World’s Top 50 Richest: How They Made it
September-29-2006
Forbes is out with its list of The 400 Richest Americans.
Have you ever wondered how Forbes knows who to put on the list (and
where)? Here, in the magazine’s own words, is Forbes’ methodology:
Our estimates of people’s net worth are deliberately conservative and
should be considered `at least’ figures. We do our best to value
everything, from stakes in publicly traded or privately held
companies, real estate and investments in natural resources to art,
yachts and mansions. We dig through SEC documents and court records;
call analysts, employees, competitors and ex-wives; and look at
newspaper and magazine articles. We also take a hard look at
debt. However, we do not pretend to know everything on a private
balance sheet.
All numbers have been rounded to the nearest $100 million. All
publicly traded shares were priced Aug. 31. Privately held companies
are valued by coupling estimates (or, in some cases, company-provided
numbers) of revenues or profits to prevailing price/revenues or
price/earnings ratios for similar public companies.
I’m simply going to go through the list (in order) picking out those
names that might be of interest to readers of this article and saying
a few words about them (and their companies).
(I only selected billionaires who made the top 50.)
1 – William Henry Gates III ($53.0 billion)
Bill Gates, chairman of software giant Microsoft (MSFT), once again
takes the top spot. Today, more than half of Gates’ net worth is
invested outside of Microsoft. Despite a recent resurgence in its
share price, Microsoft is as cheap as it’s been in many years. The
stock has even started to catch the attention of some value
investors. Microsoft has been buying back shares and has plans to buy
back even more.
In June, Gates announced he will give up his day-to-day role at Microsoft;
however, he will remain the company’s chairman. This transition will be
completed in mid 2008.
2 – Warren Edward Buffett ($46.0 billion)
_Warren Buffett_
( ruName=3DWarren+Buffett) ,
chairman of Berkshire Hathaway (BRK.B), finds himself in a familiar
spot – right behind his good friend Bill Gates. Unlike Gates, Buffett
still keeps the vast majority of his net worth in a single
stock. Shares of Berkshire are up over the past twelve months.
As a result, Buffett’s net worth increased, despite the beginning of
the process that will ultimately lead to Buffett giving tens of
billions of dollars to the Bill & Melinda Gates Foundation (and four
other charities started by members of his family). The secret to
Buffett’s success: since 1965, Berkshire’s value has compounded at an
annual rate of 21.5%.
6 – Jim C. Walton ($15.7 billion)
Jim Walton is the first of several Waltons on the list. Forbes has
been incredibly lucky with their top two richest Americans, Gates and
Buffett. It’s hard to imagine two more memorable men. It’s also hard
to imagine two more similar men who appear to be so different. Gates
is high-tech; Buffet is low-tech. Gates is young (actually, he’s 50
now); Buffett is old (at 76, he’s nowhere near the oldest on the
list). Gates made his money through innovation and
entrepreneurship. Buffett (unlike most self-made billionaires) made
his fortune by steering clear of both innovation and entrepreneurship,
seeking out investments in businesses that don’t change.
I recently saw a headline refer to _Warren Buffett_
( ruName=3DWarren+Buffett) as
an "entrepreneur". Buffett is many things – but, an entrepreneur isn’t
one of them. Like many on the list, he’s an investor and a
businessman. Unlike many on the list, he has no appetite for direct
entrepreneurship. He has bought many businesses from entrepreneurs –
and those entrepreneurs continue to work for him at Berkshire. But,
the man at the top is no entrepreneur.
What does all this have to do with the Waltons? The only man that
would be as interesting a headliner for Forbes as Gates or Buffett is
Sam Walton. Of course, the founder of Wal-Mart (_WMT_
( ol=3DWMT) ) has been dead
for more than a decade now. Still, if the Walton family’s wealth is
aggregated it easily tops the list. In fact, it would now be close to
$80 billion.
9 – Michael Dell ($15.5 billion)
The eponymous founder of computer maker Dell (DELL) saw his net worth
decline over the last year as the market cut his company’s share price
in half.
Apparently, Michael Dell only has about a third of his net worth in
sharesof Dell. Part of that outside wealth is invested in _Eddie
Lampert_
( .php?GuruName=3DEdward+Lampert) ‘s
ESL investments.
Like Microsoft, Dell has started to attract the attention of some
value investors, as its price-to-earnings multiple has contracted in
the face of growing pessimism. The long-term growth outlook for Dell
certainly isn’t what it used to be; but, then again, the stock’s P/E
ratio isn’t what it used to be either.
12 – Sergey Brin ($14.1 billion)
Despite being only 41, Michael Dell isn’t even close to the youngest
name on the list. Google co-founders Sergey Brin and Larry Page (both
33), are the youngest on the list. Actually, there are eleven
billionaires on the list who are younger than Dell. But, of those
eleven, only Brin and Page are in the top twenty-five.
What’s the chance Brin and Page will eventually top the list? It’s
hard to say. But, there are a few factors going against them. The
biggest is that they’ve already sold a lot of stock. Gates, Buffett,
and the Waltons demonstrate the importance of keeping a very large
stake in a single company (at least during the period of fast growth),
thus allowing your wealth to compound atan annual rate far greater
than the advance in the general market. Selling this much stocks this
early (and planning to give away quite a bit) could keep Page and Brin
from topping the list, even if Google continues to grow at its
unfathomably fast pace.
Google isn’t cheap; so, the company will have to grow very fast just
to prevent a sharp decline in the price of its shares. Despite
Google’s youth,the company is already quite large – perhaps too large
to provide the growth needed to lift Brin and Page to the top spots.
With a market cap of $123 billion, Page and Brin’s Google is already
about half the size of Bill Gates’ Microsoft (which has a market cap
of $266 billion) and just a tad smaller than _Warren Buffett_
( ruName=3DWarren+Buffett) ‘s
Berkshire Hathaway (which has a market cap of $144 billion).
On the other hand, Gates and Buffett are both giving away their money
as well; so, that should keep them from pulling too far ahead of the
pack.
21 – Forrest Edward Mars Jr. ($10.5 billion)
Mars is one of the most valuable private companies in the United
States. It also happens to be a truly unique company. As a result, the
estimated net worth of the Mars family isn’t really comparable to the
estimated net worth of billionaires with stakes in public
companies. Remember how Forbes describedits methodology:
Privately held companies are valued by coupling estimates (or, in some
cases, company-provided numbers) of revenues or profits to prevailing
price/revenues or price/earnings ratios for similar public companies.
The problem with this approach is that there simply isn’t any public
company "similar" to Mars. Don’t believe me? Below is a list of Mars’
major brands.
Snackfood: M&M, Mars, Milky Way, Snickers, and Twix.
Petcare: Pedigree, Cesar, Whiskas, and Sheba
Main Meal Food: Uncle Ben’s
Let’s try to find some companies similar to Mars. There’s Hershey
(HSY).
That company has sales of $5 billion and a market cap of $12
billion. It also happens to average a double-digit return on assets
and a consistently highfree cash flow margin. Last year, Hershey had
a 46.89% return on equity.
Tootsie Roll (TR) has sales of just under $500 million and a market
cap of nearly $1.6 billion. That company generally averages a return
on assets inthe high single digits or low double digits along with a
consistent double-digit FCF margin.
Cadbury Schweppes (CSG) has sales of just under $12 billion and a
market cap of about $22 billion. However, Cadbury isn’t really all
that similar to Mars. Cadbury is actually an unusually capital
intensive business that even includes some bottling operations; Mars,
by all accounts, ties up very little capital in areas outside of the
company’s core competency.
Many of Cadbury’s brands were recently acquired rather than internally
developed long ago (as is the case at Mars). As a result, Cadbury
Schweppeshas some of the most bloated confectionary operations of any
confectioner with strong global brands.
This is evident in the company’s poor cost comparisons with the likes
of Hershey and Tootsie Roll in candies, Wrigley (WWY) in gum, and
Coca-Cola (KO) and Pepsi (PEP) in soft drinks. You’ll also notice that
Cadbury’s brands are generally in a weaker position than its
world-wide competitors in all of the areas in which it competes. Mars
is in exactly the opposite position.
Forbes estimates Mars has annual revenues of $19 billion. In the past,
Mars itself stated it had revenues of $18 billion (in 2005); so,
really the $19 billion number isn’t based on much actual guesswork by
Forbes – it’s essentially an acknowledged number.
As a public company, Mars would likely have a market cap of at least
$50 billion. Forbes doesn’t provide an explicit estimate for the value
of the company; however, based on the $10.5 billion net worth estimate
for the three members of the Mars family who made the list, it looks
like Forbes may be using an overly conservative estimate.
Mars is a private company (and not a very public one at that); so,
it’s nearly impossible to estimate the value of the company with any
accuracy.
However, based solely on the estimated sales number and the brands the
company owns, I would say it is considerably more likely that Mars
would have a public market value in the $45 – $60 billion range than
in the $30 – $35 billion range.
So, the members of the Mars family may actually be a lot closer to the
top five or ten names on the list than their twenty-first place
ranking suggests.
24 – Carl Icahn ($9.7 billion)
Today, Icahn is probably best known for his investment in Time Warner
(TWX).
But, during the past year, he’s actually been involved in several
major dust-ups that aren’t as high-profile as the Time Warner
saga. His investments in Korean cigarette maker KT&G and biotech
company ImClone (IMCL) have made headlines. Icahn also makes
investments (particularly in smaller companies) that get little or no
attention. For example, during the last year, Icahn purchased shares
of Take-Two Interactive (TTWO) and BJ’s Wholesale Club (BJ) among
others.
Whether he’s called a "shareholder activist" or a "corporate raider",
the implication is clear. Carl Icahn is rarely friendly to the
existing management at the companies he invests in. In fact, he’s
often unabashedly hostile =80` as he was in his Sepetember 20 th
letter to ImClone Chairman David Kies. Thisis how Icahn concluded that
letter:
You should recognize that your leadership of ImClone should come to an
immediate end. The time has come for you to peacefully pass the baton
to a successor who will be able to bring strong leadership back to
ImClone. If you fail to do so, you will have thrown down the gauntlet
and we will have to react accordingly.
Not exactly poetry – but, it gets the point across.
26 – Kirk Kerkorian ($9.0 billion)
There’s been more than enough written about General Motors (GM) over
the past year; so, I won’t add anything here. I will, however, mention
that one point made by some blogs (and even some "mainstream" media
sources) is nonsensical. It’s been written (presumably with a straight
face) that Kerkorian can’t possibly be making a long-term investment
in GM, because (at 89) he simply doesn’t have enough time left to see
such an investment through.
The strongest argument against this line of reasoning is that making
investment decisions based on your anticipation of imminent death is
akin to making life choices based on the belief that you don’t have
free will and all future events are predestined. In both cases, if
your assumption is correct, you gain little or nothing. If your
assumption is incorrect, you lose a lot.
Besides, all of this assumes you have no interest in leaving greater
wealth behind (whether to charity or your family), which seems rather
absurd.
Kerkorian isn’t exactly forgoing his own enjoyment; he already has far
more money than he could ever spend on himself (that would be true
even if he were 29 instead of 89).
Also, it’s worth noting that Phil Carret lived to be 101. I don’t mean
to suggest Kerkorian may live just as long; rather, I mean to suggest
even at 89, you could be hanging up your cleats twelve years too
early. To put that in perspective, if the average American male
expected to die twelve years before he actually did, he would be
planning to die around the time he would start collecting Social
Security.
As a rule, investors who are as passionate as Kerkorian usually die
long before they retire.
30 – Philip H. Knight ($7.9 billion)
Phil Knight, chairman of athletic footwear and apparel giant Nike
(NKE), no longer serves as CEO of the company he founded; but, as the
departure of Bill Perez demonstrated, Knight still runs the show.
Former SC Johnson executive Bill Perez only lasted a little over a
year in the top job, before being replaced by long-time Nike employee
Mark Parker. Mr.
Parker has spent most of his career at Nike. The fifty year-old CEO
has been with Nike for more than a quarter century. He was given the
CEO job (and a directorship) in January of this year.
31 – Philip F. Anschutz ($7.8 billion)
Phil Anschutz keeps appearing in the strangest places. His Walden
Media production company produced the mega-hit movie The Lion, The
Witch, and The Wardrobe, an adaptation of the first of C.S. Lewis’
seven Chronicles of Narnia books.
Lately, most of what has been written about Anschutz has focused on
his politics – which is unfortunate, because the man is one of the
mostfascinating investors around. Anschutz has made several
interesting (and often contrarian) investments in his lifetime. His
past investments in publicly traded Union Pacific (UNP) and Qwest (Q)
are well-known (Anschutz is Qwest’s founder).
Through his private holding company, Anschutz has made investments in
energy, media, professional sports, and real estate. Lately, he has
been withdrawing from his role in these investments to focus on his
entertainment ventures (including Walden Media).
32 – Keith Rupert Murdoch ($7.7 billion)
The past year has been an unusual one for News Corp (NWS) chairman
Rupert Murdoch in that much of what was written about him didn’t focus
on his politics (or his personal life). MySpace is now the favorite
subject for those writing about Murdoch.
News Corp’s $580 million acquisition of online social network MySpace
has been written about extensively. MySpace seems to come up in nearly
every discussion of large media companies. For example, the firing of
Tom Freston, CEO of Viacom (VIA), was perceived as being due in part
to his failure to acquire MySpace.
News Corp’s stock price has risen considerably over the past
year. Right now, the biggest story surrounding the stock is continued
speculation that Murdoch and Malone will work out a deal involving the
disposition of Liberty Media’s 16% stake in News Corp.
34 – Charles Ergen ($7.6 billion)
Charles Ergen, founder of satellite TV company EchoStar (_DISH_
( bol=3DDISH) ) is generally
well respected on Wall Street. However, the Street’s view of his
company has dimmed considerably over the last year.
The problem isn’t specific to his company. The outlook is simply a lot
more pessimistic for both of the big satellite TV operators, DirecTV
(_DTV_ ( V) ) and
EchoStar. The "triple play" threat from cable companies who can bundle
phone, internet, and television services at a reduced monthly rate has
slowed subscriber growth at EchoStar and DirectTV. There’s also some
fear that phone companies will be able to compete effectively with the
other television service providers.
Fairholme, a highly concentrated mutual fund, currently has about 10%
of its assets invested in EchoStar, making it one of the fund’s big
positions along with Berkshire Hathaway (BRK.B) and Canadian Natural
Resources (CNQ).
Fairholme’s manager, _Bruce Berkowitz_
( GuruName=3DBruce+Berkowitz) ,
gave his opinion of Charles Ergen in an interview with Value Investor
Insight:
"We think Charlie Ergen is a great jockey who has done an unbelievable
job, who clearly has skin in the game=80¦"
35 – Sumner M. Redstone ($7.5 billion)
The 83 year-old Redstone now serves as chairman of two separate public
companies, CBS (CBS) and Viacom (VIA). Of the two, Viacom was supposed
tobe the fast grower; CBS was the stodgy old media stock. Since the
split: CBS is up, Viacom is down, and Freston is out. Sumner Redstone
fired Tom Freston, CEOof Viacom, earlier this month.
38 – Donald Edward Newhouse ($7.3 billion)
Donald Newhouse runs privately held media company Advance Publications
with his brother, Samuel Newhouse. Donald and Samuel’s father (also
named Samuel) began purchasing stakes in newspapers during the 1920s.
Many of those early investments were forgettable. For instance,
Samuel’s first purchase, The Fitchburg Daily News, went out of
business within a year of his investment. Two of Samuel’s purchases
proved to be critical to the company’s success. In 1934, Newhouse
purchased a majority stake in the Newark Ledger. Five years later, he
bought the Newark Star-Eagle and combined histwo Newark properties to
create The Star-Ledger.
Today, The Star-Ledger is New Jersey’s largest daily newspaper by
far. In fact, it has a daily circulation greater than that of its next
three New Jersey competitors combined. The Star-Ledger is one of the
top twelve American dailies by circulation, with a weekday circulation
of approximately 400,000 and a Sunday circulation of over 600,000. The
paper has one of America’s lowest staff to circulation ratios and
manages to generate more advertising revenue than some other papers
with slightly higher circulation numbers.
Advance Publications (named for the Staten Island Advance, a paper
acquired by Newhouse in 1922) probably has annual sales of over $6
billion. The company is the second largest magazine publisher in the
U.S. – onlyTime Warner (TWX) is larger. The company’s magazine
properties include such high-profile names as The New Yorker, Vanity
Fair, and Vogue. However, the company’s low-profile newspaper
properties are responsible for much of the value Forbes sees in the
media company.
Advance also has stakes in cable properties and has substantial online
operations.
49 – Steven Paul Jobs ($4.9 billion)
Steve Jobs, CEO of Apple Computer (AAPL), actually has most of his
wealth in Disney (DIS). As a result of the merger between Disney and
Pixar, Jobs has a 15% stake in Disney, making him that company’s
largest shareholder.
Approximately $4 billion of Jobs’ estimated $4.9 billion net worth is
attributable to his stake in Disney.His ego may be invested in Apple;
but, his wealth is invested in Disney