In 1969 I made the biggest mistake of my life. It was an event referred to as recently as late 2007 by the Liberal Democrat MP Vince Cable in the House of Commons during Virgin Money’s bid for the Northern Rock bank. He said, when speaking under UK parliamentary privilege, that I was not a fit person to run a bank. In the UK, nearly forty years after a lapse in judgement, I was still being pilloried.
I was nineteen years old and driving a shipment of records to Belgium when I stumbled on the fact that records bought in Great Britain that were intended for export were not subject to purchase tax. So I bought the records I needed, pretended they were for export, and then sold them to British customers. The whole ploy involved driving four Transit vans loaded with records to Dover, taking them to France, then returning on the next ferry with the records still on board. It was not only illegal, it was really pretty stupid. In May 1969, I was caught red-handed by HM Customs & Excise, put in a cell overnight and charged under Section 301 of the Customs & Excise Act 1952. It nearly killed off my entrepreneurial dreams; thankfully it didn’t — but it did teach me a hard lesson about never doing anything illegal or unethical ever again. I hadn’t fully appreciated the seriousness of what we were doing or the potential damage it could do to my reputation. It was my mum and dad who bailed me out, putting up their home as security. In the end, customs agreed not to press charges as long as I paid back three times the tax that had not been paid — around £60,000 — and I was spared a criminal record. What I didn’t know at the time was that the big record retailers were pulling the same stunt in a more systematic way, and they too soon ran into the same problem.
After this shock, all the staff got together and we agreed to work night and day to settle our debts, expanding the company as fast as we possibly could in order to pay off these debts and to avoid me going to court.
It took us three years. But I learned a very important lesson: never do anything that means you can’t sleep at night.
One thing is certain in business. You and everyone around you will make mistakes. When you are pushing the boundaries, this is inevitable — and it’s important to realise this. Even when things are running well, there is always the prospect of a new reality around the corner. Suddenly, all the good decisions you made last week are doing you untold damage. Where on earth did you go wrong?
At Virgin, we have always been prepared to face the facts — however unpalatable they might be. Failure usually occurs when leaders avoid the reality of business. You have to trust the people around you to learn from their mistakes. Blame and recriminations are pointless.
In business, as in life, there will always be external risk factors that are beyond your control. Oil prices triple. A terrorist blows himself up in a shopping mall. Hurricanes level entire cities. Currency fluctuations leave behind trails of bankruptcies.
But you can take measures to mitigate and manage business risks. Then, if disaster strikes, at least your attention won’t be split every which way by other worries. Always, always, have a disaster protocol in place. Because if something truly horrific occurs, a lot of frightened people are going to come to you looking for answers.
On 23 February 2007, at around 8.15 p.m., one of our new Pendolino tilting trains — travelling at 100mph — jumped over a set of points in Cumbria in the north-west of England, on a remote and scenic part of the West Coast Main Line.
On board was Margaret Masson, an elderly lady travelling back to her home in Cardonald, near Glasgow. Margaret — her family and friends called her Peggy — was thrown around in the coach as the train slid along the railbed and then careened down a steep embankment.
For ten years, Virgin Trains had been safely carrying millions of passengers all over the UK. Virgin Atlantic, meanwhile, had flown millions of customers around the globe without injury. That night, life changed in our business. We had our first casualties. Margaret Masson was dead. Several other people were seriously hurt.
Zermatt, Switzerland. My family and I came off the slopes after a brilliant day’s skiing. There had been a welcome dump of snow and everyone agreed it had been a perfect day. In the evening, exhausted, we all sat down together to watch a film in the local cinema, when I felt eight or nine gentle buzzes on my mobile phone. I went outside. The text message said there had been a rail accident and that it was Code Black, indicating that it was serious. I phoned our then director of communications, Will Whitehorn (now president of Virgin Galactic), who sits on the board of Virgin Trains. The call went to voicemail — an unusual event for a person who is always in touch with me. I called Will’s wife, Lou, on her mobile and she reminded me that it was his birthday; for the first time in a year, he had actually switched his phone off. I phoned Tony Collins, the managing director of Virgin Trains, and the man responsible for building the Pendolino trains.
‘I’m afraid it’s a serious derailment. The train’s gone down a ravine and the police are trying to get to the passengers. We should prepare ourselves for the worst.’
‘I’ll be there in a few hours,’ I said. ‘Can you meet me?’
‘I’ll pick you up when you get in. Just let me know your arrival time.’
I couldn’t get a helicopter because the snow I had just been skiing over and having such fun on was still falling, shutting down much of Switzerland. The airports at Sion and Geneva were both out of action. The best I could manage was to drive to Zurich, which was five hours away. I hired a car and drove through the night. I got the first flight out of Zurich at 6.30 a.m. The flight went to Manchester and I met up with Tony Collins and with Will, who had flown in from Heathrow. They briefed me on the latest situation, and then we caught the BBC morning news. The reports said the train was intact, and that this had contributed to the large number of survivors. That was heartening: Pendolino No. 390033, City of Glasgow, like all our new trains, had been deliberately built like a tank. An interim accident report, later confirmed, suggested that a track failure was responsible for the accident. This news, too, reshaped our task and made it somewhat easier, because we could be fairly certain by then that nothing Virgin Trains had done or failed to do had contributed to the incident.
As we headed to the Royal Preston Hospital in Lancashire, however, we still had little idea of the scale of the accident. The hospital registrar there said the emergency services had been gearing up for over 100 casualties when they first heard the news. Because the Pendolino carriages coped well, only twenty-four people needed to be taken to hospital — still, the scale of the medical preparations we saw was daunting.
We went up to Grayrigg, to visit the crash site. It was as if a massive Hornby model railway set had been picked up by a spoilt giant and dashed to the ground. With a jolt I recalled how much I’d had to argue with the Department of Transport — which provides large subsidies for the railway system — to allow us to increase the safety specifications of our trains. If this had happened to any of our old BR rolling stock, the injuries and the mortalities would have been horrendous. As it was, the carriages had held together. Even the windows were intact.
It was while I was surveying the devastation that I was first told about the bravery of one man. Since that time, whenever I think of the courage of our test pilots, or my friend the explorer Steve Fossett, who’s sadly lost to us now, or the ballooning guru Per Lindstrand, I also consider the resolve it must have taken to deal with 400 tonnes of derailed train. The actions of the train driver Iain Black, a former policeman, were incredible. Once the train had derailed, its own momentum propelled it a further 600 metres along the railbed. Iain battled to slow the train down on the stones. He stayed in his seat for a quarter-mile, trying to control the train. He didn’t protect himself by running back from his cab. Instead, he did everything he could to save his passengers, and in the process he sustained serious injuries to his neck. It was his selfless action that averted more casualties. In my book, he is a true hero.
We stared numbly at the wreckage for a while, then returned to the hospital.
I met Margaret Masson’s family in the hospital mortuary, of all places. They were clearly devastated. I offered them my condolences. We found ourselves hugging each other.
The next minute — or that’s how it seemed — I was facing television cameras and a press pack hungry for answers. I thought I was going to choke up. I came very close, but held it together and stuck to the facts as we knew them on the day.
At the time I couldn’t say much. Again, I offered my condolences to Peggy’s family. I also expressed my gratitude to Iain, who lay in another hospital nearby with injuries that would keep him off work for many months. Our other on-board staff — Karen Taylor, Derek Stewart and Gordon Burns — had all behaved in an exemplary fashion, and well beyond the call of duty, ignoring their own minor injuries in order to lead customers safely from the train.
After that, if I wanted to help people — the police, emergency and hospital workers, the mountain rescue volunteers, railway colleagues from Virgin, Network Rail and other companies — the best thing I could do was to keep out of their way. I left feeling unsatisfied: was there really no more that I could do? There didn’t seem to be, but I comforted myself with the thought that at least I’d been there.
It is a boss’s duty to get to the scene as quickly as humanly possible. If you delay showing your face in public after something like this, recriminations, anger and blame set in. This will be bad enough for you; imagine what all that confusion and worry does to the people who’ve been affected by the incident. In my view, if the press are demanding early answers for good and just reasons — and that was very much the case here — it is imperative for business executives to be prepared to face the media at the first opportunity. Every senior executive should be capable, if push comes to shove, of becoming a visible company spokesperson. I remember, after a serious plane crash at Kegworth in January 1989, Sir Michael Bishop, who was CEO of the airline British Midland, spoke to the media straight away with great clarity and care.
When Virgin Trains was putting its own emergency procedures in place, we analysed a number of serious rail incidents, and had been consistently appalled by the amount of time it took before anyone stood up and said: ‘Speak to me about this’. And we were daunted at how fast confusion and blame set in as people waited for any kind of statement from anybody about what had happened and why.
So our disaster-planning scenarios have three main aims: to get to the scene fast; to be efficient in dealing with the passengers, staff and media; and to be honest about what is happening. The other lesson to come home was that the tremendous planning and refusal to skimp on costs on building the Pendolino to the very highest standards in the world really paid off and saved the lives of people who would not be here today if they had been travelling in the old trains we replaced.
You can’t protect yourself against the unexpected, so you need to keep your house in as good an order as you can. If disaster strikes, you don’t want to find yourself doing twelve things at once and misprioritising them in public. It’s vital, therefore, that you take control of your internal business risks — the ones you can influence.
I’ve failed to follow my own advice here on a couple of occasions — and I’ve always regretted it. For instance, I’m not always good at cutting my losses. I should have faced up to the realities of the market and sold off Virgin Megastores years before we did. My decision to overrule my colleagues and hold on to them for too long cost us a lot of money, only balanced by the fact that the chain’s very existence and brand was the distributing channel and bedrock of the early success of Virgin Mobile.
I don’t think that a chairman need fall on his sword if someone messes up in the company. Chairmen must learn from the incident and try to make sure that particular mistakes are never repeated. An apology on behalf of the company — perhaps in a public forum, sometimes in person to the individual who has been messed up — is an appropriate starting point. I know business books that say you should never admit to failure, but I would not tolerate such an attitude among my people. I see nothing wrong with admitting a genuine mistake.
An entrepreneur has to make the tough calls. Some say it requires a ruthless streak. I don’t agree. I don’t think I’m ruthless, although I have been portrayed that way by a few people who don’t really know me and have never met me. There are some things in my business life that I regret — and I have made mistakes about people. One of my faults is that I have often been so focused on a business project or an idea that I have been unable to appreciate what was going on in someone’s life right in front of my nose. I’ve tried to learn from this, taking extra time to listen. Actually, I think it is counterproductive to be ruthless. You’ve got to treat people as you would yourself, or better.
Let’s be clear about the manager’s responsibilities here. There’s an idea abroad that people no longer resign when they should. To hear some people spin it, you would think resignation is the only effective action the manager of a troubled company can take. This is patent rubbish. And for the record, there never was a time in business or political history when talented people resigned over trifles, or out of some notion of honour. It’s a myth.
If something catastrophic happens to a company, and the chairman actually appointed that person who caused this systemic failure of the business, then the chairman certainly needs to consider his or her position. If a major bank does not have the security systems in place to protect itself from a rogue trader, and that trader does immense damage to the company, then, yes, the chairman or chief executive should probably consider resigning their position. They are ultimately responsible.
In most other cases, managers should stay where they are and sort their messes out. It’s what they’re paid for, after all. Most importantly, someone should apologise for the mess happening in the first place.
You definitely should get the best people around you when confronted with a serious problem. Don’t try to deal with it all by yourself. Don’t be afraid to seek help and advice. If someone else is better than you at dealing with it, then for goodness’ sake delegate it. And equally for goodness’ sake, don’t jump down their throats if they fail.
My management team reckon 2003 wasn’t exactly a vintage year. That was the year Apple’s first iPod personal music player was emerging. We had a couple of very bright people from Palm who came over with their own funky version of the MP3 and a range of accessories. The analysis didn’t truly stack up according to the management team but I insisted we push on with it: our very own MP3 player, Virgin Pulse! We had to make some heroic assumptions about how to scale up because we were buying the devices from China and Taiwan. We spent $20 million on designing and bringing it to market — and our products were critically acclaimed in the United States — but it didn’t have the simplicity of the iPod and the cost of manufacturing just throttled us out of the marketplace. Apple had taken a leaf from Texas Instruments, the pocket-calculator experts who dominated their market for many years. If you drive down the retail price fast enough when you are the dominant player, you never allow anyone else to catch up because they can’t make enough money. It requires the dominant player to be brave, because it can mean cannibalising your existing sales by dropping the retail price. That’s what happened when iPod introduced the cheaper and smaller iPod nano — it slammed the door on anyone else trying to build significant market share beneath them. The Virgin Pulse bombed and we had to write off $20 million.
It’s often hard when you’re focusing on the day-to-day in business to admit that what you thought was right becomes wrong. For example, we put a truly innovative upper-class seat on Virgin Atlantic’s planes in 2000. However, we took too long to develop them and did not keep the project secret enough. British Airways got wind of what we were up to (and even got hold of our plans) and out-innovated us with a better seat. Customer feedback was swift and brutal. People were voting with their credit cards and travelling with other airlines — and our airline began to suffer. We could have kept the seats until they depreciated, but we decided the mistake was just too ghastly to live with. We cut our losses and dumped them. The cost to us? £100 million. The benefit to us? We now have the best business-class flat beds in the world, designed by our own team, and we have created a product our rivals cannot match. We have easily recouped our losses with this decision.
It’s embarrassing to admit this stuff, and I think it’s a fear of embarrassment that discourages many chairmen and bosses from doing their jobs properly. It’s all very well sitting there wondering why your business is disappearing, but it’s only by getting out from behind your desk and sampling the products that you will ever see what’s going wrong. When you have found out what is going wrong, the next step is to get the team involved to fix it rather than fire them. That way, you can keep your team together and close the door on rivals who might benefit from your mistakes by hiring the very people who have just learned the lesson the hard way.
Starting a soft-drinks war with Coca-Cola was crazy. It was one of our highest profile business mistakes, though it was also one of the things that raised the profile of the Virgin name in America. Launching Virgin Cola in 1994, we were having fun and revelling in underdog bravado, so pleased to be snapping at the heels of the biggest dog in town. Taking on Coke taught us two things: how to make a great cola with a different taste; and how to antagonise a global business that brought in $28 billion in 2007, with profits of $5 billion.
It was only several years later that I learned how Coca-Cola eventually set up a SWAT team to ensure that Virgin Cola never got a proper foothold in the soft-drinks market. Yes, we somehow contrived to blind ourselves completely to the power and the influence of a global brand that epitomises the strength and reach of American capitalism.
Here’s how we did it — and, whatever you do, don’t try this at home.
The Virgin Trading Company, a wholly owned Virgin subsidiary, was our beverage start-up division. Virgin Spirits, a joint venture with Scottish whisky distiller William Grant, had been established to market and distribute Virgin Vodka. You can still enjoy a bottle of Virgin Vodka — it’s available on Virgin Atlantic flights, along with our special Glenfiddich Scotch whisky.
The Virgin Cola Company was a joint venture with the Canadian soft-drink company Cott Corporation, the world’s largest supplier of retailer own-brand soda drinks. Cott bottled own-brand products for such chains as A&P, Loblaw’s and Safeway in Canada and Albertson’s, K Mart, Safeway, 7-Eleven and Wal-Mart stores in the United States. Virgin Cola was introduced in the UK in 1994 and we originally achieved success in the pub and restaurant trade. I was convinced by the late Gerry Pencer, the chief executive of Cott Corporation, that we were in a position to make a strong bid for a portion of the global market. After all, Cott had customers in Australia, Britain, Hong Kong, Israel and Japan, and these were key markets for us. But Cott baulked at taking on Coke directly. We should have listened.
We knew there was a lot going on behind the scenes. One of Tesco’s main buying team, John Gildersleeve, a senior director who was a non-executive of several companies, had indicated that they would take one million cases of Virgin Cola. The next we heard, he had told Simon Lester at Cott that they wouldn’t be supporting us after all. This was three weeks before the launch — and the invitations had gone out for the event at Planet Hollywood in London.
I phoned John to ask why the change of heart. He said: ‘It was a very fine decision — the door’s not completely closed.’ He knew I wanted to make a press announcement, and he knew I needed the confidence of having a major retailer on board. ‘But we have two concerns. First, there are some commercial considerations. They can be resolved. But second, there’s this whole question of the brand positioning and what it might do for us.’
He explained to me that a solus arrangement — an exclusive deal with Tesco — is a two-edged sword. He said Tesco would be identified with the product whether it was good or bad. If I got fed up with it in three months’ time, it would reflect on Tesco — good or bad. He said when Sainsbury’s launched their own Classic Cola, Tesco adopted a position that they would only sell ‘The Real Thing’.
John said that he was worried that we might be a bit inflammatory in the way we attacked Coca-Cola. He pointed out that Coke had been very good customers for Tesco and the last thing he wanted was Coke being taken out of his stores. This was an honest opinion that I respected. I could see Tesco’s position, but it was very important for Virgin Cola to be on the supermarket shelves — preferably on offer at the end of the aisles.
I explained that every company we start, we stick with; that we wanted to give the public more choice; and our campaign was focused on defending our position and explaining why we were better — we weren’t interested in merely slagging off a competitor. I told him this applied to all our campaigns — even to Virgin Atlantic’s battle with British Airways. I pointed out our reputation among consumers was very good. (A NOP market research survey in a recent edition of PR Week was conveniently to hand to back this up!) Both David Sainsbury of Sainsbury’s and Archie Norman at ASDA had also told me they would stock Virgin Cola.
The next day John came to see me in person. As a consequence of the call and our meeting, Tesco changed its mind and decided to stock our cola. It was a wonderful boost for us. In December, sales of cola went up 36 per cent in Tesco stores — and 75 per cent of these were sales of Virgin Cola.
Then Coke started to make life more difficult for us.
I was in a Virgin Trains meeting when one of the former British Rail executives told me he had been on a management away-day at an assault course, and he had met some Coca-Cola managers. He’d asked them what they were doing on the assault course. They replied: ‘We’re getting ready for action with Virgin Cola.’
I thought the story was over the top at the time, but with hindsight I can see that, once Coke had woken up, of course they had read the launch of Virgin Cola as a declaration of war.
Coke’s commandos went into action. Coca-Cola’s secret recipe is a syrup essence shipped to hundreds of independent bottlers around the world and they are responsible for producing, packaging, distributing and merchandising. Coke visited every bottling business and said they didn’t want Virgin Cola to be produced by their bottlers. It wasn’t simply the cola — the bottlers also depended on their livelihoods for the other soft drinks in the Coke portfolio, such as Sprite, Fanta, Diet Coke and Minute Maid: all highly lucrative business for the bottlers.
In 1998, we acquired Cott’s share of the business and relaunched Virgin Cola with a further $25 million investment. Our goal: to take on Coke on their home territory. Coke wanted war. So we drove a British tank into Times Square in New York and fired a mock round at the Coca-Cola sign (we’d secretly had it wired up the night before by a pyrotechnical team and it looked like it had gone up in smoke) before ploughing through a massive wall of cola tins. Sightseers ran wailing from the square and we nearly ended up in jail.
In Britain, Virgin Cola was flying off the shelves. In France, we were closing in on Pepsi, doing well in Belgium and Switzerland and negotiating a franchise in Japan and Italy. We thought we might be able to pull it off.
In 2004, I was invited to meet my new corporate bank boss, Diana Brightmore-Armour, a very bright woman working in London for Lloyds TSB. We were enjoying a fun evening when she revealed to me: ‘Richard, you don’t know this, but I was working for Coca-Cola in Atlanta when you launched Virgin Cola — I knew what an impact you would have so I persuaded the senior management to set up a SWAT team to ensure that Virgin Cola failed.’
I was quite amazed. In 1997, we knew that Coca-Cola were keen to drive us out of business but we didn’t realise to what extreme.
‘I was at a senior executive meeting when it was reported that you were preparing to launch the cola into America. Most people at the headquarters were rather blasé. They didn’t really know about Virgin and thought it just another local soft-drink brand.’ But she garnered support from one or two Brits at the meeting and they helped her warn the bosses: ‘This isn’t just anyone — this is Richard Branson, who has a lot of clout and can build a major brand. We need to stop this as soon as possible,’ she told them.
While Coca-Cola had few worries about a regional brand competing in a local marketplace with Coke and its other products, it didn’t want to face another competitor such as Pepsi. My dining companion revealed how a team came to England to set up another team to ensure that distributors and shops were all given extra incentives to sell Coke — and keep us off the shelves. I heard later that the number of Coke people trying to stop us was bigger than the whole of our team in Virgin Cola! We truly were the underdogs.
After gaining a peak of 75 per cent of sales at Tesco and over 10 per cent of total UK market sales, sales started to decline. Coca Cola’s SWAT teams were beginning to punish us. Coke started discounting cola more cheaply than bottled water — an offer we couldn’t match: we simply didn’t have the money. The only way to make money on a commodity where the price is so low is to ensure that you sell huge volumes — that’s what the Coca-Cola company does. Coca-Cola threatened small retailers that they would take out their fridges if they continued to stock us. They also hinted that they would withdraw Coke altogether from the same retailers.
Our Coke escapade led to a number of articles asking whether Virgin had a proper strategy in place. A Business Week cover article questioned whether we had the ability to manage Virgin’s ‘chaotic’ empire. Well, of course we had. We were a way-of-life brand, offering a consistent and enjoyable experience to our customers whether they were flying the Atlantic or making a mobile phone call. Virgin wasn’t chaotic — it was utterly focused on the job of realising its core values in many diverse sectors.
Colas are a drink young people enjoy, so we figured a Virgin Cola would be a good idea. Coca-Cola is a huge corporation, and since Virgin is all about outfoxing the big guy, we leapt at the opportunity to take them on. Colas are pretty much indistinguishable as drinks, and much of the customer’s enjoyment comes from brandishing their favourite brand; the Virgin brand was popular, so how could we lose?
We lost by ignoring the gaping hole in this otherwise rather solid-sounding proposition: as a cola manufacturer, we weren’t the people’s champion. They already were. They were getting their product into people’s hands, every day, everywhere. They were offering their product at an unbeatable price because they had the biggest economies of scale on the planet. They were offering their customers a rather nice soft drink into the bargain. And their brand name was so ingrained in people’s minds that when they asked for a Cola, they’d call it a ‘Coke’.
Yes, Coca-Cola played hardball against us. But we had already lost. We still produce Virgin soft drinks, but in a much more targeted and niche way. And Virgin Cola is still the number-one cola drink — in Bangladesh!
I notice that Red Bull has launched its own cola. I know it will take them some time and a large tranche of money to win significant market share. But then, as a drinks company, this is their core business.
And perhaps the best thing to come out of our Virgin Cola escapade was a brilliant new company called Innocent Drinks, run by some entrepreneurial guys who were at Virgin Cola and saw a gap in the market for fresh fruit smoothies and have now built a business worth several hundred million dollars. While still with Virgin they set up a stall at the V festival to have revellers sample their products. They had two bins: a ‘yes’ bin and a ‘no’ bin. They asked people whether they should give up their full-time jobs to start the company. People tested the product and by the end of the day, the ‘yes’ bin was overflowing. Our loss, but even if it isn’t a Virgin Company, I get a real surge of satisfaction to know that these guys cut their teeth in a Virgin business and made it work.
Back in 1971, when I was more gung-ho, I wrote in my notebook: ‘We don’t need lawyers.’ But over the years, stating our agreements in clear and unambiguous terms has proved, again and again, to have been vital for our success. Our contract with T-Mobile, in particular, turned out to be a vital document for us. Incurring unnecessary legal fees can ruin your start-up, but the answer, I now think, is not to ignore the lawyers, but to get the basics right from the very beginning. Any start-up business should sit down and take a long hard look at its legal agreements.
Our Virgin Mobile business was going exceptionally well in the UK. There was an incredible buzz — we were hitting the bullseye of the UK youth market with funky and irreverent adverts and great deals. Tom Alexander and the team were single-minded about the business and piling on thousands of new customers and there was a sense of fun. In the first three months of 2003 the turnover was exceeding £1 million a day.
Our television adverts were scooping awards for innovative marketing — and we were stealing market share from Orange, Vodaphone and even our network partner, T-Mobile. In the UK, we were able to use the American rap superstar Wyclef Jean for a cult advert. In it, he unwittingly signs a contract that leads him to being bound as a trailer park sex slave. In an attempt to escape he is subsequently imprisoned for ‘breach of contract’. The underlying message of ‘Be careful what you sign’ demonstrated the benefits of switching to non-contract Virgin Mobile.
For all of us at Virgin Mobile, however, that advert had acquired a second, private meaning.
Our original deal had T-Mobile putting in the network, and Virgin arranging handset procurement, marketing and the Virgin Mobile brand. It all worked smoothly — until a new American executive, Harris Jones, arrived on the scene in Britain. He really set the cat among the pigeons.
He was smart. He looked at our original contract and saw we had a joint company worth £1 billion, of which Virgin owned 50 per cent: a fantastic success story in which both parties were doing well. Harris Jones — and ultimately his bosses — were desperate to obtain our shares and were willing to try a number of different tactics to get hold of them.
What was their problem?
They saw the Virgin Mobile deal as just another cost, because for every customer on Virgin Mobile, T-Mobile paid us a monthly marketing fee. This payment was a termination charge which T-Mobile collected from other networks to connect their callers to Virgin Mobile’s customers. Virgin Mobile was entitled to this termination fee, even though we didn’t own the network infrastructure. It was in black and white in the contract.
T-Mobile were saying that the terms of the contract were legally questionable. While we thought the agreement was crystal clear, going to court over this was frightening: T-Mobile was a substantial business and had pockets deep enough to fund an expensive litigation. Every day spent dealing with lawyers is not only costly, it’s hugely time-consuming for key executives. Our relationship soon became very sour indeed, and our cherished flotation looked increasingly remote.
The case ended in the High Court in London — and T-Mobile lost. The judge, it was reported, said that T-Mobile’s conduct was ‘deserving of moral condemnation’.
The head of T-Mobile in Germany handled the fallout well. He was good enough to invite me over to Germany so that he could apologise to me in person — a decent gesture, and one we appreciated. After many months, we managed to secure an out-of-court settlement with Harris Jones’s former bosses in Germany and with a new UK team led by his successor Brian McBride. Due to the court ruling they had to sell us their shares for £1 (Brian framed the coin in a presentation case!), and they offered Virgin Mobile a new airtime contract that it still operates with today. Thanks in large part to him, we managed to steer our way towards a stock-market flotation.
The lesson of all this is that you need to get your basic business contracts properly sorted out. It’s always worth getting the contract right in the first place. And be prepared, on occasions, to go to court to defend the company. I’m afraid that when you draw up a contract for a joint venture, you have to take into account what might happen if there is a falling-out — or, worse still, when someone is trying to screw you. It would be lovely if all business could be done with a handshake — and I have done plenty of successful business this way in the past — but there are unscrupulous people out there, and you have to guard yourself and your business. We have never lost a major court case in forty years of doing business. In the GTech case (where I was awarded substantial libel damages), the British Airways case and the T-Mobile case, we have stood by our decision always to fight our corner.
Protect your reputation. Don’t be afraid of making mistakes.
These are the rules I live by. They ought not to contradict each other but many businesses wrongly assume that they do. Yet there is no denying the risk that mud sticks, and a damaged reputation in business can follow you around for years. You can deliver on every promise, keep your word, deal fairly, show forbearance — and the world can still throw you curveballs that mess up your reputation. And long after you have learned your lesson and moved on, others will still be harping on about this or that misfortune, this or that error. I’ve known plenty of talented and trustworthy business people who have carried the shadow of past errors around with them, and whose careers have suffered as a result.
There is no way to solve this problem, but there are ways to mitigate its effects. Certainly you should never keep your head down. That will do you no good at all — it’ll simply confirm someone’s lousy opinion of you.
I would say, first of all, that you should improve your communications. At Virgin, we take a great deal of care to keep the press up to date with what we’re doing. Aside from maintaining a high profile, this helps decent journalists put any old, bad news in context. Our culture of openness also prevents bad news from building up a head of steam before it reaches the public. The public is actually pretty forgiving of most business errors except hypocrisy, and stalling almost always backfires.
We also practise what we preach. We look for people with exciting, dynamic CVs, not spotless ones. We’re not pushovers, but we’re happy to take chances with people, to move them around, to see how they tick and where they fit in. We don’t pin the blame on people, or marginalise them when things go wrong. This culture pays dividends the longer we’re in business, because eventually people realise that we’re a company that knows how to deal with its problems, and is willing to take chances.
Over the years the Virgin brand has earned the reputation of being bold and unafraid. Isn’t it extraordinary how few brands communicate fearlessness? Commercially, our reputation for fearlessness has been like gold dust. It turned our battle with Coca-Cola, which was commercially bad for us, into a story that, in brand terms, strengthened customer loyalty.
An error-strewn reputation is more damaging as rumour than it is in face-to-face dealings. Satirical magazines like Private Eye are always horrified to discover how many successful and famous friends stick by figures who are supposedly ‘disgraced’. But that’s not so surprising: individuals are better than groups at judging someone’s character.
Your friends are your allies in the battle to improve your reputation after a knock-back. They will not only advocate for you; they will front for you. Their reputations will help yours recover. Distinguished people aren’t stupid, and cultivating someone to take advantage of their reputation isn’t going to wash. But they are, to a fault, generous and understanding. (They’ve been through the mill; they know what life’s like.) So don’t be afraid to ask the senior figures in your circle for advice and help.
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.
2. Do a deal with a Citi or BOA [Bank of America] where they buy the company but we put in the brand so they get a Virgin-branded retail presence in the UK.
3. Talk to Northern Rock and the Bank of England direct. Richard could be used as frontman to make some sense of the crisis. Northern Rock could be rebranded Virgin and the Bank of England stand behind the current loan facility. We could withdraw from mortgages for the time being and focus on savings to rebalance the balance sheet — and with Richard fronting a saving campaign — Branson making sense of the current crisis — it’s all now about increasing savings and reducing debts etc.
4. Whatever happens, I think we should do some research into who people would trust with financial services now. I bet the answer will be — Richard Branson.
On the one hand I know that this all sounds pretty batty, but on the other hand — discontinuities in the system make it right for change — and I think we could do something, if Richard was able to speak to Darling or Brown to ask how we can help.
What do you think? I’ve restrained myself from copying this to Richard until I got your views.
Gordon’s reply was his usual mix of caution and common sense. ‘I think 1. is interesting and the rest is batty! Let’s talk tomorrow morning.’ Stephen was equally cautious.
Jayne-Anne decided to phone me directly. She asked me if I’d seen the queues outside Northern Rock’s branches on the news.
I certainly had.
‘Well? Do you think we should give it a go?’
‘Screw it,’ I said, ‘let’s go for it.’
You can only get into pole position by giving something a try. Over many years, Virgin’s business aim has been to find a strong position in a game-changing market. We’ve done this in the record business, media, telecoms, health clubs and the airline industry and will soon do it in space travel. We put ourselves out there, searching for new opportunities. And we know that they are more likely to come our way if we get ahead of ourselves and prepare the ground first.
Next day Jayne-Anne talked through her ‘batty’ ideas with Peter Norris, one of our long-term advisers, and a man who had run Barings. Peter said straight away that Virgin should start to look at the idea seriously. By now Gordon and Stephen had got their breath back and were over the shock — it was time to think how best to assemble a team to take on this enormous task. Our Northern Rock adventure had begun.
The following day I phoned Matt Ridley, the chairman of Northern Rock. I told him we would love to see how we could help save the bank. Matt is a charming man. He appeared delighted to take the call: ‘This is great news, Richard. The Virgin brand is just what the bank needs,’ he said. ‘Of course, you do realise you’re going to need literally billions of pounds?’
‘Ohh, yes,’ I said. And I thought to myself: Billions? Did he really say billions?
‘I’m confident that can be arranged,’ I said. Well, of course he said billions. He was a bank.
‘I fully understand,’ I said, and by then, with sweat beading my brow, I really did.
The bank’s position had become public at 8.30 p.m. on Thursday 13 September 2007, when the BBC reported that Northern Rock had asked for and been given emergency financial support from the Bank of England. The funding facility was finalised in the early hours and announced to the London Stock Exchange at 7 a.m. Within hours of opening, long queues began to form outside Northern Rock branches across the UK. The website collapsed and its phone lines were jammed. This was shocking news: the first run on a bank in the United Kingdom since Victorian times.
There was a great deal to admire in Northern Rock, and I wanted to protect and save what was good about it. When the run on the bank began I watched the television pictures of the queues along with everybody else. Now, the queues were undeniably disturbing, they were the story. But being in the businesses I’m in, it won’t come as any surprise that I also had my eye on the front of those queues, where Northern Rock spokespeople were trying to reassure some very worried customers. I admired the way the staff turned out at the branches and dealt with people as they demanded their money back. They stood right in the front line, calmly advising customers. I heard from inside that everyone had come in to help — it was all hands to the pumps.
The bank had weaknesses: yes, they had got themselves and their customers into a whole heap of trouble by borrowing short in the money markets for long-term mortgages. But hindsight is easy: the bank had been popular with intermediaries — the financial advisers who recommended the bank’s mortgages — and they had very modern systems in place. It was an engine that was fine in its way — but too hungry for the road it was on. It had run out of petrol. Our job was to see how it could be made to work again on a more environmentally benign fuel than the short-term money markets.
First of all, we needed to put together a winning team. While much of the media interest was to focus on me personally in the coming months, it won’t surprise you to learn that I’ve neither the time nor the skills to run a bank. As far as the rescue team — a formidable group of people led by Jayne-Anne Gadhia, the head of Virgin Money — saw things I was very much in the background. Each evening I would ring Jayne-Anne for a catch-up, and to see if there was anything I could do.
Stephen Murphy appointed James Lupton of Greenhill to help us in London, along with Peter Norris’s firm Quayle Munro, and Andrew Balheimer of top law firm Allen & Overy — we had the makings of our team. We needed to know how to deal with a company the size and scale of Northern Rock. ‘Do you really think we can get this?’ Their answer was that if we could secure the funding, then it was made for us. But only if we could get funding.
So I was given the task of drumming up support for our equity consortium. One of our team dubbed it ‘dialling for dollars’ — and certainly I was able to use some top-flight contacts to pull people on board. I also made a number of more personal calls to ensure there would be goodwill towards a private rescue bid — I was given the green light at the highest level.
We built up a business plan to explain how we would turn Northern Rock into the Virgin Bank. (I had toyed with the idea of calling it Virgin Rocks, doffing the cap to our rock-music origins; Jayne-Anne gently but firmly dissuaded me.) My first port of call was AIG, the insurance group who sponsor Manchester United Football Club. They were very keen to support us. It was a flying start. We went on a roadshow, presenting our plans to the big global banks. Our longstanding relationship with the Royal Bank of Scotland paid dividends — they requested that we deal with them, and their partners, Citigroup and Deutsche Bank, exclusively. This was a brilliant boost for us. We now had in place a possible investment of £11 billion (yes, billion!)
On Friday 12 October 2007, we unveiled our consortium of heavyweight financial backers. Our team included Wilbur Ross, the veteran distressed debt investor; AIG, the world’s largest insurance company; First Eastern Investment, led by Victor Chu; and Toscafund, the hedge fund led by Martin Hughes and chaired by Sir George Mathewson. (Sir George, the former chief executive of the Royal Bank of Scotland, was very kindly acting as our senior adviser while we looked for a chairman.)
The Virgin team went to Freshfields, the London law firm, for an initial meeting with the Northern Rock management team, when Adam Applegarth, the beleaguered chief executive, was still in situ. Jayne-Anne told me later that she had been hugely impressed with the Northern Rock team’s willingness to divulge information, and with their diligence in trying to sort out the mess. Following this meeting, Northern Rock opened their data room to the Virgin team.
But now there were other competitors eyeing up the bank. Investment firms Olivant, Cerberus, JC Flowers and Five Mile were all up against our plan. It appeared that this was going to be a competitive bid and, given the credit crunch, the battle for funding was likely to be fierce.
It was clear to us all that we needed a credible senior figure to pull the project together. So Jayne-Anne allotted me the task of persuading Sir Brian Pitman — the leading banker of his generation and a man of huge knowledge — to become our chairman.
I had worked with Sir Brian for years on the board of Virgin Atlantic and through our connection with Singapore Airlines. I like and admire him. At seventy-six, his brain is as sharp and focused as ever. He is on the board of Carphone Warehouse, and ITV, and is a senior adviser to Morgan Stanley. Stephen and Jayne-Anne had spoken and met with him several times as we refined our proposal. He was extremely reluctant to get involved and told me it would be difficult to turn the bank around.
But I pestered him and he eventually relented. He would, at least, hear us out.
Jayne-Anne went down to his home in Weybridge to give a two-hour presentation. He saw enough to realise our bid was credible. He understood, too, that it required a man of his gravitas to shape it. He made some welcome suggestions to the plan, and came up to London a couple of days later to meet the team. But he still wasn’t saying yes.
The pressure on us grew. Lee Rochford, Royal Bank of Scotland’s Managing Director of Financial Institutions Securitisation (I wonder how he describes himself at parties?) phoned to say that in order to support us they needed to be assured that we would have a suitably qualified chairman. So Jayne-Anne called Sir Brian in Surrey asking him once again to consider. Finally, he agreed. It was a coup. Jayne-Anne phoned Lee to reveal the name. He was delighted: ‘That’s fantastic news.’
Sir Brian attended all our key meetings — including sessions at the Bank of England, the UK’s Financial Services Authority and the Treasury — and he was by far the most distinguished and experienced of all the senior bankers who attended these sessions. Our credibility was established.
In the face of the credit crunch and the sub-prime problems in the United States, our recession planning needed to be faultless. First of all, it had to satisfy the regulators. Our bid chairman was a stickler on that. This was the question we had to ask ourselves, if we were to protect the downside: ‘What would happen in the worst-case scenario, in which the housing market in the UK goes into a deep recession?’
The question Sir Brian was posing was a poignant one, as well as a practical one. Once, when Jayne-Anne asked him why he had agreed to join us, he said there were a number of reasons — but one was that he remembered how Northern Rock had looked after miners’ families during the strikes of the 1980s. Apparently they stopped asking for mortgage payments while the strike was on, and risked lots of bad debt. But they lost nothing, and the miners and their families kept their homes. Sir Brian said that a business with such an honourable history deserved to be rescued.
Our plan was to inject £1.25 billion of new cash plus Virgin Money as a business. The cash would have come from Virgin, Wilbur Ross, Toscafund and First Eastern, and the plan was to allow the existing shareholders to participate in a rights issue that would enable them, on very preferential terms, to recoup their investment over the coming years.
Unfortunately, it had still to dawn on Northern Rock’s shareholders what a bad state their bank was in. Their general feeling was that ours was a poor offer. It wasn’t, as became all too clear. We really were being about as generous as we could possibly be — especially given the need to introduce so much new capital to satisfy the regulator’s requirements. (Of course, I don’t blame the shareholders: as I said earlier, hindsight is easy.)
Two leading hedge funds made it clear to the government that they would vote against the Virgin deal and force nationalisation if the government chose us over their own rescue plan. I feel that kind of rhetoric began to force the prime minister’s hand; despite the need for a quick deal, the government couldn’t be seen to support us and have the shareholders vote against us. The process was going to be a long-drawn-out one, but we were all set up to work it through.
We reported that without an injection of new capital of £1.25 billion, Northern Rock bank would not be able to withstand a recession of the magnitude of the early 1990s. We disclosed our reasoning and our figures to the FSA and they appeared very happy with our work and prudent assumptions. Indeed, this is my answer to those who suggested that I was only in all this to mug the British taxpayer of billions of pounds at little risk to my own business. Sir Brian explained this to me in stark figures several times. ‘We have got to lose £1.6 billion in total as the consortium before the taxpayer loses anything.’
Nevertheless, we were confident. Our plan showed that we could repay all the debts by 2010. By early 2009, according to our figures, Virgin Bank would have lost £300 million; it would break even by 2010, and grow after 2011. This was an enormous risk for all of our equity providers, and for me personally. Virgin’s normal rate of return in business is around 30 per cent. The returns here would be about half that — but applied to huge figures. I was entering alien territory. Stephen and Gordon talked me through the process and we weighed up the risk to the group. We all agreed we would press on.
We had to do many presentations to our equity consortium to keep them with us. Late in the day Jayne-Anne presented to Martin Hughes of Toscafund. Given the increasing cost of funding, she wondered if we would need to make people redundant. Martin was adamant that we should carry the cost of excess staff until the business was thriving again — he just didn’t want the spectre of job losses to mar our bank. Like most really successful people I’ve met, Martin was more interested in doing the right and proper thing than the easy and expedient one.
Every night at 6 p.m. the Virgin team hooked up for a conference call led by Stephen and Gordon. It was our opportunity to catch up with each other and agree the next steps. Ours was a collegiate approach, using the wisdom of seasoned banking professionals, each of them a veteran of a significant merger deal. No one else had this treasure chest of knowledge, and I was extremely proud that the Virgin name could attract such top-notch people. In business, this kind of team support is in surprisingly short supply.
Wilbur Ross was a hard taskmaster. Jayne-Anne sat up till the small hours on a number of occasions as he stress-tested her on all the downside scenarios. My business view is always to protect the downside — and this was one of Virgin’s biggest ever gambles. Wilbur was much more interested in how much he could lose, rather than how much he could gain. In major bids like this, involving billions of pounds, success comes from identifying the downside — and covering it — far more than planning for the upside. Wilbur wanted to make sure that we were prepared for every eventuality. He became convinced that we were. Sir Brian, the FSA and the Bank of England agreed, and declared us their preferred bidder.
The hedge-fund investors — who had been betting on the share price — were livid at the prospect of us taking over. As we approached Christmas, the credit squeeze was getting tighter and tighter. All over the City, major banks were announcing problems caused by a lack of liquidity. While our lines of funding with RBS and their partners were still open, the cost of that funding was getting more expensive. We began to look at our numbers and we all agreed it was becoming too expensive to borrow. It was starting to look unattractive for us — and we considered withdrawing. It was then that the Bank of England and the government stepped in and offered support by suggesting ‘wrapped sovereign bonds’. These were bonds or gilts issued by the government and paid for at a commercial price. All of the bidders would have access to this funding, and so the merits of each proposal could at last be considered with a degree of objectivity.
This would certainly ease the pressure on us, because we knew our bid was already in very good shape.
True, we would as a consequence face stringent European Union restrictions on fair trading. If we were getting government-backed bonds, this would give us an advantage over commercial banks, and we would have to be restricted when competing with them, until we’d paid these loans back. This was only fair, and we had no problem with it. The government said that there would be no dividends until the UK taxpayer was paid back. This, too, was only reasonable: Virgin would have repaid the money back to the taxpayer before we took anything.
The Virgin team were interested and waiting for a term sheet to come out from Goldman Sachs just as I was heading out to China on a high-level business trip with senior British business figures and Gordon Brown, the prime minister.
We were delayed in leaving because of the emergency landing of British Airways’ Boeing 777 at Heathrow. They had lost power in both engines as they descended, and through the immense skill of the pilot the plane had crash-landed on the grass before the runway saving everybody on board. I’ve had my run-ins with BA over many years but you have to hand it to them: they employ first-rate flight crews. The atmosphere on our flight was one of quiet elation, the surroundings reminding us of the life-saving efforts of the 777’s captain and first officer.
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.