by Bower, Tom
Most of the City institutions approached by Gormley ridiculed his proposal. The only exception was Norwich Union. The insurer had recently been fined by the government regulator for mis-selling pensions. Associating with Virgin, its directors calculated, would alleviate the opprobrium. Among the attractions to the insurers was the brazenness of Branson’s proposed TV promotion: ‘For years the pension industry has got away with not telling you how much of our money they cream off in charges.’ Branson would promise ‘no-nonsense value for money’ and the lowest charges.
Gormley’s target was to raise £70 million from the public within six weeks. Branson rang daily to check on progress. Two days before the deadline to collect the funds – the end of the financial year – Gormley was desperate. Only £5 million had been committed. On the last day, the security guard rang Gormley to announce that a Royal Mail truck was backing up to their building. Inside the sacks of mail were commitments worth £40 million from the public, who had been attracted by the promise of a safe investment. More followed later.
Gormley’s project took off, and within months Virgin Direct was earning good profits. Despite Branson’s denunciation of those who ‘cream off in charges’, Virgin’s PEPs, organised by Norwich Union, were among the most expensive for investors. Virgin’s annual management fees were 1 per cent of the fund, while M&G and other rivals levied 0.3 per cent. Investors also earned less. Virgin’s tracker of unit trusts rose 109 per cent in two years, while the FTSE All Share Index (including dividends) climbed 144 per cent. Few complained. Trust in the Virgin brand suppressed most concerns.
‘Let’s ramp it up,’ suggested Gormley in 1997, eager for expansion. Norwich Union declined, but just then George Trumbull of AMP, an Australian bank, began calling him.
Flush with money, AMP was aggressively buying financial institutions across Europe. Gormley’s ambition to offer mortgages, pensions and life-insurance policies matched AMP’s resources. The deal they negotiated entirely favoured Branson. AMP carried 100 per cent of the risk in return for using the Virgin brand. The profits would be equally shared, while AMP, who provided the entire infrastructure, would bear any losses. The AMP executive who negotiated the partnership, Paul Batchelor, would be described by his successor as ‘a personality who wanted to fall in love with Virgin. He was full of dreams, and Virgin played straight into the space.’ Norwich Union sold its share to AMP, and Virgin Direct was relaunched as Virgin Money, with the new attraction of internet banking. The TV advertisements again featured Branson: ‘I have identified a sector that is arrogant, complacent and fleecing the customer.’ The financial-services industry, he continued, ‘specialises in bullshit. Its record includes pensions mis-selling, endowments that don’t come up to scratch and massive investment underperformance.’ Virgin Money, he promised, offered honest value.
At that moment, Branson’s reputation was being challenged elsewhere. Amid considerable noise, he had launched Virgin Brides, Virgin Cosmetics, Virgin Net and Virgin Cola. The drink’s sales, he proclaimed loudly, had captured 10 per cent of Britain’s market. Independent research showed Virgin Cola’s sales were barely 1 per cent of the country’s cola consumption, which cast his forecast of earning £1 million in profits every week as fictional. Branson’s salesmanship reflected his wishes rather than the reality. His philosophy had become famous – ‘It’s all about bending the rules or breaking the rules’ – yet the same man was a guardian of money. ‘I set up Virgin Money to offer people straightforward financial products that are easy to understand,’ he claimed.
In 1999, Virgin Money was managing about £1 billion of deposits pledged by the public. Earning good profits, Gormley persuaded Branson to embark on the next stage. His creation was Virgin One, an internet bank offering customers a better rate of interest if they opened a single account for their cheques, savings and mortgages. Half of Virgin One would be owned the Royal Bank of Scotland, with the other half owned equally by Virgin and AMP. Branson would not be earning easy profits in this deal: Virgin was committed to contributing to the costs and to any losses. Virgin One’s advertisements showed Branson, dressed in a pin-striped suit and bowler hat, promising to ‘turn personal banking on its head’.
The bank gave him the chance to transform his conglomerate into a global giant. The scenario outlined by Gormley utilised the communications revolution: Virgin, he said, should use the internet to forge a closer relationship with its customers. Virgin Atlantic already sold tickets and transferred money via the internet. That was just the start, said Gormley. By fully exploiting the internet’s potential, Virgin could use its database to offer all its products to loyal customers, without media advertisements, so reducing the cost of sales. Anyone buying an airline ticket would be automatically offered a special deal to try Virgin One banking, and vice versa. Gormley’s suggestion placed Branson at a Rubicon. Virgin Money was his moment to merge all the disparate Virgin companies into one seamless global corporation.
‘Let’s show them,’ was Branson’s favoured exhortation during discussions. The words encapsulated the fun he derived from challenging an established giant. On that occasion, the phrase was targeted at the bankers. Virgin One was his opportunity to pocket millions of pounds by transforming Virgin from a branding venture into an integrated empire, with internet marketing to sustain its expansion. That depended on Branson educating himself about the new technology, but instead he deferred to Stephen Murphy’s advice. To his misfortune, the Virgin Group’s chief executive did not sufficiently grasp the internet’s potential in the same way as, for example, Martha Lane Fox had when she co-founded lastminute.com in 1998. Just as Steve Ridgway, another middle-aged conservative, had dismissed Ryanair’s exploitation of the internet for its ticket sales since the mid-1990s, Murphy excluded taking advantage of it to promote and cross-sell Virgin’s products. Similarly, Jayne-Anne Gadhia, appointed by Branson to manage Virgin One, was flummoxed.
Gadhia was selling Norwich Union’s unit trusts when she read an article about Branson in Hello! magazine, and through a friend she arranged an introduction. Clever, articulate and sassy, Gadhia shared Branson’s qualities as a salesperson. She could sell other people’s ideas or improve someone else’s design, but unlike Branson she lacked originality. A conventional marketer of savings and loans products, the history graduate from London’s Royal Holloway College nonetheless became Branson’s principal adviser on financial services. Cautious and uncreative, she did not share Gormley’s enthusiasm for a blockbuster campaign to persuade the public to abandon traditional banking. Branson himself, mystified by the financial business, was defensive towards those challenging Gadhia. ‘We’ll think about it,’ he answered in reply to any criticism. Branson failed to grasp the paradox. His original fortune had been created by thinking out of the box, but since the sale of Virgin Music he had relied on conventional administrators. His hippy era, when suits were banned and his directors had been summoned to board meetings while he lay in his bath, was gone. His new advisers were ill equipped to compensate for his unfamiliarity with new finance and the internet, and they were sensitive to his dislike of those challenging his supremacy.
In order for Gormley’s strategy of unifying the Virgin Group through internet marketing to work, all the Virgin companies needed to co-operate. But collaboration contradicted Branson’s philosophy. Since he began in the 1970s, he had encouraged rivalry among his staff, feeding when appropriate their instinctive suspicions about each other. He was sanguine about the lack of mutual support between Virgin’s companies. For example, Gormley would later discover that Virgin Atlantic refused to buy wine from Virgin Wines. Bewildered outsiders guessed that Branson wanted to avoid either internal conflict or the accusation that one Virgin company was subsidising the other. The truth was more prosaic. Ever since Virgin Music had been created, Branson had disenfranchised his employees and associates to protect his financial secrets. Compartmentalism entrenched his control but frustrated change.
To promote Virgin Money in
2000, Gadhia relied, as usual, on Branson’s appearances in advertisements. A year later, however, a financial crisis began. In 2001, AMP’s finances crashed. A raft of senior executives in Sydney were fired. Others were dispatched from Australia to rescue the bank’s assets in Britain. ‘Branson has taken us for a ride,’ a visiting banker told his British staff. AMP, he discovered, had lost at least A$200 million from its relationship with Virgin, while Virgin had earned about A$100 million. ‘It’s a lousy deal,’ he declared. ‘It’s noise in the system that we don’t need. Sell it.’
Branson was furious about AMP’s decision to abandon the relationship. In a ‘ferocious’ call from Necker, he cursed the Australian. ‘You can’t do that to the staff.’
‘You don’t understand,’ he was told. ‘AMP has lost hundreds of millions of dollars in Britain.’
‘I’d like to buy AMP,’ Branson told Andrew Mohl, the new chief executive.
‘At the right price, yes,’ replied Mohl, ‘but you’re dreaming if you think you can buy at this point. You haven’t got the money.’ In Screw Business as Usual, Branson described Virgin Money as ‘a community rather than a profit-making vehicle …What we want to do is make everyone better off.’
Virgin Money was sold to Henderson, a British company, and Virgin One was offered to RBS. Initially, Fred Goodwin, the bank’s chief executive, rejected the offer. ‘He’s relentlessly negative,’ reported an AMP banker. Eight months later, Goodwin changed his mind. He paid £125 million for the bank, a higher price than previously suggested, and a good profit for Branson. Jayne-Anne Gadhia moved to RBS.
By 2002, Virgin’s financial business was practically eliminated. Gormley had departed to launch Virgin Wines and would eventually sell that company at a loss. Like so many ideas based on exploiting the Virgin brand, the public were not attracted by a Virgin label on a standard product. Gormley apologised to Branson. ‘Don’t worry,’ Branson replied. ‘You made me a pile of money on financial services. You’re still in my credit book.’
Sidelined in Britain but hungry for more profits from the money business, Branson sought opportunities in other countries. But rather than developing internet banking, he was transfixed by its traditional side. His best idea was to launch a Virgin credit card in Australia, in collaboration with MasterCard and Westpac.
In 2003, Branson arrived in Sydney accompanied by blondes, a big grin and his familiar promise to take on banks and end ‘the rip-offs’. The ‘cosy bank oligopoly’, his publicists said, was fertile territory for Virgin, with its challenge of lower interest rates and better service. Within a year, the business had evaporated. Privately, Branson blamed Westpac for either poaching Virgin customers or rejecting two million applications in order to protect its own credit-card business, but he must have realised the truth: few customers were attracted to the British company. Unlike AMP, Westpac refused to cover the losses. This disappointment coincided with the sale of Branson’s stake in Virgin Mobile Australia, in which he took a A$20 million loss on the shares. Branson had taken a punt that the Virgin label would attract customers and lost.
Repeatedly, Branson was failing to reproduce his British successes in other countries. During one visit to Noosa in Australia in March 2004, he tried to do the opposite – invest in Pulp Juice, a soft-drinks company owned and managed by Ian Duffell, an old friend. ‘Pulp is a fantastic concept,’ Branson told the media. ‘I think it will go down really well in Britain and South Africa.’ His assurance that Virgin would build fifty bars sparked a 56 per cent increase in the company’s share price and enhanced the credibility of Duffell and another investor as they sought to raise extra funds from shareholders. Four months later, before he had actually invested any money, Branson pulled out. Duffell rued what he called ‘a sorry story of big promises, failed ventures and the loss of over $15 million of shareholders’ funds’. The business officially collapsed in 2006.
Instead of re-evaluating the strategy, in 2006 Branson arrived in South Africa to launch another credit card, this time in collaboration with the Barclays-owned Absa Bank. Once again, he promised the ‘biggest shake-up ever’ to end ‘rip-offs’. The joint venture to provide insurance, savings, mortgages and pensions would cost, he estimated, $32 million over two and half years. His expectations went unfulfilled.
In early 2007, believing that he had learnt from his mistakes, he welcomed Jayne-Anne Gadhia’s return to Virgin. First, she tried to buy back Virgin One from RBS. The preliminary discussions convinced the RBS bankers that ‘Branson had not got the money’, and their discussions ended. Next, Gadhia wanted to establish Virgin Money in America, to offer Virgin credit cards. Anthony Marino, the head of Virgin’s development in America, searched for an opportunity. The hot topic, he reported, was peer-to-peer lenders.
Unregulated by law, peer-to-peer lenders negotiated the terms of personal loans between families and friends for student loans and mortgages. The attraction for the lenders was high profits and special tax benefits. Among the best was CircleLending, created in 2001 by Asheesh Advani in Waltham, near Boston. Marino approached Advani out of the blue. Describing Virgin as a venture-capital company searching for opportunities in the mortgage business, Marino outlined Branson’s ambitions to break into banking’s internet age. Excited by Virgin’s plan, Advani negotiated with Gadhia to sell CircleLending for about $52 million and remain as the chief executive. Weeks later, Advani and Branson stood together in Waltham to launch Virgin’s latest investment. Dressed in a black T-shirt bearing the logo ‘Go Fund Yourself’, Branson gave his audience a familiar message: ‘We like shaking up industries, and I think we can give mortgage companies, banks and credit-card companies a run for their money.’ Over the next five years, he added, CircleLending would expand from thirty to a thousand employees. ‘Richard has told me’, said Advani, ‘that he’ll be investing tens of millions of dollars in the business.’ The launch coincided with Branson finding his best chance to break into global finance.
An entrepreneur’s success depends on hard work, skill, inspiration, ruthlessness – and also on luck. All those ingredients are necessary when a suitable opportunity arises. In some instances, entrepreneurs create their own chances; at other times, an event materialises that is ripe for exploitation. In Branson’s career, he had both created and exploited the breaks. The collapse on 13 September 2007 of Northern Rock, a bank based in Newcastle, was a chance for the latter – and an opportunity for Branson to become a serious banker after ten years on the fringes.
The television pictures of depositors queuing to withdraw their savings – the first run on a British bank in nearly 150 years – terrified Gordon Brown, the prime minister. The government’s loan to the bank was rising towards £90 billion as Brown and Alistair Darling, the chancellor of the exchequer, searched forlornly for a saviour among the established banks. After dithering for two months, Brown acknowledged that the government’s only alternative to nationalisation was to find a buyer among the minor players, including Branson.
‘Go for it,’ Branson told Gadhia. By capturing Northern Rock, Gadhia had explained, Virgin would inherit one million customers and a network of branches. She was supported by Stephen Murphy and Peter Norris, the former Barings director blamed by many for contributing to that merchant bank’s collapse in 1995. Despite his notoriety, Norris was trusted by Branson. To compensate for Gadhia’s lack of experience in retail banking, she secured the financial support of RBS; and, to bolster Virgin Money’s credibility, she recruited Sir George Mathewson, the sixty-seven-year-old retired chairman of RBS and Toscafund, to Virgin Money’s executive. Investors in RBS and Toscafund would eventually lose substantial sums of money, and some blamed Mathewson for their losses. To add more gravitas, Branson also recruited Sir Brian Pitman, a seventy-five-year-old former chairman of Lloyds TSB and a director of Virgin Atlantic. Two retired bankers were the stars of the Virgin cast hoping to save the stricken bank.
Kept in the background was Wilbur Ross, the source of Branson’s cash. Ross, a sixty
-eight-year-old American, had earned his fortune by turning around insolvent steel mills. Since the financial crash, his targets in America and across Europe were failed lenders. Once bought, his plan was to return them to profit within two years and resell them. Northern Rock fitted the profile. The only obstacle in owning a bank notionally worth £94 billion was Virgin Money’s credibility.
In 2006, Virgin Money had issued 2.5 million credit cards, but its profits were just £10.6 million. The company had no experience in managing credit cards, and certainly not in banking. Even Gadhia, keen to promote Branson’s takeover, unintentionally admitted the weakness. ‘We believe the Virgin brand’, she explained, ‘is exactly what is needed to reassure the public.’ Branson’s launch of Virgin Cola, she continued, had aroused her enthusiasm for the man and his empire. ‘It was great,’ she gushed about an outright failure. Branson’s bid depended on Gordon Brown’s judgement.
Ever since Branson had flown to London in 2003 to travel with Brown on a Virgin train from Euston, he had improved his relations with the politician. Because much of Virgin’s business depended on government franchises and regulations – especially its airlines, trains and cable – Branson, who had endorsed Labour in the two previous general elections, had agreed to participate in Brown’s ‘enterprise’ seminars and serve in the ‘star chamber’ of his Business Council for Britain. He also had good reason to complain about the party: his two bids for the national lottery had failed, he had lost two bids for rail franchises (Cross Country and the East Coast line) and he was angry that his bid in 2006 to buy ITV had been stymied by Labour’s support for Murdoch. But bearing grudges, Branson knew, was futile. Instead, he told the prime minister how Virgin’s interest in Northern Rock coincided with the government’s.