Loud and clear
Wednesday, July 25, 2007/
M2 Telecommunications founder Vaughan Bowen bought into the industry in 1999, and has hit the $100 million revenue mark in quick time. He tells AMANDA GOME his lessons and strategies.
Vaughan Bowen is only 34 and his company, M2 Telecommunications, is set to hit $100 million revenue after three recent acquisitions.
What’s more, his company’s share price hit $1 for the first time. Bowen shares his strategies, lessons and favourite investment tip: “Put all your eggs in one basket and guard the hell out of the basket.”
To hear the interview with Vaughan Bowen, click here. To download this mp3 file and listen to it later, right-click this link and “Save target as…” to your computer (Macs; option-click).
Amanda Gome: Vaughan, you started your company M2 Telecommunications in 1999 at the age of 27. M2 has bought three businesses in the last three months. Getting acquisitions right is like music, getting it wrong is like cancer, you’ve said. You came from real estate and you were looking for something new and that’s how you came into telephone technology.
Vaughan Bowen: People often say that I was well qualified to join the telecommunications industry only because I used to use the telephone a lot but that is the case. Yes I was in the property services business, in facilities management and was also in commercial real estate for a while in Indonesia and I came back and had a few dollars and was looking for an opportunity.
And how much did you have to invest?
I had about half a million dollars.
What niche did you see?
My partner in the business at the time had a relationship with a little company in Adelaide that was called Message Mate. We purchased that, took the two MMs out of Message Mate and called it M2. I decided I wanted to have a business that was generically branded so that we could grow into other fields of endeavour.
Fortunately that was a good decision at the time because the messaging business of ours is a fractional component of what we do these days.
What products did you start with and how did you grow the business?
The products that we began with were telecommunications related. They were basically digital equipment that would attach to a small business’s phone system to provide such things as on-hold messaging and after hours answering and voice mail services. ‘Press 1 to speak to this, Press 2 to speak to that.’ That kind of technology.
Basically all the tools that made a small business look like a big business. These technologies had been endorsed by the likes of Siemens and Samsung and Telstra.
We quickly realised that it was an expensive business to be in. It’s a pretty competitive space against the likes of NEC and Siemens so we battled away with that for a couple of years.
We were a couple of years in the business and had used up most of the seed capital that we and other investors had put into the business, and we really needed to add some extra dimension to what we were doing, particularly in the area of recurring revenue.
That was probably a central defining moment for the business when we recognised that recurring revenue versus the volatility of box sales or the ups and downs of selling products month to month.
So we found a small business in Melbourne that was reselling telecommunication services. Now we’re in the full gamut of telco services but at the time it was fixed line services and we began to build ourselves a telco.
Were you forced to starve…?
Yeah, it was very marginal. It was a very difficult time.
How did you get through that?
A lot of sleepless nights. Support of some key investors was very important. Some of the original investors in the business stood by the company when it needed some capital to get over that transitional hump from being product sales to being as I say now the recurring revenue sales of a telco business. Certainly there was a lot of wages foregone as you would expect.
Who advised you? Did you have an advisory board or just some key mentors?
We did an off-market public raising and formed an unlisted public company, and in doing so we put together a board of directors that was there to give governance and steerage to the business, which is very helpful. When you’re a young bloke having a go… you need a bit of grey hair to keep you on track.
At what stage did you decide to float and why did you do that?
It was twofold really. Our seed investors expected an exit path and a listing of the company on the stock exchange gives a potential exit path for those investors if they so chose.
Did they put pressure on you?
From time to time you had a phone call from a shareholder or two.
Did you clench your teeth?
Yeah, well we were pretty resistant against doing it too early because the businesses that list on the stock exchange too early can often be a recipe for trouble.
It’s a lot of cost and a lot of effort and a lot of distraction being a listed public company, so we didn’t want to do that until such time as we felt our business underlying was profitable and robust and we had a management group that could support myself and the board in running a public company.
When did you float?
In October 2004.
How much did you raise?
We only raised $2.5 million.
What did you expect to raise?
Oh, $2.5 million, we were well over-subscribed. We didn’t actually need capital. The business had already by that stage, this is what I said about not listing until the business was sustainable. We were very profitable. Very cash flow generative.
When we listed, the business had several million dollars in cash reserves. We didn’t need the money. We raised the minimum amount basically you can raise. You have to get a minimum of 400 shareholders so you have to raise some money. I would have raised no money if I had my way. It was just giving away more of the company.
Just giving those investors an exit.
That’s right, yes. The second reason was that it gave us a vehicle for acquisitions because it created effectively our own currency in the form of M2 shares. We knew that over time as we added value to those shares that they would become a currency that we could use in potentially acquiring or consolidating other telcos in the industry.
And what did you issue at?
At 25 cents. And our shares today just hit $1. So that’s pretty milestone.
So how many acquisitions have you done since listing?
Four. One a couple of years ago and then we took a bit of a hiatus and we’ve bought three businesses in the last three months, so it’s been a fairly frantic time.
That wasn’t planned that way. We had these various transactions on the go for a while but just by chance they all fell at the same time and one of them’s been… it’s a public company actually. We acquired another publicly listed company called Orion Telecommunications which is going through a final shareholder approval process and the like at the moment but that’s a big process.
What have you learnt from doing acquisitions?
Integration of people?
Mainly yeah. That’s so critical.
Yep. Our business has always been about culture. I guess every company manager says that, but our business has developed a real personality over the years. We’ve got such a large base now of very long service management.
We’ve got managers that have been here since the very beginning so bringing in another acquisition, bringing in another group of people through an acquisition I should say potentially creates an imbalance to that culture and doing it right, when you do it right it’s like music. When you do it wrong it’s like a cancer coming into the business.
What do you regret?
Well the first acquisition we made a few years ago was only a little business, but we really didn’t work hard enough on the cultural integration and systems integration so that the business felt like they were one group and the company we purchased was Sydney based and…
..and you’re Melbourne based…
And we’re Melbourne based, and that us and them situation which people talk about was certainly not something that we nipped in the bud.
Now we do it differently. We made a large acquisition three months ago of a company called Wholesale Communications Group which is a large wholesale telco. We had a very stringent 100 day implementation plan and we formed a project team for Project 100.
Everything from branding integration to physical premises integration to mail servers, software servers, mail servers, you name it customer communications was completely detailed. People were allocated to timelines.
We flew team members from our management group into their offices and spent time there and vice versa and we did everything possible to make the two businesses feel like a family quicker and it’s just made the world of difference. We’re thrilled with how that’s worked. I can’t stress how easy it is to make mistakes in acquisition.
Now this sort of takes you to a company with around $100 revenue.
Just a little under $100 million. That’s including the Orion business which we’ve just declared our acquisition intentions and it’s been approved by their board but there a process they have to go through.
And so now how do you describe your company and what’s next for strategy?
We call ourselves a diversified telecommunications group. Now. And that means that we provide the full suite of telecommunication services. Obviously as I mentioned we evolved from the fixed line services area that we are a very high level partner… wholesale partner with Optus for mobile services.
We have the full suite of broadband data products. We have hosting services. We have virtual private network services that we do for our business customers. Anything in a telco services that you would associate with a Telstra or an Optus we deliver and we deliver it under our own badge and we specifically deliver it to two markets.
One is the small enterprise market which is typically five to 50 employee businesses and the second is to the wholesale telco market. Here we supply telco services to other telcos and to ISPs and that’s a big part of our business now. About 60% of our business is to SMEs is about 60% and about 40% is to other telcos.
OK. And where to from here? How big do you want to get?
Well I think… one of our strengths has been that we’ve realised what we are and what we cannot be. What we cannot be is a Telstra or an Optus. Not without going and investing tens of billions of dollars in infrastructure investment. There’s been telcos that have come and gone.
But we can be a several hundred million dollar company very capably. We were a $35 million company 12 months ago so it’s not at all far fetched that this business can be several hundred million revenue terms but more importantly than revenue, we make profits. We’ve made profits ever since we turned over $7 million.
We’ll make EBIT profits this year… we’re forecast to make EBIT profits of about $4 million off what will be revenues of $40 million so about 10% EBIT. So for a non-infrastructure telecoms company to spit out 10 cents in every dollar of its revenues in profits is quite an enviable position that’s not common.
And what’s your profit projection for next year?
We’re holding fire on that at the moment while we finalise our end of financial year 2007 numbers and we’ll communicate to the market in due course.
How old are you now?
And what hours are you working?
I would typically be in the office before 8am and typically out of the office around 8pm.
And how many days a week? Do you get the weekends off?
Yeah, there’ll be some time in every weekend that I’ll end up getting on to my CrackBerry. But it’s not a chore in the main for me. What we do is fun. It’s quite an entrepreneurial energetic business that’s always doing new things.
And how do you avoid burnout?
I’ve got a lovely wife who keeps me sane sometimes. I do quite a lot of exercise. I still try to run 3 or 4 days a week which keeps me from being too unhealthy and spend time with family when we can and lots of friends. We enjoy dinners and travel and you know, nothing too out of the box or too Zen.
One of your favourite quotes is Warren Buffett’s Put all of your eggs in one basket and guard the hell out of the basket. You’ve got about 30% of the company have you? Which has a market capitalisation of…
The company’s worth about $60 million.
So you’re sitting on a fair whack.
But still you can leverage paper.
Go back to that Buffett quote. Look I have very little paper investment outside. I own some property, I own my house, I own another investment property and I have a sailing boat because I like to sail but there’s not… there’s really nothing in significant terms outside of M2 but as you said, the M2 position is certainly good on paper and I intend to keep guarding it very carefully.
Being 34, what have you learnt about leading a company at that age?
That you’re continually learning. I’m an incredibly different manager today than I was when I was 27.
Are you more assertive, more patient? What’s changed?
Learning to delegate was the biggest single change. It’s incredibly leveraging to the business, incredibly leveraging for me for the business to have realised a few years ago now that just because it doesn’t come off my desk doesn’t mean it’s not good.
I used to guard every letter that effectively would go out of the joint and every proposal or presentation or… I felt like I needed to be part of every meeting in order to articulate our story properly. Well that’s… I think I do a fairly reasonable job of all those things but how can a business properly scale itself if everything has to funnel through….
But surely that intensity early on meant that then you set the culture and then you could delegate.
That’s right, you had to work your tail off at the beginning. You have to do it to set up the systems and write all the template letters and get all the template proposals.
The hours were more of a grind in the early stage because what you do is you do a lot more of the physical in terms of actually ploughing out documentation and systems and processes and things like that. You do a lot more of that for a lot less outcome.
We made, I don’t know in our first 2½ years we got the business from a zero base to a $3 million base. In our next three years we took it to a $40 million base so there’s an exponential step up.
So you’re almost building a big company from day one.
Yeah, process-wise I was trying.
How did you know which processes to build in?
Processes that are replicable. The simple line of thinking that if this is something… would this work if the business was five times the size or whether…
Right, that’s a good tip. What about export? You are licensing off IP to other telecommunications companies in Asia?
We’ve been licensing, we done some licensing here in Australia and in New Zealand. We have a presence in New Zealand now, we’ve been operating our business over there for about 12 months so that’s our offshore expansion at the moment but we are certainly talking with various parties in Asia.
We’ve had some expressions of interest campaigns. We’ve run through Singapore recently for some IP that we’ve developed that we think would be quite valuable in some of the emerging Asian markets because some of the Asian markets are less mature.
Most of them are less mature telco IP-wise than what we are here, and if a company like ours has been able to make a good fist of it here and if that’s a mature market then I think we’ve got a bit of value to lend to those newer markets so yeah, there’s definitely licensing or sweating our IP asset that bit more.
And what about India?
Yeah, we have some dealings with a company in India. We’ve had a relationship with a company that runs a large telemarketing operation out of India for some time that operates as a licensee to some of our know how which has been a very successful alliance.
Not under our own brand. They operate under their own brand, but it’s been a very successful alliance, so yeah, we have dealings in [India].
And what percentage of revenues comes from offshore?
It might be 5%.
So is that a big growth opportunity or you’re still really pushing into the Australian market?
It’s a little different. We were still in our original business where we were building boxes and selling them then I’d probably say that’s where it should all be coming from, but it’s hard when you’re running a telco.
When you’re running a service company I guess it’s like any business that’s service oriented, it relies upon your delivery of a service in the market you’re in and it’s hard to just go and say here’s the carbon copy for how M2 operates and do it in Hong Kong or do it in Canada so I… there’s certainly international scope but we’ve got $100 million a $41 billion Australian telecommunications market. Someone said the other day, we’re not even a rounding error.
And also the telecommunications, the competitors at your level are going through a lot of difficulty aren’t they. There’s a big lot of change going on.
There is a lot of change. A lot of telcos have unfortunately found themselves a bit betwixt and between. A friend a mine uses the term a little bit pregnant.
Somewhere where you really can’t be, you’re one of the other and they have taken this position where they’ve got some infrastructure but they don’t have enough infrastructure to be able to completely control their own destiny.
They still have a reliance on the incumbent Telstra so you get in this situation where you’ve invested a lot of capital but you really don’t have the freedom to choose and then there’s a lot of telcos that fall into that category just by definition and that’s challenging for them but…
And why have you stayed clear of that?
Well we stayed clear of infrastructure originally because we didn’t have the money for it. Sometimes money can burn a hole in your pocket as my Dad would tell me and we said we don’t have the capital resources to go and start rolling out infrastructure so let’s be creative and be a marketing company first and foremost.