Highlights From Past Leucadia Shareholder Letters and Link to Current

To Our Clients,

We usually use this space to share our thoughts regarding the markets, our respective challenges and opportunities, corporate culture, the uncertainties in the world that each of us regularly faces and other topics we hope are of mutual interest. This quarter, we share with you some of the highlights of the last of 35 annual letters written by the founders of Leucadia, Ian Cumming and Joe Steinberg. The parts of their letter we are sharing are the beginning and the end of their 2012 annual letter, which provide some perspective on Leucadia, the process of management transition and, in the end, the humanity and character of two exceptional people who happen to be among the best long-term investors in the world. We also provide here a link to the entire letter for your enjoyment and education should you wish to read about their path from a small shell of a company in 1978 into what today is a pre-eminent and well-respected $10 billion equity market capitalization diversified holding company (of which Jefferies is the largest operating engine).

Our relationship with Ian and Joe traces its roots to Andrew Whittaker, our Vice Chairman and longstanding close partner. In the letter you will read below, Ian and Joe credit Andrew with introducing them to their most successful investment ever, Fortescue, but in fact his contribution to Leucadia National began over 25 years ago when he became their “go to” investment banker, the type of relationship he now holds with an incredibly large number of our longstanding clients and friends. Indeed, it was Andrew who introduced Rich to Ian and Joe, and together Andrew and Rich built the relationship that today is manifest in the combined Leucadia and Jefferies. So we also take this opportunity to recognize Andrew, a selfless and tireless leader within Jefferies and, without whose vision, intellect, integrity and partnership, neither Jefferies nor Leucadia would be where we are.

We believe the messages in Ian and Joe’s final Annual Letter are abundant, but here are the themes that struck us:

1. It is hard to build a truly valuable enterprise by yourself. Having true partners lessens the burden, improves the odds of success, helps minimize mistakes, and is more fun.
2. Long-term greed almost always beats short-term greed. There really are no good shortcuts.
3. Long-term value can be created as long as you protect your company from the inevitable market panics and setbacks. If showing up is 90%, always staying in the game may be the other 10%.
4. It is hardest to buy when everyone is selling and vice versa, but that is always where value is created or protected.
5. Being humble and devoid of arrogance makes it a lot easier to build wealth and increases the odds you don’t lose it.
6. At the end of the day, we only have our reputations.
7. There is nothing wrong with a little luck along the way.

We could go on about Ian and Joe. The bottom line for us is that they have taught countless lessons for which we will always be grateful. We take our new responsibilities at Leucadia incredibly seriously and view this as an opportunity to continue to build a world-class, diversified investment and merchant banking firm. There is a lot of work to do and, as you may imagine, we view it as a marathon and not a sprint.

Please enjoy Joe and Ian’s final letter,

Rich and Brian 

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To Our Shareholders (Leucadia) 

The Last Hurrah

Forty-three years ago, the two of us met at Harvard Business School and thirty-five years ago was the beginning of a remarkable partnership – the results of which are tabulated on the opposite page. The end of 2012 marks the end of this partnership and the last letter from the two of us. In terms of financial results and as “LUK” would have it, 2012 was also our most successful year. Earnings before tax for 2012 were $1.371 billion, a record.

As the years sped by and we got older, a succession plan became more and more essential. For several years, we argued, explored many alternatives, argued some more and spoke with anyone and everyone we believed worthy of our shareholders’ trust to guide the good ship Leucadia. On March 1, 2013, our succession plan culminated with the acquisition of the Jefferies Group, Inc.

Jefferies very able leadership team, Rich Handler and Brian Friedman, have become the CEO and President of Leucadia and one of us assumed the role of Chairman and the other is rolling up his sleeves to start again, this time with family as his partners. The rationale for the acquisition and the succession plan were spelled out in the proxy statement sent to you prior to the Shareholders Meeting at which 81% of our shareholders voted, with over 99% in favor. We are gratified with that vote of confidence.
Leucadia usually flies below the radar and is often unconventional in its choice of investments. We have always preferred to make money, rather than headlines. Though investment banking is hardly the flavor of the month, initially even some long time Leucadia shareholders may have been surprised by our decision to acquire Jefferies and to turn the helm over to Rich and Brian.

We first met Rich in 1987. He was a 26 year old baby in the business, fresh out of Stanford Business School and working at Drexel on a few deals with which Leucadia was involved. At Drexel he quickly learned that for a financial company there is no such thing as a “slight” liquidity crisis. This lesson on fragility served him well later in life but, might have been picked up sooner had he attended Harvard Business School!

In 1990 after Drexel, Rich joined Jefferies when it was a small equity trading firm with $140 million of revenues and $7 million of net income. We were one of his first clients, and Rich and his team led our Senior Subordinated Note offering in 1992, which was Jefferies very first institutional bond deal. In early 1993 they continued with our Convertible Subordinated Debentures, their first, and later in 1993, their first investment grade bond deal for Leucadia’s Senior Notes. From 1990 to today, Jefferies did every one of our capital raises, eighteen in all, over $3.4 billion of capital.

Since Rich joined Jefferies 23 years ago, the compound annual return for his shareholders has been an exemplary 22%. Since becoming CEO Rich also became a very large shareholder of Jefferies taking more than 75% of his cumulative compensation in stock. So, as the search firm we didn’t use might have said, “he seemed like a good fit.”
In 2000, Leucadia invested $100 million in Jefferies Partners Opportunity Fund and for seven years earned a 20% return after fees. A second fund, Jefferies High Yield Trading, was launched in 2007 at the top of the market. Despite the impossible timing and the catastrophic financial environment, we eked out a reasonable return on that fund too.
Brian Friedman joined Rich’s team in August of 2001, and brought complementary skills of remarkable breadth and a tireless work ethic. Eventually they became partners in managing Jefferies and Brian has been instrumental to its success every step of the way.

In the mid 2000’s, Rich periodically asked us if we wanted to invest in Jefferies and to join his Board. We reminded him that we were value investors and since Jefferies stock was trading at high multiples of book value, the time was not right. In 2007, Rich came to us believing that the global financial system was stretched too far and that something soon would snap. In February 2008, with Rich’s relentless and increasingly loud encouragement, we bought the maximum number of Jefferies shares permitted before filing Hart Scott which allowed us to buy more after waiting 30 days. As he predicted, by the end of the 30 days, all hell had broken loose. Rich then proposed a large stock swap that allowed us to monetize Leucadia shares at $50 per share in exchange for a 13.7% fully diluted stake in Jefferies plus $100 million of cash to Leucadia. Rich didn’t want to overly dilute his own shareholders so to complete our investment, he quietly and quickly bought additional shares for Leucadia on the open market at attractive prices which got us to a 29% ownership position in Jefferies. He also quickly sold all of the Leucadia shares acquired in the swap; at the time, we were convinced Jefferies did not need the money, but very much needed a credible investor to bless its balance sheet, which was as clean then as it is today. When the dust settled, Jefferies effectively raised $430 million of equity capital with minimal dilution, we joined the Board as 29% shareholders and Rich and Brian went on a five year offensive while the rest of the world was on fire.

From 2008 through 2011, we watched first hand as Jefferies nearly tripled revenue and aggressively built out a diversified and global investment bank. We were impressed when they bought back their debt cheaply during the global panic and then re-issued during calmer times – often only months later. Talk about volatility! We watched Jefferies improve its brand and human capital. We applauded their culture of transparency, client focus, integrity, creativity, work ethic, and commitment to shareholders, bondholders, employees and clients.

Following the implosion of MF Global, there were some white knuckle times as Jefferies rebutted a venal barrage of unfair and untrue attacks by agenda-driven short sellers disseminating faulty and malicious gossip. A market panic is a dangerous cocktail and you learn a lot about people when faced with a crisis. The Jefferies team under Rich and Brian’s steady leadership navigated the turmoil with honesty and tireless effort. Their head-on strategy of transparency and openness proved successful. Ultimately truth won out and confidence in Jefferies was restored.

Jefferies bounced back quickly and, like Leucadia, had a record 2012. From out of the turmoil emerged an ideal alignment of needs. Rich and Brian were determined never to allow Jefferies to go through that type of painful experience again and were open to a smart long term capital solution to enable them to continue to build the firm. And, we were looking for successors and, as always, with our ample capital on the lookout for a good deal. They didn’t want to sell Jefferies at the bottom of a cycle; a stock for stock deal enabled them to do well by their shareholders while providing increased protection for their bondholders and creating long term stability for their employees and clients. Leucadia shareholders picked up a great asset at a fortuitous time for both companies and we solved our succession challenge. Combined, we have a world class investment banking firm, with a merchant banking focus, tax efficiency and a pile of cash. We also have new leadership that is greatly experienced and heavily invested in the long term success and value creation for Leucadia shareholders. We’ve never been enamored with describing transactions as “win / win,” but we are hard pressed to find a more fitting expression of where we find ourselves as we craft this last letter.

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Au Revoir

As we conclude this final epistle and wrap up our extraordinary working relationship, we find ourselves reflecting on Leucadia’s formidable past and promising future. A 35 year partnership is rare in marriage and even rarer in business. Those unfamiliar with our approach have sometimes been startled by the occasional tenacity of our interactions. We are both strong personalities with correspondingly strong opinions. Each of us has been described as “often wrong, but never in doubt.”

We frequently saw a deal differently or disagreed on the strategic course of an operating company – the alchemy of our partnership enabled us to resolve our differences. We trust one another and respect the value of our differing skills, interests and intuitions.
Over the last 35 years we have unfailingly stood by one another in times of heartache, health and personal challenges. Our relationship means more to us than we easily acknowledge.

We owe a special debt to our families who were often neglected while we chased the next deal. We are both blessed with loving wives and children who have risen above our excesses and absences to make us very, very proud.

One of us remains to do all he can to help Rich and Brian take Leucadia to new heights. The other will be cheering – and kibitzing – from the sidelines and building a private family company. Managing Leucadia has been a magnificent adventure. We have done well and so have our shareholders. It has given us great pleasure to meet shareholders and to learn that proceeds from the sale of Leucadia stock sent their kids to college. None of this would have been possible without the hard work, devotion, courage and enthusiasm of our Directors, employees and advisers. We can’t list them all, but would like to pay special tribute to those who have been with us for more than twenty-five years — employees Tom Mara, Joe Orlando, Jane Goldman, Joe Veetal, Joe Sartin and Gloria Kozinski, and Directors Jay Nichols, Jim Jordan and Paul Dougan.

Thank you.

Ian M. Cumming                            Joseph S. Steinberg