When we arrived in Beijing, I phoned Jayne-Anne asking if the Goldman Sachs package had come in yet.
'Yes, it's just come through.'
'Good,' I said.
'What's been happening on the flight?'
'What do you mean?'
'It's all over the news that you and Gordon Brown have been having private talks about Northern Rock.'
'Ha ha.'
'No. Not "ha ha". What are you up to?'
There was a long pause.
'Jayne-Anne, please tell me you're joking about this.'
'It's on the news now,' she said.
There were forty journalists at the back of the plane, and one of the rival consortium's PR advisers. Gordon Brown had passed through the plane to talk to them, pausing to tell me what he then told them: that he'd be issuing the Goldman Sachs term sheet to all the bidders within the next twenty-four hours.
That was it. Nothing else. At any time. Never mind in front of forty journalists and a pack of hedge-fund managers who wanted me out of the picture!
Yet the entire China trip was to be coloured in the British media by a supposed 'sweetheart deal' between me and Gordon Brown. The herd instinct of the British media did lasting damage to our chances. There were even cartoons of Gordon Brown being in my pocket – and I being in his. Whether it was malicious or simple over-exuberance, I'll never know. We were told that the prime minister and the Treasury still favoured a private sector deal, but I think the whole Chinese episode must have influenced his team's eventual thinking.
The media played a major role, even beyond the China trip, in the whole evolution of the Northern Rock story. During the crisis, Bryan Sanderson, now Northern Rock chairman (after Matt Ridley's resignation), told Jayne-Anne that every paper had a journalist dedicated to the story and that they were being told to come up with a new story every day – that made for too fertile a field of gossip!
The Treasury didn't help matters when it started negotiating in the press, too. John Kingman, the civil service power broker in the Treasury charged with running the show, actually told our team that, in any decision made, the government would have to take account of the view of Robert Peston, the BBC's business editor. Now Robert is a very likeable guy and a good journalist, but we thought it was odd that he often had information about our proposal before we were told!
The most bizarre coverage for Jayne-Anne followed an early-evening call she had with Kathryn Griffiths at the Daily Telegraph. Like everyone else, Griffiths wanted to know how much Virgin would earn out of brand licence fees. She was told that it would be an arm's-length amount similar to that charged at other companies – including Virgin Media. That meant about 1 per cent of income – which, given the problems with Northern Rock, amounted to very little each year for years to come. Next morning the Telegraph Business-page headline screamed: 'BRANSON TO MAKE £200 MILLION FROM FEES FOR ROCK'. Our press team asked them how they had concocted this figure, and were told it was calculated over twenty-five years! It all contributed to the idea that I was trying to make a fast buck. When Jayne-Anne later went to Newcastle and talked through the numbers with the Northern Rock management team, David Jones, the finance director, asked why we had excluded the licence fee for using the Virgin brand. But we hadn't! He just couldn't believe the amount was so tiny as to be irrelevant. Even Sir Brian, in his interview with the Financial Times in early February, stressed the returns would be unexciting and that nobody 'will make a killing'.
He went on to say: 'We've satisfied ourselves that with the capital we are putting in we'd have enough pure equity in this thing that, if the worst came to the worst, the shareholders would lose money, not the taxpayer.' Yet the whole Branson–Brown 'sweetheart deal' notion began to grow arm and legs. It even reached Prime Minister's Questions in the House of Commons on Wednesday 23 January.
David Cameron, the leader of the Conservative Opposition, asked Gordon Brown about the taxpayers' exposure under the prime minister's bond scheme. It became part of a political boxing match between a new prime minister on the ropes and an Opposition leader determined to throw some mischievous punches.
'Let us be clear: the rescue package is as much for his reputation as it is for the business. If the bonds are not paid back, and if Northern Rock fails to meet its obligations, what is the total exposure? How much?'
'The loans and bonds are secured against the assets of Northern Rock, which, as everyone understands, has a high-quality loan book. It is our intention to get the best deal for taxpayers: they will get their money back, and make a profit,' said the prime minister.
Cameron then claimed the figure was £55 billion – a neat rhetorical trick, achieved by lumbering every household in the country with a hypothetical second mortgage!
If the press around that China trip was extremely damaging to our bid (and it was) so was the political point-scoring in Parliament. The Liberal Democrats were particularly aggressive, hiding behind parliamentary privilege to insult and belittle us.
Vince Cable, the MP for Twickenham and deputy leader of the Liberal Democrats, sounds an amusing guy and he's been an excellent performer in the House of Commons. His sound bites have enlivened proceedings in the British Parliament, but then, in the House of Commons, libel laws don't apply: he can say pretty much what he wants to.
And he did: 'Can the Chancellor tell us what Mr Branson is going to contribute? My understanding is that he is proposing to put in £250 million in kind, not cash, to acquire a bank worth £100 billion, or forty times that value.' A bank worth £100 billion!? If so, it certainly wouldn't have been in trouble.
Being able to come out with this sort of thing unchallenged clearly went to his head, because he went on to claim that I had been involved with this 'sweetheart deal' with the government. He talked about 'nationalising the risk, and privatising the profit'. Then he cast aspersions on me personally saying that I was not a fit person to run a bank – and that I had a criminal record gained when I was nineteen. This was untrue, of course, and the only reason he knew of my stupidity was because I'd chosen to be open about the story in Losing My Virginity some forty years after it had happened. I do hope he paid the full cover price for his copy.
I appealed to Nick Clegg, the new leader of the Liberal Democrats, asking that they depersonalise the campaign. Sir Brian Pitman and Jayne-Anne Gadhia offered to meet Vince Cable – but he refused to see them, insisting on meeting me.
On Monday 4 February, the announcement of Olivant's withdrawal piled more political pressure on chancellor Alistair Darling. His hope for a bidding war between Virgin and Luqman Arnold's private equity group simply fizzled out. The Financial Times headline summed it up – 'OLIVANT ABANDONS ROCK AT 11TH HOUR' – and he was reported to be 'stunned'. Olivant's proposal had attracted the support of Northern Rock shareholders including SRM and RAB, the hedge-fund investors, who had amassed 18 per cent of the bank. They were opposed to the Virgin deal because they simply weren't going to get as much out of it.
At the very last minute, we were asked to increase our government guarantees and add an extra £100–200 million for equity warrants. This was stretching it for us, and in the same week I came across a lot of comments that we were 'getting the bank on the cheap' and 'benefiting from the upside, without taking downside'. This was news to me.
Indeed, towards the end of the whole process, Stephen Murphy spoke to Wilbur Ross who made it clear that as the government were seeking to tighten all the terms, the risks in the deal were getting more substantial while the returns were now becoming marginal. Wilbur warned that he could not accept any further reduction given his responsibilities to his investors. We had to respect this as Wilbur is a hugely experienced investor in international markets, and he and Tosca were our key investor partners. The government was (rightly) seeking a massive amount of new capital to protect the UK taxpayer, but wasn't recognising that this has to be rewarded for the risks involved. That position was never going to work.
In the end, I think
the very thought of a business – despite taking the risks – eventually making a return on its investment threw Gordon Brown and his beleaguered Chancellor of the Exchequer into a panic.
The prime minister took the decision to nationalise the Northern Rock bank at 2 p.m. in Downing Street, after he and Alistair Darling concluded there was no other option. Their announcement was not diplomatically handled. Our only surviving rivals for the bid, Northern Rock's own internal management team, were still answering questions about their rescue plan when Gordon Brown declared his decision.
After our disappointment I received a cordial phone call from Gordon Brown, requesting that I didn't make too much noise and nuisance about the decision. He told me that nationalisation was the right option. In the back of my mind I couldn't help but wonder whether the UK's press hysteria about me being on a trip to China with the prime minister had put the kibosh on our chances. Still, I did as I had been asked: I didn't make a fuss. I issued a statement saying we had submitted as strong a proposal as we could, and that I was 'very disappointed'. And I was certainly disappointed enough to feel I deserved those drinks at the Biras Creek bar that night.
On reflection, the whole Northern Rock saga represents to me a case of the government looking for the most politically expedient solution and not planning for the long term. Virgin, as a private company, had been willing to take Northern Rock off the government's hands and make it work again. We could have developed a brilliant bank, the Virgin Bank, out of it, and I am confident we would have generated new jobs by doing so. As it is, the Labour government will be forced to shrink the company quickly, cut the jobs and get the money back to limit any political fallout. There isn't much innovation or product development in this route and certainly not more competition in the banking market – and the poor old taxpayer gets all the downside risk.
But governments and civil servants can't run businesses – that's been proven a depressing number of times all over the world, and for years in the UK we had daily experience of their ineptitude every time we boarded (or weren't able to board) what they laughingly called a 'train'. Business is not in their make-up. To be fair, it's not their job, any more than running a bank single-handedly would ever be mine.
And that, of course, is the point: I was never going to run the bank. I know my limitations. I know what I'm good at, and what I'm not good at. I would never pretend that I could run a bank – and that's why we built a credible banking team. Jayne-Anne Gadhia of Virgin Money, Gordon McCallum and Stephen Murphy of Virgin Management, Sir Brian Pitman, Sir George Mathewson, Wilbur Ross, an immensely successful US investor in difficult turnarounds, and advisers such as James Lupton and Peter Norris. We had assembled a formidable team of serious bankers and investors and in the end we were the only real show in town. Our lawyers had a better understanding of the company's legal position than the company's or government's own advisers, while James, Peter and their teams ran rings around their opposition. My vision was to make it possible that the bank could be saved, by finding really good people to run it.
Nationalising Northern Rock? I think it was the wrong decision which will haunt not only this government but whoever is elected to hold the reins of power in Britain for years to come.
I spent the day after nursing my poor head. The press cuttings were filtering through and we received a number of emails and calls from well-wishers. The Chancellor sent me a note thanking me for Virgin's interest and our offer but reiterating that nationalisation was the best option for the bank.
I couldn't and can't agree with that, and it saddens me to think of all the good work that's been undervalued, and all the opportunities that have been lost.
Inasmuch as it was in me to feel anything that day – aside from the throbbing in my head – I felt, and I still feel, a great deal of sympathy for the people working within Northern Rock. The staff were tremendously decent people caught in the middle of a public nightmare. They worked every hour, every day of the week, for many months, and they remained upbeat. I'm positive they would have enjoyed being part of the wider Virgin family.
And Jayne-Anne's own team played a blinder too. Virgin Money's finance director, Dave Dyer, and its strategy director, Matt Baxby, worked with total commitment. They more than embodied the Virgin spirit and put a great many personal and family matters on hold while we aimed for the prize.
Jayne-Anne phoned me on the Tuesday after the announcement. I was worried about her. She had been a stalwart, driving the process for us, plus she and her husband Ashok had a five-year-old daughter to look after. Jayne-Anne had spent a hell of a lot of time away from home, her weekends were taken up with some hefty reading of reports and number crunching, and most nights she worked long past midnight. I thought she might be very let down.
'I hope you're not standing on top of a building and about to jump,' I said.
'Oh, don't worry, Richard,' she said chirpily, 'I've spent the weekend looking over the figures of Bradford & Bingley and Alliance & Leicester.'
My head began to throb again. A lot. 'For heaven's sake, why?'
'They both look ripe for a takeover. Listen . . .'
That was the kind of spirit that cheered me up. At Virgin, we move on.
What if you can't move on? What if there is nowhere to move to?
Assuming you're not burning other people's money in their faces, you could always perform the hardest trick in the book of business tricks: get very small, very specialised and very expensive.
I would absolutely count this as innovation, and of the highest calibre: you're taking a large operation and finding ways to scale it down, retarget it and remarket it, all the while adding bucketloads of value to justify the hike in price. And it's very hard to do – not least because you're in so much pain as you're doing it. (Indeed, your old business is dying around you.)
What is the first thing we do at Virgin when we're faced with a problem? We get together promptly to look for the answer to a single question: 'Is there a way out?' And we then go right to the endgame and ask: 'What is the ideal way out of this problem for everyone?'
You need to become 100 per cent focused on trying to find that way out. If it's a major problem, give it 100 per cent of your time and energy until it is sorted. Work night and day to resolve it, and try to delegate everything else that is going on. If, having done this, you fail to resolve the problem, then at least you know you've done everything in your power you can. Move on. If it means taking a hit, then take it on the chin. Don't even think about it again. If you're hurt, lick your wounds and get up again. If you've given it your absolute best, it's time to move forward.
As I write this the economy is deteriorating; it may be that some of you will be faced with this task in the near future. Good luck. And may the next chapter, which is all about innovation, give you some serviceable ideas.
5
Innovation
A Driver for Business
In 1986 I gave an interview to a British music paper. The headline was 'BRANSON'S BOMBSHELL'. I said that we were planning to put every album and single on to a small portable computer box and that the listener would be able to buy it and play any record they wanted, listening through mini-headphones. I said it would revolutionise the music industry — and people believed me. I got frantic phone calls from some major record company bosses pleading with me not to launch such a device. They told me it would blow away the record industry. Then I pointed out the date. It was 1 April — April Fool's Day. When the editor of the paper found out, he wasn't amused.
Fifteen years later, Apple sold its first iPod.
Already, in this book, we've talked a lot about innovation. The best, most solid way out of a crisis in a changing market is through experiment and adaptation. Businesses surf the waves of changing circumstances, and I can't offhand think of any industries whose best players are not constantly engaged in reinvention of one sort or another.
Making changes and improvements is a natural part of business, and for sole tr
aders and very small companies, the distinction between innovation and day-to-day delivery is barely noticeable and unimportant. It's all just business, and creative, responsive, flexible business comes easier to you the smaller your operation.
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