A money manager friend of ours recently told us that in doing some research into cash-rich companies, he was struck by how many of the good ones have a history of being family run. Unlike firms run by MBA-types, with little personal connection to brand, these companies socked away cash during the good times, and resisted the constant temptation to lever up either by taking on too much debt or blowing the bank on ill-timed share buybacks.
Case in point: Loews Corporation (L), the hotel, insurance and energy conglomerate run by the Tisch family. In an excellent interview with The American magazine, CEO James Tisch talked about his philosophy of running the business:
You mentioned being leveraged. You’re known, as a company, for not taking on a lot of debt. Can you discuss your philosophy on that?
I like to sleep at night. That’s why we manage the business very conservatively. As a holding company, we have an excess of $4 billion in cash and we have just under $875 million in debt. And we like to buy strong, solid, traditional businesses that are not, in any way, a fashion business. When I say fashion business, I’m not just talking about clothing. I’m talking about high-tech businesses, businesses where you have to recreate yourself every few years or you need to develop new products. We like businesses that we know are going to be around for the next two, three, four, five decades and businesses that have a real need and niche within our economy.
We also like to buy businesses that are in cyclical industries. And we have come to believe in the cyclicality of businesses, industries, and the economy, so we like to buy businesses when things are bad, when the economy is down, or when the cycle for a particular industry is down. In order to do that, typically, you need cash on your balance sheet because at the time that you want to buy, generally, financial institutions are not going to be willing to lend, and that’s, in part, what makes the price so attractive.
Tisch also makes a strong case for reducing the corporate capital gains tax now:
What other public policy issues are of concern to you?
I do a lot of work involving taxes, specifically corporate long-term capital gains taxes, which are 35 per cent and much too high. As a result of 35 per cent corporate long-term capital gains taxes, there are literally trillions of dollars of assets that are locked into corporate balance sheets that can’t be sold. Because even though the transaction may make sense on a pre-tax basis, on an after-tax basis, with the government possibly taking 35 per cent of proceeds, the transaction just doesn’t make any sense at all.
So we have been championing a proposal that’s been introduced into the Senate to reduce the corporate long-term capital gains tax rate from its current 35 per cent rate, which has been out for multiple decades, down to whatever the individual long-term capital gains tax rate is, on the theory that what’s good for the goose is good for the gander. And we believe—and we have data to support our contention—that by so reducing the corporate tax rate to the same level as the individual tax rate, that even though this will be a tax rate cut, the Treasury will get more money from the corporate long-term capital gains tax.