Branson: Behind the Mask (13 page)

‘Hi, it’s Richard here.’

‘Richard who?’ asked Rowan Gormley, a South African employed in a London private-equity firm.

‘Richard Branson. I’m calling because I’d like you to work here at Virgin.’

The two arranged to meet at Branson’s house in Holland Park. Neither appeared to know what to say. The year was 1995.

‘You called me,’ said Gormley, discomfited by the awkward silence.

‘Yeah,’ mumbled Branson. ‘I wanted you to come up with some new ideas. Come and work for us.’

Attracted by Virgin, Gormley soon after delivered his list at a meeting attended by three of Branson’s most trusted lieutenants – Stephen Murphy, Will Whitehorn and Trevor Abbott, one of the original architects of Virgin’s music business. Gormley listed Virgin hotels, Virgin holidays and, finally, ‘What about Virgin financial services?’

‘Virgin is about fun,’ snorted Abbott derisively.

Murphy and Whitehorn shared his disinterest. Gormley turned to Branson. ‘Virgin is trusted, and financial services can make lots of money.’

‘Do it,’ said Branson.

‘Do we have any money?’ asked Gormley.

‘No,’ replied Branson, admitting the reality about his empire. ‘Find the money and do it.’

‘What about Abbott?’ asked Gormley.

‘Ignore him,’ replied Branson.

Shortly after, Abbott left Virgin on bad terms and subsequently committed suicide, blaming Branson in part. ‘Richard broke my back,’ he recorded on a video shortly before he hanged himself. In Branson’s world, failures were forgotten. Gormley could be the future. His invention was Virgin Direct, which would sell personal equity plans – or PEPs – that were priced by tracking an index of shares quoted on the London Stock Exchange. Its launch depended on finding a suitable partner.

The formula for this start-up was familiar. A potential partner would provide the money and expertise in exchange for using the Virgin brand. Dividing the profits was subject to negotiation but, where possible, the losses would be borne by the partner. In this case, as an added ingredient, Virgin’s partner in the banking business needed to be an authorised deposit-taker. In
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Branson wrote: ‘I wanted to get into the banking industry because I saw the money markets and finance as a way to build bridges between the social sector, big government and business.’ Banking, he added, would fulfil his ultimate objective of ‘a fairer distribution of wealth’.

Most of the City institutions approached by Gormley ridiculed his proposal. The only exception was Norwich Union. The insurer had recently been fined by the government regulator for mis-selling pensions. Associating with Virgin, its directors calculated, would alleviate the opprobrium. Among the attractions to the insurers was the brazenness of Branson’s proposed TV promotion: ‘For years the pension industry has got away with not telling you how much of our money they cream off in charges.’ Branson would promise ‘no-nonsense value for money’ and the lowest charges.

Gormley’s target was to raise £70 million from the public within six weeks. Branson rang daily to check on progress. Two days before the deadline to collect the funds – the end of
the financial year – Gormley was desperate. Only £5 million had been committed. On the last day, the security guard rang Gormley to announce that a Royal Mail truck was backing up to their building. Inside the sacks of mail were commitments worth £40 million from the public, who had been attracted by the promise of a safe investment. More followed later.

Gormley’s project took off, and within months Virgin Direct was earning good profits. Despite Branson’s denunciation of those who ‘cream off in charges’, Virgin’s PEPs, organised by Norwich Union, were among the most expensive for investors. Virgin’s annual management fees were 1 per cent of the fund, while M&G and other rivals levied 0.3 per cent. Investors also earned less. Virgin’s tracker of unit trusts rose 109 per cent in two years, while the FTSE All Share Index (including dividends) climbed 144 per cent. Few complained. Trust in the Virgin brand suppressed most concerns.

‘Let’s ramp it up,’ suggested Gormley in 1997, eager for expansion. Norwich Union declined, but just then George Trumbull of AMP, an Australian bank, began calling him.

Flush with money, AMP was aggressively buying financial institutions across Europe. Gormley’s ambition to offer mortgages, pensions and life-insurance policies matched AMP’s resources. The deal they negotiated entirely favoured Branson. AMP carried 100 per cent of the risk in return for using the Virgin brand. The profits would be equally shared, while AMP, who provided the entire infrastructure, would bear any losses. The AMP executive who negotiated the partnership, Paul Batchelor, would be described by his successor as ‘a personality who wanted to fall in love with Virgin. He was full of dreams, and Virgin played straight into the space.’ Norwich Union sold its share to AMP, and Virgin Direct was relaunched as Virgin Money, with the new attraction of internet banking. The TV advertisements again featured Branson: ‘I have identified a sector
that is arrogant, complacent and fleecing the customer.’ The financial-services industry, he continued, ‘specialises in bullshit. Its record includes pensions mis-selling, endowments that don’t come up to scratch and massive investment underperformance.’ Virgin Money, he promised, offered honest value.

At that moment, Branson’s reputation was being challenged elsewhere. Amid considerable noise, he had launched Virgin Brides, Virgin Cosmetics, Virgin Net and Virgin Cola. The drink’s sales, he proclaimed loudly, had captured 10 per cent of Britain’s market. Independent research showed Virgin Cola’s sales were barely 1 per cent of the country’s cola consumption, which cast his forecast of earning £1 million in profits every week as fictional. Branson’s salesmanship reflected his wishes rather than the reality. His philosophy had become famous – ‘It’s all about bending the rules or breaking the rules’ – yet the same man was a guardian of money. ‘I set up Virgin Money to offer people straightforward financial products that are easy to understand,’ he claimed.

In 1999, Virgin Money was managing about £1 billion of deposits pledged by the public. Earning good profits, Gormley persuaded Branson to embark on the next stage. His creation was Virgin One, an internet bank offering customers a better rate of interest if they opened a single account for their cheques, savings and mortgages. Half of Virgin One would be owned the Royal Bank of Scotland, with the other half owned equally by Virgin and AMP. Branson would not be earning easy profits in this deal: Virgin was committed to contributing to the costs and to any losses. Virgin One’s advertisements showed Branson, dressed in a pin-striped suit and bowler hat, promising to ‘turn personal banking on its head’.

The bank gave him the chance to transform his conglomerate into a global giant. The scenario outlined by Gormley utilised the communications revolution: Virgin, he said, should use the
internet to forge a closer relationship with its customers. Virgin Atlantic already sold tickets and transferred money via the internet. That was just the start, said Gormley. By fully exploiting the internet’s potential, Virgin could use its database to offer all its products to loyal customers, without media advertisements, so reducing the cost of sales. Anyone buying an airline ticket would be automatically offered a special deal to try Virgin One banking, and vice versa. Gormley’s suggestion placed Branson at a Rubicon. Virgin Money was his moment to merge all the disparate Virgin companies into one seamless global corporation.

‘Let’s show them,’ was Branson’s favoured exhortation during discussions. The words encapsulated the fun he derived from challenging an established giant. On that occasion, the phrase was targeted at the bankers. Virgin One was his opportunity to pocket millions of pounds by transforming Virgin from a branding venture into an integrated empire, with internet marketing to sustain its expansion. That depended on Branson educating himself about the new technology, but instead he deferred to Stephen Murphy’s advice. To his misfortune, the Virgin Group’s chief executive did not sufficiently grasp the internet’s potential in the same way as, for example, Martha Lane Fox had when she co-founded lastminute.com in 1998. Just as Steve Ridgway, another middle-aged conservative, had dismissed Ryanair’s exploitation of the internet for its ticket sales since the mid-1990s, Murphy excluded taking advantage of it to promote and cross-sell Virgin’s products. Similarly, Jayne-Anne Gadhia, appointed by Branson to manage Virgin One, was flummoxed.

Gadhia was selling Norwich Union’s unit trusts when she read an article about Branson in
Hello!
magazine, and through a friend she arranged an introduction. Clever, articulate and sassy, Gadhia shared Branson’s qualities as a salesperson. She could sell other people’s ideas or improve someone else’s design, but unlike Branson she lacked originality. A conventional
marketer of savings and loans products, the history graduate from London’s Royal Holloway College nonetheless became Branson’s principal adviser on financial services. Cautious and uncreative, she did not share Gormley’s enthusiasm for a blockbuster campaign to persuade the public to abandon traditional banking. Branson himself, mystified by the financial business, was defensive towards those challenging Gadhia. ‘We’ll think about it,’ he answered in reply to any criticism. Branson failed to grasp the paradox. His original fortune had been created by thinking out of the box, but since the sale of Virgin Music he had relied on conventional administrators. His hippy era, when suits were banned and his directors had been summoned to board meetings while he lay in his bath, was gone. His new advisers were ill equipped to compensate for his unfamiliarity with new finance and the internet, and they were sensitive to his dislike of those challenging his supremacy.

In order for Gormley’s strategy of unifying the Virgin Group through internet marketing to work, all the Virgin companies needed to co-operate. But collaboration contradicted Branson’s philosophy. Since he began in the 1970s, he had encouraged rivalry among his staff, feeding when appropriate their instinctive suspicions about each other. He was sanguine about the lack of mutual support between Virgin’s companies. For example, Gormley would later discover that Virgin Atlantic refused to buy wine from Virgin Wines. Bewildered outsiders guessed that Branson wanted to avoid either internal conflict or the accusation that one Virgin company was subsidising the other. The truth was more prosaic. Ever since Virgin Music had been created, Branson had disenfranchised his employees and associates to protect his financial secrets. Compartmentalism entrenched his control but frustrated change.

To promote Virgin Money in 2000, Gadhia relied, as usual, on Branson’s appearances in advertisements. A year later, however,
a financial crisis began. In 2001, AMP’s finances crashed. A raft of senior executives in Sydney were fired. Others were dispatched from Australia to rescue the bank’s assets in Britain. ‘Branson has taken us for a ride,’ a visiting banker told his British staff. AMP, he discovered, had lost at least A$200 million from its relationship with Virgin, while Virgin had earned about A$100 million. ‘It’s a lousy deal,’ he declared. ‘It’s noise in the system that we don’t need. Sell it.’

Branson was furious about AMP’s decision to abandon the relationship. In a ‘ferocious’ call from Necker, he cursed the Australian. ‘You can’t do that to the staff.’

‘You don’t understand,’ he was told. ‘AMP has lost hundreds of millions of dollars in Britain.’

‘I’d like to buy AMP,’ Branson told Andrew Mohl, the new chief executive.

‘At the right price, yes,’ replied Mohl, ‘but you’re dreaming if you think you can buy at this point. You haven’t got the money.’ In
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Branson described Virgin Money as ‘a community rather than a profit-making vehicle …What we want to do is make everyone better off.’

Virgin Money was sold to Henderson, a British company, and Virgin One was offered to RBS. Initially, Fred Goodwin, the bank’s chief executive, rejected the offer. ‘He’s relentlessly negative,’ reported an AMP banker. Eight months later, Goodwin changed his mind. He paid £125 million for the bank, a higher price than previously suggested, and a good profit for Branson. Jayne-Anne Gadhia moved to RBS.

By 2002, Virgin’s financial business was practically eliminated. Gormley had departed to launch Virgin Wines and would eventually sell that company at a loss. Like so many ideas based on exploiting the Virgin brand, the public were not attracted by a Virgin label on a standard product. Gormley apologised to Branson. ‘Don’t worry,’ Branson replied. ‘You made me a pile of
money on financial services. You’re still in my credit book.’

Sidelined in Britain but hungry for more profits from the money business, Branson sought opportunities in other countries. But rather than developing internet banking, he was transfixed by its traditional side. His best idea was to launch a Virgin credit card in Australia, in collaboration with MasterCard and Westpac.

In 2003, Branson arrived in Sydney accompanied by blondes, a big grin and his familiar promise to take on banks and end ‘the rip-offs’. The ‘cosy bank oligopoly’, his publicists said, was fertile territory for Virgin, with its challenge of lower interest rates and better service. Within a year, the business had evaporated. Privately, Branson blamed Westpac for either poaching Virgin customers or rejecting two million applications in order to protect its own credit-card business, but he must have realised the truth: few customers were attracted to the British company. Unlike AMP, Westpac refused to cover the losses. This disappointment coincided with the sale of Branson’s stake in Virgin Mobile Australia, in which he took a A$20 million loss on the shares. Branson had taken a punt that the Virgin label would attract customers and lost.

Repeatedly, Branson was failing to reproduce his British successes in other countries. During one visit to Noosa in Australia in March 2004, he tried to do the opposite – invest in Pulp Juice, a soft-drinks company owned and managed by Ian Duffell, an old friend. ‘Pulp is a fantastic concept,’ Branson told the media. ‘I think it will go down really well in Britain and South Africa.’ His assurance that Virgin would build fifty bars sparked a 56 per cent increase in the company’s share price and enhanced the credibility of Duffell and another investor as they sought to raise extra funds from shareholders. Four months later, before he had actually invested any money, Branson pulled out. Duffell rued what he called ‘a sorry story of big promises, failed ventures and
the loss of over $15 million of shareholders’ funds’. The business officially collapsed in 2006.