Business Stripped Bare

by Richard Branson

  I know what I'm talking about here because in 2004, when we were considering options for the flotation of Virgin Mobile on the London Stock Exchange, one of the perceived risk factors was me.

  Investors usually have short memories. But the elder members of the City of London pinstripe-and-braces brigade recalled that I had taken the Virgin Group on to the stock market with huge fanfare and expectation in November 1986, and then, after the great market crash of October 1987, I offered to take it back into private hands again. I could feel the thick, red letters stamped on my forehead: 'Health Warning: This Man is Dangerous.'

  The flotation of Virgin had attracted more applications from the public than any previous stock market debut, aside from the massive government privatisation of gas, electricity and telecoms. Nonetheless, my first experience of Virgin as a publicly listed company was one of the most miserable times of my business life. I became very disillusioned with the constant round of analysts' meetings and investor roadshows. I hated being accountable to institutional shareholders who didn't appear to understand our philosophy – and I know a lot of executives working in plcs have a certain sympathy for my viewpoint. But nobody was forced to 'take a bath' when we changed tack – and our investors got their original stake back plus a healthy dividend.

  What happened was this. In 1985, our fledgling Virgin Atlantic airline found itself entrenched in a transatlantic price war, and our cash was being squeezed. My advisers at the time convinced me that we needed to expand the equity base of the group. Don Cruickshank took on the task of organising an initial public offering for Virgin's music, retail, and vision businesses, which were combined into the Virgin Group plc, a public corporation with 35 per cent of its equity listed on the London and NASDAQ stock markets.

  Looking back, it was a funny sort of offering. Virgin Atlantic was considered far too risky an investment and was excluded from the share offering. So were our nightclubs, Virgin Holidays and Virgin Cargo. Yet Virgin Atlantic became Britain's second largest long-haul airline, Virgin Holidays the number-one long-haul holiday company, the clubs have made a fortune and Virgin Cargo grew to handle nearly 100,000 metric tonnes of cargo by 2000!

  Early in 1986, Don and Trevor Abbott, who was brought in by Don as finance director, raised £25 million in a private placing of convertible preference shares from Morgan Grenfell. There was no legal commitment to convert this to equity in the event of a flotation, but it all seemed remarkably easy. In the public sale, the financial institutions would convert their preference shares into 15 per cent of the listed business, and we would create new shares for other investors, raising a further £30 million. This still gave me 55 per cent of the Virgin Group, while outside investors held 34 per cent. The business, which twelve months earlier Coutts Bank had nearly forced into insolvency, was valued at £240 million. Some of the cash raised was moved into Voyager, the company set up to invest in Virgin Atlantic.

  During early 1987, we used money from the flotation to plot the takeover of EMI Music from Thorn EMI, by building up our shares, and to open an American music subsidiary, Virgin Records America. Naturally, both projects soaked up our capital. Then the stock-market crash in October 1987 hit us – and I made a mistake. I continued to buy shares in EMI as they were plummeting. Don Cruickshank and our non-executive directors raged at me: 'Richard, you cannot do this. You are throwing away good money after bad.' It was just the sort of thing we should have been doing if we'd had deeper pockets, but we didn't.

  As the world recovered from the October shock, I expected the share price to jump back after we announced our results, more than doubling profits from £14 million to £32 million for the year ending July 1987. But the price of our shares had fallen along with everybody else's, from our flotation price of 140p to just over 70p. Double your profits, halve your share value: this was barmy logic. In July 1988 we told the market that we were conducting a management buyout – and at the original price of 140p per share. I didn't want to let down the army of smaller investors – including many close friends – who had put their savings and faith in our business. We took out a £300 million loan to do this, which meant that our gearing was very high. My dream of taking over EMI Music came to an end there and then. The City of London had misunderstood our business – we would now go off and become one of the largest groups of private companies in the world with several quoted investments to boot.

  In 2004, I hoped that the flotation of Virgin Mobile in the UK would enhance our already considerable rehabilitation in the eyes of the City.

  From early on there had been speculation in the business press that we would float, with the Sunday Times calling Virgin Mobile the new jewel in the Virgin crown. But there were a few wobbles as we headed for our stock-market flotation in July – mostly caused by external market conditions, which made it difficult for firms to become listed on the London market.

  Ironically, we were due to float in the same week as Premier Foods, the makers of Branston Pickle, which gave the newspapers a chance to dust down their 'BRANSON PICKLE' headlines.

  How would investors view the return of a major Branson business in July 2004? This time round, the circumstances were entirely different. I had learned a great deal about business in the intervening years, and I knew that, while my bearded and smiling face was used in the newspapers, I choose not to be a board director of any of our public companies, and therefore would not be in direct control. Corporate governance was a whole new ball game in 2004, and from day one, Virgin Mobile was set up and acted like a plc-in-waiting.

  A highly experienced team of corporate business figures was brought in to help Tom Alexander so there would be no replay of the 1980s. Charles Gurassa, chairman of TUI Northern Europe, and prior to that chief executive of Thomson Travel, joined as chairman, and Caroline Marland, a non-executive director of Burberry and Bank of Ireland, Rupert Gavin, well known for his work as head of BBC Worldwide, and David Maloney, chief financial officer of Le Meridien Hotels, all joined the board as non-executive directors. These were heavyweight players who would steer the team as they joined the FTSE 250 index.

  Tom Alexander and his team, aided by the non-executive board, had experience and pedigree. They required my backing only as a significant investor, and, of course, for the Virgin brand; so they let me be honorary president!

  Our financial numbers were very good, and Virgin Mobile had been run scrupulously for the market. I knew that the 1987 experience might put off one or two investors. Well, so be it: there was no one forcing people to invest if they didn't like us.

  On 30 June 2004, Virgin Mobile announced its intention of seeking a full listing of its shares and all Virgin Mobile employees who had worked for the company for more than a year received a gift of free shares. JP Morgan and Morgan Stanley acted as book-runners and sponsors and with Investec Securities they also acted as underwriters.

  On 7 July 2004, we said that the indicative price per share would be between 235p to 285p, making the business worth over £1 billion at the top end of the valuation. Not a bad return, I thought; perhaps we were being too optimistic. As the market worsened, we had to temper our expectations, and on 21 July Virgin Mobile announced an offer price of 200p per share, valuing the business at £811 million, with proceeds of £125 million and share capital of £500 million.

  I could hardly complain, particularly given the difficult markets which had seen several other IPOs abandoned during the year. The Virgin Group made around £400 million from Virgin Mobile being floated on the London Stock Exchange, and has invested this money in new Virgin ventures in the United States, China and Africa. Memories of 1987 and the 'Branson Factor' never became a serious issue – and Virgin Mobile has continued to grow.

  *

  When life isn't going well, it's very hard for a company to stay flexible enough to meet the challenge. Virgin Mobile USA has been trading punches in a fierce market since the beginning. It has pretty much done everything right – and it's still by no means out of the woods. />
  What delights me is the way the company has continued to innovate its way out of trouble. A defensive, conservative, cautious mindset – a natural enough reaction when things get tough – can kill you stone dead in a competitive marketplace. When your very existence is threatened, you have to change. This is one of the hardest lessons to learn in business, because it's so counter-intuitive. Plus, as you'll see from Virgin Mobile USA's experience, it's just plain hard to do.

  We'd had a brilliant start in 2002 and were kicking ass. Virgin Mobile USA was giving young Americans the features they wanted, while offering a straightforward price plan with no contracts to sign and no fine print. But by 2005, the prepaid mobile phone market was a dogfight. After four years, Dan Schulman and his team were finding conditions tough. Bigger competitors – with deeper pockets – started to squeeze Virgin Mobile USA, targeting the prepaid customer.

  Dan responded with great products. Our Flasher V7 flip phone had a flash camera, two-way picture messaging, 'superphonic' ringtones, downloadable games and custom graphics, and it was Virgin Mobile's first handset to plug into our new higher speed network. The price was great, too. And somehow it still wasn't enough. It was costing us more and more money to win market share.

  The American team had taken out a large loan to make an impact in this vast territory, and it looked at one stage that defaulting might be a real possibility. To add to their woes, they had supply problems, and pending legal action with Virgin's major handset supplier, Nokia. I heard from Dan that employee morale was draining away, as our planned IPO was pushed further and further into the future. Bonuses were slashed and the very viability of the company was in question. Shareholders were concerned. One thing was for sure: our current strategy wasn't sustainable.

  Dan spent a weekend alone and came up with his new manifesto, Virgin Mobile Rising. It was his clarion call to the company and to himself to regain the leading position and focus on a set of radical actions. Keep four million customers sweet. Resolve the debt and morale issues. Sort out legal matters with Nokia, Freedom and Telcordia. Relaunch the business. All within six months.

  It was outrageous. It was gutsy. I loved it – and so did his team.

  In 2006 Virgin Mobile USA overhauled itself. The brand underwent a complete revamp, as did the handsets, as did the distribution network. New services like Sugar Mama (a way to earn extra minutes), Stash (a prepay debit card) and ReGeneration (a charity network to assist homeless young people) built on emerging youth trends. By the end of July business was improving dramatically. Even against Cingular, who also had low-price handsets, Virgin was able to grow its market share. The customer base rose to 4.6 million, an increase of 20 per cent, and revenues went from negative to positive. Virgin customers sent or received 1.5 billion text messages, one from every customer every single day of the year. In addition, they downloaded 15 million ringtones and 2.5 million games. By December 2006, Virgin Mobile USA customers were using 950 million minutes of mobile phone time. That's a lot of chat.

  We got ready for our trip to Wall Street. On 11 October 2007, Virgin Mobile USA announced its initial public offering, selling 27,500,000 shares of Virgin Mobile USA, at $15 a share.

  No one ever said business was going to be easy, though – 2007 was Virgin Mobile USA's first year of profitability, with a net income of $4.2 million. But five months after the flotation, things were not looking so good. The US stock market was going into a tailspin caused by the sub-prime mortgage crisis and the collapse of Bear Stearns bank. Recession loomed. The share price was hit by a general downturn in the market and increased competition. Some analysts were beginning to question the MVNO model – and our stock price hit $2 a share. This was a disappointment to all of our investors. But I was convinced it would bounce back.

  Dan, too, was upbeat and clear about Virgin Mobile's future prospects. 'We think we have one of the most attractive value propositions in the market, and that our business is well positioned for the future,' he told investors. I agree. Throughout its five-year operating history, Virgin Mobile USA has driven industry innovation and I believe that if it keeps its nerve, and continues to simplify and evolve its products and services, it will generate increasing demand.

  For all its troubles – or perhaps because of them – I am incredibly proud of Virgin Mobile USA. The company has had the guts to innovate its way out of trouble. As the poet Robert Frost said: 'The best way out is always through.'

  Dan knew that, and really bit the bullet. He knew that if a company needs reinvigorating, it needs a complete shake-up from top to tail. He knew not to confuse the intense physical retune of a company relaunch with the corporate comb-over of a mere rebranding exercise. He knew to address the basics – to clear the company's debts and settle its legal issues. And he knew to keep his staff onside with full, honest, direct corporate communications.

  Virgin Mobile USA deserves to succeed. And if you follow its example in difficult times, so do you.

  On the evening of Sunday 17 February 2008 I took the ribbed motor launch from Necker Island across to Biras Creek in the North Sound of Virgin Gorda. The daylight was fading and there was a brisk breeze, so I was wearing a cashmere jersey; not my normal attire in the Caribbean. But I felt a chill – a chill of despondency.

  With me was Ryan West (known to everyone on Necker as Westy), Nicola Duguid, my then personal assistant, and Professor Dan Kammen. Dan and Westy had come to tell me how our sustainable tourism project on neighbouring Mosquito Island was progressing. Dan's energy lab at Berkeley, University of California, was undertaking some computer modelling for us to create a low-carbon island holiday resort: all windmills and solar panels.

  But my mind was elsewhere, and I was terribly disappointed. Five months of hard work by dozens of people across the Virgin Group had just come to nought, and I was mourning one of the most audacious deals we had ever concocted. The numbers were big, and the risk to the brand created over forty years was huge. There could have been serious repercussions for the brand if we failed to turn the business around. But I knew we had done our preparation. I knew success had been within our grasp. And I knew we could have done a good job. Now, of course, nobody will ever see the results.

  We had lost our bid to rescue the embattled Northern Rock bank.

  As we gathered on the jetty I said: 'Right, chaps, I've just heard that they're nationalising Northern Rock. So if it's all right with you, I think I'm going to get drunk.'

  This story illustrates so many of the positive points I've tried to make in this chapter and throughout the book. Nevertheless, when the stars are set against you, there really may be nothing you can do. Blame and recriminations offer a spiteful sort of short-term comfort, but they're toxic, and can only only stunt your future enterprises.

  The opportunity emerged in August 2007 as the international credit crunch began to bite. For many months I had been watching closely as the situation tightened, and I eventually decided to sell all my non-Virgin personal shareholdings in the stock market for cash. It turned out to be a wise move: I was luckier than many with equity in Northern Rock. Over the next few weeks, problems began to unfold as the mortgage banks were unable to get loans. But we didn't expect one of the biggest collapses in British banking history.

  Jayne-Anne Gadhia, meanwhile, was up to her eyes in mud – though in a good way. On Sunday 16 September she was with her friends, Susan and Rosemary, being pampered at the Stobo Castle health spa near Peebles, outside Edinburgh. The Sunday papers were talking about the collapse of Northern Rock, and Jayne-Anne pondered that Virgin could do something with this . . .

  She sat up, dropped the paper on the floor and cast around for a phone.

  She called Gordon McCallum.

  'Don't be daft,' was his initial response. 'It's a step too far.'

  That evening she blasted off a follow-up email to Gordon and Stephen Murphy.

  Hi there

  Call me insane, but I have been thinking hard about how we might take some advantage
from the current situation at Northern Rock – and help out at the same time. I think there are a number of opportunities – ranging from the possible to the outrageous.

  1. Accept that the big balance sheet providers will take the assets and look to take the systems etc. for a decent price.