Business Stripped Bare

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