


The one deal which caused Leucadia some “heartache” back in the early 90s involved a deal where I was simply brought in, one might say at the “closing ceremonies.” A group of ex-South Africans/ex Mexicans who had reclaimed the promised lands of La Jolla, California were looking to make their next killing, this time across the way from the Maquiladoras on this side of the Mexican border, fifteen minutes form Nogales, Arizona. The South Africans had got out of the “old country” when one Rand equaled $3.50, some when it was over $5 to the Rand. Some of these folks really learned the lessons of my father’s generation and those before him especially those who knew about the trading of that most versatile commodity lumber.


My very first job in the U.S. involved working for one of the largest commodity traders who traded in just about everything under the sun including lumber and silver and yes, of course, wives. Interesting wouldn’t you say that Engelhard Industries operated in both the silver and the lumber business as well as thorough breads? My introduction to this interesting market place occurred on March 20th, 1978, three days after arriving in the States. A couple knows the lessons of that story well. I still have a silver bar in remembrance of the world once having gone mad, yet again. 


Anyway, these ex-patriots were as certain as it gets about anything as sure as no lack of water in Arizona. They were going to buy this more than halfway completed development for $10 million from Leucadia, square it all off, adding a million or two to the $30 odd million that had previously been spent on the development before Leucadia acquired it – I think again in a bankruptcy – and the plan was after about 3 or 5 years to end up with about a zillion net profit, conservatively, of course. They wanted me to consider managing the project. The compensation package seemed generous assuming the deal penciled out. I had never been to this part of the States and so I thought there was nothing to lose by flying out with them a few weeks or so before the deal was to close. We flew all around this magnificent spot/dessert that Hollywood’s elite of the 40s and 50s would go to as their hideaway. The bar in the clubhouse was very well utilized; especially it seemed by the husband of the woman who was running the show.


After we had done our fly by, going as low at times as my father had mistakenly done on one of his operations, we touched down on the properties well-manicured runway. Although I knew a thing or two from mass residential development, thanks in no small part to the McMillin family of San Diego, I felt a little overwhelmed by the clatter of the champagne glasses that continued on into the bar area. My visit later to one of the competing projects convinced me that if we were going to be successful we would have to employ salespeople at least as good as our competitors who hired folks well schooled in the principles of sale-by-mail. Despite some of my reservations, by the time we took off back to San Diego, everyone was still as high as a kite – remember, these folks were from my Dad’s generation – they didn’t do pot or coke, although I should acknowledge my one uncle made a good chunk of his change by being the chief executive of Charles Engelhard’s world wide estate.


Growing up, I was led to understand that Mr. Engelhard died from carrying around too many cans of coca cola. [A good lesson for some of my friends who love the stuff, yet they own no stock in Berkshire Hathaway, you figure that?]


At the time, I had never heard of Leucadia National and so when I asked the name of seller of this “gem in the rough” nothing registered. I decided however to go do some serious due diligence. I called up Leucadia’s New York offices and spoke with a wonderful lady. I may not have been totally upfront by telling her that I was about to begin looking under Leucadia’s “skirt.” I simply asked if she would send me out their latest quarterly report. The rest is now history. But it serves as a good lesson to all. Always ask, “Why am I so lucky to be the recipient of manna from heaven?”


In other words, why would some of the smartest people on Wall Street who took a business from a negative $8 or so million net worth to a positive $300 million in a decade or so all while paying their full share of taxes, be so dumb as to leave a zillion on the table; a little less of course, if one were to be generous with local officials? My arguments convinced enough of the ex-patriots to at least put a pencil to the back of their paper napkins. Most them had never paid a dime in taxes since their monies where deposited in the place where the rich used to think of as a safe home, so when I began drawing my arrows, the not so-die-hards simply chose to return to their hot vacation spots, some went off to London.


A decade or so later, Leucadia would eventually dispose of this “gem in the rough” for around 40% less than the ex-patriots had committed to paying. To the dismay of the investors Leucadia held on the deposit. The Leucadia people are serious business people, even willing to risk doing business in Russia. If you think this is a “paid commercial” for Leucadia, you wouldn’t be wrong. I may in fact owe them. Last year, Leucadia distributed back to its shareholders over $800 million in dividends or about $14 per share – it also spun off a subsidiary, Homefed [symbol HFDC], to its shareholders.


Although Leucadia has never really been really in the high-tech field, other than its wineries they had the vision to go with ParkerVision [PRKR]. Fidelity National Financial [FNC], I think, makes a lot of sense too, though this is much more up Leucadia’s alley. Insurance has really been their game, again, a mini-Berkshire Hathaway some would say, certainly a family member of Warren “Cry Baby”Buffet agrees. Leucadia’s best may yet be to come and I am not talking about their recently announced deal with Finova – that deal didn’t even require me to pick up a pencil and start drawing connecting dots and Ds. More important, it didn’t have me bothering their president with another email. Finova looks a hellava lot better than getting in bed with Reliance although some may now be arguing a resurrection is in hand, a feat that may require much more than the patience of Joe(b).


Leucadia’s Colonial Penn deal is one perhaps that belongs in the books, again not quite Citicorp’s Fairchild Industries play, but then again, there are many things a VC can do that make it much tougher for a Leucadia type to compete against, assuming of course CV plays according to the rules. Hence Leucadia’s decision not to hang on to all the cash they had accumulated and rather put it back in the hands of their shareholders. Leucadia is a prime example of business at its best. Here are these two gentlemen who could very easily hold on to their shareholders’ cash – since their combined ownership allows them to pretty much call the shots without ever having to raise their pistols – and find ways to invest it in not so stellar investments, take their commissions, their management fees, and no one would dare to question their motives, all while issuing themselves more stock options up the kazoo. Quite frankly, if I were advising Warren Buffet on his estate planning right now, I would suggest the following:


“Cut a deal with the Leucadia kids and go easy on those Dairy Queen ice cream bars.”


In the past, I‘ve offered Mr. Buffet my pennies worth. For example, I said he should buy In and Out Burgers, principally because I like their hamburgers and the smiles that come with it, to mention little of their pricing and cleanliness, blah blah blah. [In my suggestion I left out lightening up on the creamy stuff.] Mr. Buffet wrote back thanking me for my interest in his welfare. He also copied me on a letter he had sent to someone who beat me to the punch. Unfortunately, In and Out Burgers’ $150 million in volume doesn’t quite add up to a blip on BRK’s radar screen.


So what about In and Out for Leucadia? They shouldn’t think of me to run it though. My plans, over the next twelve months, are to travel. More importantly, In and Out Burgers needs someone who really does know how to get on with everyone. Anyone who goes in there thinking they are so smart and begins to fine tune the place will screw up this “crown jewel,” creating as some might rightfully argue, an unnecessary Revolution. Their sales per square foot would have put Alan Austin to shame. [He used to be in very high fashion industry and held more than a record or two.] In and Outs net is perhaps even better than any suB-way operation.


Now that is a business noun close to home, certainly better than most other immigrants with funny accents. Perhaps though not as well as a St. Louis lawyer who has had his fist-ti-cuffs with the man we know as Fred. There may be many things about Fred that we may not all fully understand. Yes it is true that the House of Representatives were investigating the Subway foundation, and, yes, Fortune Magazine did their blockbuster piece. However, it would be a good thing if we were all to find some common ground here that would allow Fred, who is without question quite brilliant, more of an opportunity to really show his good stuff. It wouldn’t at all surprise me if Fred never once inhaled and 15,000 operations can do a lot of doog beside for serving sandwiches.


My meeting Fred ultimately resulted in my name appearing on the Internet, distinguishing me from my more famous cousin who I one time conversed with on a most important “black[1]” number relating to a Broadway musical, “Meet me in St. Louis.” There is only a question of whether the “inventor” of the medical system that captivated both Fred and I, understood the extent to which her games were not quite in the same playbook as those prescribed by her father and those before him. She, however, should also be forgiven, for she has had more than her fair share of burdens. She has cared for a whole family or two while sacrificing much. I wish her well too.

[1] I am on the far right wearing the black hat.