IT WAS the best of times, it was the worst of times. The dotcom boom that marked the turn of the millennium promised so much. The dotcom bust that followed delivered much more. Technology went nuts, business models bore no resemblance to anything seen in the old-fashioned 20th century, and the world was being reinvented as ‘bricks and mortar’ gave way to ‘clicks and portals’.
Financial Director watched all this unfold with a mixture of giddiness and bemusement. It was terribly exciting to see the new world unfold, and terrifying to see what was happening in capital markets. We could see how e-business could change the world – it’s just that it seemed there was too much emphasis on the ‘e’ and not enough on the ‘business’.
For Financial Director, the best part was talking to the FDs who were right at the proverbial coal face, making it all happen. And we met so many of them: from websites to software to infrastructure, Financial Director interviewed FDs from a veritable Hall of Fame of the dotcom era: Amazon, Lastminute.com, Egg (remember Egg? It was a bank), Microsoft, Cisco Systems … The list went on.
As we tried to track down some of these FDs to interview them again for this article, it occurred to us that they all survived the dotcom experience. A few, including Mike Tierney at Cisco Systems, are still with the same company, a dozen or so years later. Stacey Cartwright at Egg went into the riches of the rag trade, helping transform the low-tech, FTSE 100-listed high-fashion Burberry Group. Most of them, though, have remained in the tech sector, some as company chairs and some as FDs.
As far as we can tell, only one has joined the pensions world – which sounds like it’s at the opposite end of the excitement spectrum. Back when we met him in early 2001, Richard Farr was the co-founder and CFO of Gorilla Park, a so-called incubator for high-technology businesses. The idea was to invest money and skills – not least Farr’s wealth of 1990s experience in IPOs and turnarounds – and fast-track these businesses to the market. But as the dotcom boom imploded, money for deals dried up. “Everyone walked away so we had no chance to refinance our baby gorillas,” Farr says, but with no trace of rancour.
With his background in restructurings, Farr could read the economic cycle: he knew that there was “an almighty adjustment” coming and that the dotcom bust wasn’t going to be a blip. There would be no more ‘get rich quick’ opportunities like Gorilla Park waiting for his talents. And he was skint. It was the right time for his alma mater PricewaterhouseCoopers to invite him to join the business recovery team. He immediately applied his experience with corporates and all the ‘30-second elevator pitch’ skills he learned in the dotcom world to completely rewrite the PwC ‘How to sell professional services to corporates’ sales programme.
Then came FRS 17, the financial reporting standard that put about £400bn of defined benefit pensions liabilities on corporate balance sheets. “I started to dig down and discovered that the actuaries had been sitting on a time bomb for years,” he recalls. “Because of the fall in equities post-9/11 and post-dotcom, the tide had gone out and, as Warren Buffett says, that’s when you find out who’s been swimming without their trunks.”
A few career moves further on and Farr is now head of pensions advisory at BDO – but rather than morphing into an actuary, he’s restructuring businesses that are weighed down by their pension liability.
He’s in his element: “There is a trillion-pound hole in the UK economy called pension liability – and it’s either going to be derisked to the insurance world, funded over a long period of time by corporates, or it’s going to be compromised and restructured into the Pension Protection Fund. We have basically built a structure which gives you options: are you going to do a pension buyout? Are you going to derisk? Compromise? Or are you going to go bust?”
Thanks to quantitative easing (QE), Farr can see this pension problem continuing for a while yet. He sees how this boom in gilts is squeezing yields, which puts terrible pressure on pension deficits. And yet this boom was caused by another, the credit boom, in which traders were, as Farr says, “marking to myth, not marking to market”.
“That’s the whole ridiculous nature of greed gone mad,” he says. “When two people are trying to trade on a model that’s a myth. They’re both making money out of it – they think. They’re both taking big bonuses out of it – they think. And then they left the bank with a headache. Hence the pension holes. Farce. Absolute farce.”
A British success story
Tim Score has had a very different experience after the dotcom boom: he’s still with the same company, ARM Holdings, that he joined just before we interviewed him in spring 2002.
“You can’t be too clever after the event but the good things I saw in ARM when I joined have come to pass, and more,” he says. “We’ve grown earnings more than 20% compounded over the last ten years.” That’s come about as the company has expanded its reach from mobile phones – almost all of which used to (and still do) have ARM-designed chips – into things like cameras, cars, sensors, printers and storage devices.
Score recalls that, when the dotcom bubble started to burst in the spring of 2000, “Most people would have said that ARM’s £10bn market capitalisation was crazy. At the time we had about £100m revenue. Now, 13 years later, we are valued at £13bn. Still – in a sense – a premium valuation, but it is now based on fundamentals.”
Revenues hit £577m in 2012 with pre-tax profits of £221m. More to the point, the company has matched or beaten market expectations every quarter since the end of 2002. And yet, as recently as 2009, the share price was lower than when Score joined the company. After a lot of hard work, a lot of bottom-line performance and a lot of retelling, the market is now finally understanding the ARM Holdings story.
As Score was getting his feet under the desk in 2002, he told us that “continuing to beat expectations” would be his biggest challenge – and his biggest hassle. “That was quite prescient of me, wasn’t it?” he says now.
In all that time, ARM Holdings only had one profit warning, in October 2002. “That profit warning was a very, very good learning experience in terms of what investors expect, how you interact with them, how you manage expectations, how you communicate, how you think about the internal business,” Score says. “Going through that type of activity teaches you a lot about your tone and style in the good times. I call it courteous humility at all times: high-fiving in the parking lot when your share price has multiplied by eight times doesn’t do you any good because six months later, you might be in a dip and people will remember you strolling around with your chest sticking out.”
Unlike Tim Score, Warren Jenson has moved on from the company where he was CFO when we interviewed him in July 2000. He is now CFO at Acxiom in California, which does marketing data solutions. The company Jenson left in 2002 has had some measure of success since then: it’s called Amazon.com.
“All credit to what that team has accomplished over the last decade,” he graciously says. “A lot of the things that we went through a decade ago were really grounding for the company in terms of its ability to understand its business, how the model worked, and discipline. My best characterisation of those years was that it was a time when the company had to get good. And it did get very, very good. All credit to the team up there – they just kept it going.”
Looking back, it was difficult to be sure at the time which dotcom business models would work, and which were full of air (or worse). Instead of focusing on revenue, some businesses were trying to put a valuation on a website’s ‘eyeball count’.
Jenson was sure about Amazon’s model, however, and for a very old-fashioned, pre-dotcom reason: “You just need to look at the operating margin,” he says. “If you were to go back and look at the quarterly operating margin for Amazon.com as different things were done, you could see the trend start to emerge.” He adds that there was a lot of “blocking and tackling” – an American football phrase referring to solid, hard work. “The company just had to prove itself.”
Listening to this, it’s no surprise that Jenson’s finance background is in General Electric. “I was told very early on that I’d make a lot of dumb business decisions during my career but the one decision I’d get fired for is a controllership mistake,” he says. It’s more of a surprise to learn that this ethos permeated a super dotcom like Amazon. “It was so important in every place that I’ve been that nobody would ever even try to suggest that you don’t abide by principles of controllership.”
While Jenson talks about good grounding, Richard Farr’s recollection of those days is a little different: “You felt as though you were walking on water. Eighteen-hour days, high energy, five-minute meetings, no paper, conference calls as we’re sitting on the airport runway … Just crazy. Crazy time.”
But though he believes that a slower boom would have meant a slower bust and that Gorilla Park might therefore have survived, he clearly wouldn’t have missed it for the world.
“People who survived the dotcom boom as finance directors got ten years’ experience in two or three years. Any finance director will tell you that experience is so valuable,” Jenson concludes. “Despite the fact that it was a complete joke at the end, it was real at the time. For those who survived the dotcom boom – as most of us have done – it gave us a greater foundation to do other things more appropriately.”
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