Virgin King (Text Only)

If there is one respect in which Branson can fairly claim to have been valued by the public at less than his real worth, it is to do with his charitable activities. He is not a giver of huge sums to charity in the way that some businessmen are; nor does he have to his credit, as the Sainsbury family do, a gift to the cultural life of the nation on the scale of a new wing for the National Gallery. But Branson has been involved in three important projects in which he has attempted to give something back to the community from which he has made his riches. The first was the UK 2000 campaign, a scheme to bring together a number of different government and private initiatives to improve Britain’s environment and to provide useful work experience for the young unemployed. From the very day Branson took on the chairmanship of the campaign, he was dogged with the tabloid misconception that it was nothing more than a litter-picking organisation; his departure from the job a year later, after acres of hostile press coverage, was a relief to himself as well as to his advisers at Virgin.

His second venture for the public good was the launch of Mates, a brand of cut-price condoms intended to shake up the monopoly in the British condom market that allowed the manufacturers of Durex not to advertise. The project was a commercial triumph: the new brand was easily established, and took more than a quarter of the market in less than two years. In terms of public health, however, the outcome was mixed; although condom advertisements were shown on British television for the first time, Mates did little to change the reluctance of young people to take elementary precautions against the spread of AIDS. Branson himself also came in for a good deal of criticism – despite the fact that he had risked large sums of his own money in a venture whose proceeds were intended only for charity.

Branson’s bid to run the National Lottery suffered a similar fate. Once again, his intentions were altruistic; he would take no profits personally from the exercise, and the lottery and the money it raised would be administered by a foundation kept entirely independent of the Virgin empire. Branson was bitterly disappointed when the franchise was instead awarded to a business consortium; but he was angrier still to find himself criticised for his involvement in an exercise for the good of others. Somehow, despite the clear separation of the lottery from his business interests, Branson never quite managed to dispel the suspicion that he was hoping to benefit personally from running it.

Most public figures – politicians and sports stars as well as business people – would be less sensitive. They would expect their motives to be impugned, their failures exaggerated, their successes attacked, their physical characteristics made an object of fun. The very fact that Richard Branson can take such offence is proof of how unaccustomed he is to public criticism, and how he has come to take it for granted that a little effort and imagination in arranging what information is made public will inevitably result in positive coverage.

Achieving good press has been as important in Branson’s business career as making sure that the books balance at the end of the year. From his first days as a magazine publisher and record retailer, Branson knew that descriptions of his ventures as successful and expansionary could become self-fulfilling. That is why he would arrange, when a newspaper journalist came to talk to him, for an employee to go to a nearby telephone box and ring in constantly during the interview in order to give an impression of activity; and why he similarly drafted in a couple of friends to pose as musicians signed to his record label for a television documentary when in fact Virgin Records had no artists at all on its roster. It took two factors, however, to turn Branson from a moderately well known and eccentric pop millionaire into a fully fledged celebrity. One was the launch of Virgin Atlantic, which gave him the opportunity to indulge his taste for dressing up in a series of outlandish outfits. (The apparent thirst for personal publicity which he then acquired had a great deal to do with the need to compete with British Airways on a shoestring advertising budget.) The other factor in his current fame was the danger involved in his record-breaking sea and balloon crossings of the Atlantic and Pacific. In public, Branson would talk about his thirst for adventure and his love of competition and the outdoors. In Virgin board meetings, he defended the spending of company money on these exercises by saying that they were the cheapest possible way of advertising group companies.

By the end of the 1980s, Branson’s image as popular hero had become a bankable asset for his businesses, arguably even more valuable than the Virgin brand name itself. He would be wheeled out to meet rock stars signing contracts with Virgin Music, even though he had not been involved in the negotiations; and they, accustomed to receiving the adulation of fans themselves, would be awed as if they were in the presence of royalty. Four years after he sold Virgin Music, Branson took me on an impromptu tour of the company’s recording studios at Shipton Manor in Oxfordshire. The woman who opened the front door was visibly delighted to see him, and reminded him as they kissed that she had worked for him a decade earlier. When we went into the studio itself, rich in the nostalgic smell of marijuana smoke, the band who were working there took their feet off the desks when he walked in.

One example of the commercial value that Branson squeezes from his own public persona and the strength of the Virgin brand was the air service that City Jet began to operate under the Virgin name between London’s City Airport and Dublin in 1994. Another was the launch in 1993 of a Virgin personal computer, which was in reality being built entirely by a separate company that paid a royalty for use of the Virgin name. Even firms that have no dealings at all with Virgin want to cash in on the Branson name. American Express, Mercury and Fiat are only three of the companies that have used him in their advertisements. In the Mercury television advertisement, Virgin received a double benefit, for Branson’s script required him to be an uncharacteristically fast-talking salesman of the attractions of Virgin Atlantic’s service.

Lack of cash has been a constant theme throughout Virgin’s history. Founded on a shoestring, the company was desperately undercapitalised throughout the 1970s, and narrowly avoided collapse in the recession that followed the election of Margaret Thatcher as Prime Minister in 1979. Even after it had established banking facilities suitable for a company of its size and had raised £25m from institutional investors, it still required great skill and assiduous chasing of debtors to make sure that none of the company’s cheques bounced. Don Cruickshank, the management consultant brought in to take Virgin public, described the group during the time he worked for it as ‘teetering on the edge of disaster, seven days a week’. In February 1985, after American aircraft had bombed Libya and passengers decided to avoid air travel, Cruickshank sat around a pub table with Branson and Trevor Abbott to discuss whether Virgin Adandc should be closed down altogether. Once Virgin’s shares were quoted on the Stock Exchange, there was more money about; but Branson’s decision to take the company private in 1989 saddled it with a mountain of debt that was paid off only by giving up the ‘crown jewels’ of the business – the Virgin Music Group itself. Perhaps surprisingly, given his wish to reassure outsiders of the stability of Virgin’s foundations, Branson himself describes his entire business career as a struggle for survival.

There is a tension at the heart of Branson’s wooing of the media. Although he wishes himself and his businesses to be written about and filmed, he is less willing to make himself accountable to outsiders. When he decided to take Virgin public, one of the investment bankers who discussed the flotation with him (though not, interestingly, the one that was eventually chosen to handle it) warned Branson and his colleagues that life as a public company would be very different. The banker was right Branson disliked having to pay dividends; he disliked having to explain to hostile analysts in the City why he had taken this or that decision; and although his small shareholders were always faithful, he disliked the thought that institutional investors might have the right to question business decisions that had hitherto been his sole prerogative to take. Branson was also uncomfortable with the need to win the approval of his fellow directors before spending the company’s money – and on one occasion, which was successfully kept secret, had to find £700,000 from his own pocket when some shares he had bought on his own initiative lost value in the market crash of 1987. Branson’s wish to be given back full control over Virgin was as important a factor as any other in the decision to take the company private. With the transaction now safely accomplished, he likes to tell the story of a Japanese businessman who was discussing the possibility of taking an equity stake in a Virgin business and trying to convince Branson of his own merits as a docile minority shareholder. ‘Would you rather have Japanese wife or Western wife?’ the businessman asked. The answer was, and is, quite clear: when the marriage in question is a commercial one, Branson would far rather have Japanese wife.

What makes the accountability issue particularly sensitive for Richard Branson is that he has always been a generator of ideas who needs someone else to follow behind him – attending to details, pruning back ventures that later prove mistaken and, where necessary, warning him against putting his wilder ideas into practice. Throughout his career, his relationship with the person who has performed this function has always been unstable. Branson’s first partner was Nik Powell, a childhood friend to whom he gave a forty per cent shareholding in Virgin at the beginning of the 1970s. A decade later, dealings between the two had deteriorated sharply; Powell thought that Branson was taking foolhardy financial decisions, while Branson himself came to the conclusion that Powell was no longer contributing enough to the business to justify his position in it. It was more than two years after Powell’s departure that Don Cruickshank, the managing director who took Virgin public, took on the responsibility. But this new pairing was not to last either. Five years later, after the two had clashed frequently, Branson’s decision to take the company private again left his MD without a clear role. The gap was filled by Trevor Abbott, the group’s more emollient finance director. Promoted to group managing director, Abbott has been more cautious than Cruickshank in saying no to his boss; five years into the job, he seems to have retained Branson’s confidence without challenging his authority. Part of Abbott’s secret is that he has no enthusiasm for the limelight that has so changed Branson’s life. Although he wields considerable power both inside and outside the Virgin empire, Abbott passes almost unknown in public, save among a small number of suppliers, partners and customers, who hold him in high regard.

Each of these three men in turn has tried to devise a strategy to account in public for the essentially spontaneous decisions that Branson himself makes. Powell had grand ideas about vertical integration, believing that Virgin would make money from all the different activities involved in the production of music and film; but that notion was damaged fatally by the group’s withdrawal from film production. Cruickshank preferred to cast Virgin as a music conglomerate whose core was the record company; but Branson had no compunction in selling it. Abbott has picked out Virgin’s long-term cooperative ventures with other companies (notably in retailing and in the company’s video-game business, but also in the airline itself) as the core of its vision. It is too early to offer a judgement on this, since Abbott’s tenure in the group managing director job has only just reached five years. But by 1994, Virgin had already dissolved two of these strategic alliances (with Fujisankei in the record business, and with Seibu-Saison in the airline) – and the company was contemplating selling its video-game business to one of its minority American shareholders. Only months before, Branson had described that business as one that could grow to the same size as the airline within a decade.

These deals with other companies do illustrate, however, a skill that has become a Virgin hallmark. Richard Branson is a brilliant and ruthless negotiator. When the company was small and he was striking agreements on his own, Branson had enough cheek to demand far more than he ever hoped to win – but also enough patience to argue a deal point by tiny point if his adversary so demanded. He was highly skilful at hiding behind others, telling those he was negotiating with that it was the objections of his lawyers or his colleagues, rather than his own misgivings, that made him unable to agree to a proposal. To this day, he has an uncanny ability to portray a transaction in the terms that make it attractive to the person he is negotiating with, rather than allowing them to focus on what he intends to get out of it. He knows when to speak and when to stay silent; and he is capable of letting others leave a meeting under the impression that they have got what they want, even if they have not in fact done so. Finally, Branson is a masterful haggler: rather than accept an official fixed price when buying something, he will put in a lower (and often a significantly lower) offer. On many purchases – an aircraft, a house, an island, even the removal bill for a snooker-table – he will succeed. One of his friends jokes that if you ask Richard Branson to lend you a fiver, he will counter with an offer of £4.50.

It is this skill that has helped Branson to perform the most extraordinary feat of his business career. Most entrepreneurs who start businesses begin by owning all the company’s shares, but find themselves forced to give away a growing proportion of equity to others as the need for new investment capital grows. Richard Branson’s control over Virgin, however, has moved in the opposite direction. When Tubular Bells became a hit in 1973, Branson only owned 60 percent of the main Virgin holding company, and Nik Powell owned the remaining 40 per cent. At Powell’s suggestion, others had been given 20 per cent holdings in subsidiary companies including the record company, the studios, and the Virgin management company. So Branson’s effective holding over these companies was just under 50 per cent. Today, the various Virgin businesses are worth over £1bn – yet Branson and his family interests own more than 60 per cent of them.

Two policies allowed Branson to do this. First, he used the cash generated by the businesses themselves to make them grow. Second, he succeeded with great skill in easing out his minority shareholders. A shareholder in one of the subsidiaries departed the company in high dudgeon with Branson, leaving his shares behind him. Another subsidiary shareholder lost his stake when the company for which he worked was closed down altogether. Branson asked Nik Powell to go during the 1981 recession, giving him £1m cash, a cinema and some other assets in return for his 40 percent stake. (Within five years, that stake was to be worth almost £100m.) There was a similar pattern at Virgin Atlantic. When Randolph Fields brought Branson the idea of flying across the Atlantic, both men were originally to own half of the airline. During the negotiations before the airline’s launch, Branson forced Fields to reduce his shareholding to 25 percent; later the same year, Fields was made to step down as the company’s chairman; another year later, Branson bought out his remaining stake for £1m.

The one exception to this pattern was Simon Draper, Branson’s South African cousin, who established the record label for him. Draper took the precaution of asking his older brother for advice, and demanded that his 20 percent shareholding in the record company should be converted into a less risky 15 percent holding in the parent company. As his position in the business strengthened, Draper demanded further safeguards – with the result that he became a millionaire many times over when the company went public in 1986. Draper was also unique in never negotiating directly with Branson. The arrangements would first be discussed by lawyers or other intermediaries; when Draper and Branson came to meet, the usual pattern was that Draper would make his demand and Branson would quickly accede to it. Yet Draper’s craving to be financially independent from Branson, and immune from whatever decisions Branson might make inside Virgin, cost him dear. So keen was Draper to limit his risk on the airline that, after Virgin went private, he sold his ten percent stake in Virgin Atlantic back to Branson for £6m. As he signed the papers, Draper turned to the lawyer and smiled. ‘I know this is probably the worst deal I will ever do in my life,’ he said. It may yet prove to be; but Draper, who now runs a private publishing house and owns thirty-nine Aston Martin sports cars, has enough money not to care.

Richard Branson’s wish to make sure he always does as well as possible from any business arrangement applies equally to his dealings with the Inland Revenue. He discovered early in his career the risks of breaking the law, when his botched attempt to evade purchase tax was detected by Her Majesty’s Customs & Excise. Luckily, the Customs were willing to settle for the payment of a £53,000 penalty, so the young entrepreneur was spared the humiliation of a prosecution, and the risk of a gaol sentence that might have put an end to his ambitions. From that clumsy attempt at fraud he learned the distinction between tax avoidance (which consists of arranging matters so as to minimise the tax bill) and tax evasion (which is illegal); and he learned to make use of top-class advisers to ensure that every step he took was watertight and could be defended against challenge. But Branson’s instinctive reluctance to see his hard-earned profits paid over to the Chancellor of the Exchequer never left him. In 1973, when Branson was not yet twenty-four years old, the first trademark of the Virgin record company was registered as the property of an offshore trust, thus legitimately placing beyond the taxman’s reach part of the royalties that overseas companies paid to Virgin. Later in the 1970s, Branson made use of a number of carefully prepared tax-avoidance packages bought in from experts. Early in the 1980s, Don Cruickshank had to warn Branson that he might actually be wasting time and money with these convoluted schemes, since Virgin was growing so fast that the schemes could not keep up.

Before Virgin went public, Branson took the step that has saved him tens of millions in tax. He transferred ownership of many of his shares in the company to offshore trusts of which he and his family are beneficiaries – so that when the company went public, and when the music business was later sold in a transaction valued at 2560m, the bulk of the capital gains could be free of tax. There the position still stands. The offshore trusts, resident in the Channel Islands, are the major shareholders in the holding companies of Branson’s present businesses; and they are able, quite legally, to invest money in his ventures if the independent trustees believe it wise to do so. If Branson ever decides to retire, he will be quite at liberty to take a one-year tax holiday abroad and to come back to the UK several hundred million pounds richer without owing anything to the Inland Revenue. Hostile questions were asked in Parliament about these arrangements soon after the sale of Virgin Music Group; but the lawyers and accountants have done their jobs too well for there to be anything to criticise.

This book is an attempt to capture what makes Richard Branson distinctive as a businessman. It is therefore in part a biography, and in part a history of the Virgin empire that he has established. But it does not seek to do both jobs in full. There is little on these pages, for instance, about Branson’s marriage to Joan Templeman, his second wife; and little about the companies in his empire with which he has so far had little to do – notably the communications businesses run by his brother-in-law Robert Devereux, and the Voyager hotel interests. In some cases, such as his participation in a consortium running train services through the Channel Tunnel, the projects are still at too early a stage for any serious conclusions to be drawn about them at all. Broadly, however, this book tells the story of Branson and his ventures one by one, starting from the mail-order record firm that was his very first serious venture at the end of the 1960s, and ending with his abortive attempt to run the National Lottery in 1994. Whether the reader will agree with the conclusions and predictions to be found in the epilogue, however, remains to be seen.

ONE

1969: Easy Work, Good Money

STEVE LEWIS, sixteen years old, knocked on the door. After a long pause, a bony youth with lank, black, greasy hair appeared. He had a prominent rip in the inside leg of his jeans. The brightness of the July sun highlighted the contrast between his pale, long fingers and the dark semicircles underneath his nails.

‘Is this number forty-four Albion Street?’ asked Lewis.

‘Yes,’ replied the boy, who looked eighteen or nineteen.

‘I’ve come about the job which was advertised in the personal columns of The Times’, said Lewis. ‘“Record company and magazine looking for young people,” it said. “Easy work, good money.” This was the address to apply to.’

‘The job’s gone, But you can come and sell magazines for us if you want to.’ Nik Powell, the boy on the doorstep, turned on his heel and led the way past piles of magazines wrapped in string and paper into the hall of the terraced house. ‘Take that stack down to Hyde Park,’ he said, pointing to one of the piles. ‘You sell them for three shillings each, you keep one and six, and you bring the rest back here at the end of the day.’

Steve Lewis was just about to start studying for his A-levels at Christ’s College in Finchley, and he wanted to earn some pocket money in the summer holidays. Music was his passion – everything from Sergeant Pepper to Jimi Hendrix, but the black American music of the Motown label in particular; that was why the advertisement had caught his eye. But he didn’t want to hawk magazines in Hyde Park, he wasn’t going to be intimidated into doing so by this unkempt, haughty teenager he had never met and he made his feelings clear.

Powell grudgingly identified himself and told Lewis that he would have to wait until Richard Branson was free. As he waited, Lewis was struck by the glamour and buzz of the office. Phones were ringing; attractive women were coming and going. At the other end of the room, a young man with tousled light brown hair and a dazzling smile was talking very earnestly into the telephone.

When at last he finished his call and came over to see Steve Lewis, Richard Branson was a great deal more friendly than Nik Powell had been. His voice was mellifluous and rather posh. He explained that he had just set up a business to sell records by mail order, but admitted rather shamefacedly that he did not know much about music. Steve Lewis saw his opening. Within ten minutes he had dropped the names of enough obscure artists to convince the nineteen-year-old Richard Branson that he could provide the expertise that the business lacked. Branson, his interest rising, told Lewis that he had placed an advertisement in Melody Maker, the country’s leading music magazine, offering a list of records at a discount. ‘If the record you want is not listed here,’ said the advertisement, ‘write to Angie, and we’ll give you a price.’ The trouble was that Angie had left, yet the business was booming.

Branson had spotted a hole in the record market, and now it was all he could do to meet demand. Retail price maintenance – the system that allowed manufacturers of products to force shops to sell them at a minimum price – had been abolished by the government five years earlier, but neither record companies nor record shops had taken much notice. Rather than engage in a frenzy of discounting, the industry preferred to carry on much as it had done before, selling records at a standard price of thirty-nine shillings and elevenpence. Branson, therefore, had advertised his records at thirty-seven and six. A flood of customers had written in saying what they wanted, and enclosing postal orders and cheques. The records themselves had come in bulk from shops in Muswell Hill and the East End that were keen to unload excess stock. A group of girls had been recruited to type labels and to pack the records into envelopes. But without Angie, who could find the unusual titles that customers asked for? Who could distinguish the up-and-coming bands from the three-minute wonders?