Singleton's acquisition formula: the currency, and the screen
Everyone says Singleton bought 130 companies. Few ask what he paid with, and why almost every deal made shareholders richer. The answer is not in what he bought. It is in what he paid with, and in the companies he refused to buy.
In the portrait of Henry Singleton we met a man who treated a company as an arithmetic problem. Today we open up that problem: what fuel ran his acquisition machine, and which screens a company had to pass.
Expensive currency: the real weapon
The secret of 1961–1969 was not that Singleton bought well. It was that he paid in an expensive currency.
Teledyne traded at 20–50 times earnings. He used it to buy companies at under 12 times earnings. Think about that carefully: one dong of Teledyne's earnings was valued by the market at 20–50 dong, while he paid only 12 dong for a dong of the acquired company's earnings. Every swap handed Teledyne shareholders more than they gave up.
A numerical example makes it clearer. Say Teledyne earns 10 billion and trades at a P/E of 25, so it is worth 250 billion, with 10 million shares and EPS of 1,000. He buys a company earning 5 billion at a P/E of 10, which is 50 billion, paid in stock, issuing 2 million new shares. After the deal: combined earnings of 15 billion across 12 million shares, so new EPS = 1,250. Earnings per share rose 25% from the valuation arithmetic alone, before a single operational improvement.
The same deal, but destroying value
Now reverse it, and here is the trap most acquirers fall into.
Say your company's stock is cheap, a P/E of only 8, and you go buy a more expensive company at a P/E of 12, paying in stock. You are issuing cheap currency to buy expensive assets. EPS after the deal falls, even though revenue and absolute profit both got "bigger". You just made the company larger and poorer at the same time.
This is why Singleton's iron rule fits in one sentence: only use stock as currency when your P/E is higher than the P/E of what you are buying. Otherwise do not issue stock. Use cash, or simply do not buy.
When the currency stopped being expensive, he changed weapons
Singleton was not attached to one currency. When his stock got cheap, he moved to cash and debt, but with discipline.
In 1980, with the valuation near its floor, he funded an enormous buyback entirely with fixed-rate debt. When rates then spiked and the newly issued bonds fell in price, he bought those same bonds back using money from the pension fund, where investment gains were tax-exempt. A move where debt, tax and timing meshed like gears.
The principle: debt is only safe when the rate is fixed, when the acquired asset's cash flow comfortably covers the interest, and when you are buying at a valuation trough.
And there is one currency few people notice: insurance float. Singleton bought insurers and used the premiums collected but not yet paid out as near-free capital to build an equity portfolio. (The same model Buffett later used at Berkshire.)
How he picked a company: six screens
The currency is only half of it. The other half is selection discipline. A company had to clear all six conditions to reach Singleton's shortlist; fail one and it was out.
It had to be already profitable (he never bought a loss-making company needing rescue). It had to be growing. It had to lead a small niche, small enough that the giants ignored it, which meant little competition and high margins. It had to have higher margins than his existing base, so it pulled the whole group's quality up. It had to generate real cash, not paper revenue growth. And the price had to be under 12 times earnings, the deal's margin of safety.
As one of his managers put it, they specialised in products sold "by the ounce, not by the ton". The same spirit as a margin of safety: pay far less than what you are getting.
A test for the Vietnamese investor: the 5% threshold
There is an invisible seventh screen: every dong of capital deployed must beat the risk-free rate. In Vietnam a 10-year government bond yields around 5% a year. If a deal only promises a 4–5% return on capital, buy the bond instead; it is safer and takes no effort. Singleton would have walked away without a second thought.
And the hardest discipline: knowing when not to buy
In 1969, when Teledyne's stock stopped being cheap and acquisition prices started rising, the arithmetic stopped working. Singleton disbanded the entire acquisition team and did not do another material deal for the next thirteen years.
Most investing mistakes do not come from failing to act. They come from continuing to act after the arithmetic turned against you. This is buying at the point of maximum pessimism seen from the other side: it takes just as much courage to sit still while everyone else is buying.
One line to remember
Currency: only issue stock when it is more expensive than what you are buying. Selection: only buy profitable, niche-leading, high-margin, cash-generating companies below 12 times earnings that clear the 5% threshold. And be clear-headed enough to stop when the arithmetic stops working.
Singleton did not get rich on brilliant strokes. He got rich doing the arithmetic correctly, over and over, for 27 years.
Silent discipline. Compound value.