How many of you have read David Jones’ account of how he rescued Next, the high-street retailer? The book brings back one particular memory for me because a very close friend of mine bought the shares at 4p in 1991 and within two years the shares were £1.50. He trousered some £15 million on his investment. Not a bad day’s work. Next is a brilliant example of a business which, despite being almost bust, was raised from the dead.
The key decision was that David Jones was prepared to sell the crown jewels, Gratton, in order to give the rest of the business the cash flow and time to recover from the depths of a retail depression compounded by over-aggressive store openings during the previous five years. As Gratton was Jones’ own baby, that he had run prior to becoming overall boss, this showed an ability and determination that marks him out as one of the great businessmen of his time.
Interest rate problems
Property is a classic sector that is affected by business cycles, more particularly business interest rate cycles, and has therefore produced more than its expected share of companies running into serious problems.
I was an investor in the management buyout of a retirement village group in 1989. As it was a property business, the deal had loads of bank debt. Well, I expect you remember what happened between 1990 and 1992 – interest rates went through the roof and asset prices sank like a stone.
In January 1991 the MD rang me, when I was out of touch in the US, to say that the IRA had bombed Downing Street, it was snowing like hell (and so, no old people would even visit the showhouses) and the bank wanted to see us in York, as soon as possible.
Now, for those of you who don’t know, York was in those days the ironically named ‘recovery unit’ for Barclays Bank. Reputation has it that this was the equivalent of a hospital in Crimea before Florence Nightingale – you went in and the only way you got out was in a box!
But that day a miracle happened. We managed to get the bank to let us trade on. We managed to convince them that this really was a good business and that if they supported us we would make sure they got all their money back. Ray, my MD, had £1 million of his own money in the deal and proceeded to spend the next ten years nursing his baby back to health. But the key for me was that the bank believed that there was a guy with the utmost integrity who would do whatever it took to keep his word.
Not only did the bank get all its money back but also Ray was recently awarded a £5 million pay packet when we sold the business.
I would say that technology has historically been less dependent upon business cycles. In the early 1990s, for example, the IT sector was still showing double-digit growth despite the mass recession just about everywhere else. But a different danger was lurking around the corner – technological change that can dramatically alter, say, pricing structures.
One of our technology companies was supplying wireless software for handheld devices so that real-time information could be obtained at any time and almost everywhere. The only trouble was that information soon became so ubiquitous that no one would pay for it. Our customers were trying to sell something now regarded as valueless, so you can imagine how little success we had in persuading them to buy our product.
So we had to change tack and use our technology in markets where real-time information was key and people would still pay for it. By a mixture of luck and good judgement, our management team found it – the betting and gaming sector.
Refuge in niches
Yet another great example of a business transition was a steel pressing business in Yorkshire. This family business had been around for years and was heavily dependent on orders from the car industry. As you might imagine, in the 1980s the business was declining to such a degree that they did not have enough volume to remain price competitive, never mind make a profit.
But the younger son realised that they had a small but expanding business in elevator buckets for the grain market. Now, one might think that this was just about as boring a sector as it gets, but grain is highly combustible and a small spark can cause an awfully large fire – in other words, elevator buckets have to be very carefully engineered to very fine tolerance limits. A niche market, but one with high margins.
Relocating to the US, it took him three years of hard work but his company became the market leader in elevator buckets and is today highly profitable.
Lessons to learn
So what are the conclusions to glean? First, make no sacred cows. Be like David Jones and relinquish a smaller business of high value to help turn around a bigger business. Second, be conscious of businesses that are vulnerable to interest rate cycles. Third, demonstrate integrity and commitment to bankers and other financiers. Fourth, be fleet of foot when facing major structural changes in the industry and look for new markets. Finally, remember the value of niches.
My take on a long career as a VC and entrepreneur is that sometimes what seems impossible can be achieved. There really are no rules.
Michael Jackson is chairman of Elderstreet Investments, the leading technology venture capitalist which he founded in 1990. He is also chairman of Sage, the FTSE-100 accounting software group which he has been closely involved for over 20 years, since its unquoted days. He has recently been appointed as chairman of PartyGaming, the largest online poker business in the world.
See also: Business comebacks and turnarounds