In March 1999 I received a call from Michael Kroger. The former president of the Victorian Liberal Party was a noted Liberal powerbroker whom I knew only as a business acquaintance. Michael had an idea he wanted to discuss. It was arranged that we would have lunch at the Australian Club in Collins Street, one of Melbourne’s legendary gentlemen’s clubs. I say gentlemen’s club because it excludes women, which I find strange and wrong. Anyway, I’m sure Michael Kroger had more on his mind than sexism and stuffed antlers mounted on the walls. He thought he could be on to something big.
Michael ordered the steak, I ordered the fish. ‘Harold, you should take your business public. It’s a great business.’ He was very complimentary, which I found flattering. I considered it good that he thought about us in that way and had picked us out. He was convincing. The deal would be that Kroger would help us float our company, Mitchell & Partners, on the stock exchange, and his merchant bank, J. T. Campbell, would be the operation driving the deal.
I had knocked back similar offers over the years. I didn’t want us to be a public company. I saw no real advantage in it. But Kroger saw an advantage: a nice big fee for his services. Amid the clinking of fine silver cutlery and the low rumble of Melbourne’s would-be business elite in conversation, I spent ten seconds making up my mind. ‘Michael,’ I said, ‘I’m not interested.’ It was a pleasant lunch, an insight into this arcane, old-fashioned world of Melbourne’s clubland, but for Michael Kroger, it was unproductive.
But Michael had another idea. Some weeks later he came back to me and suggested we create and float a parallel company to our media business. He started talking about the internet, that it was the next big thing. Everybody was talking about it, he said, wondering where it was going, how big it might get, how dangerous it would be to miss the boat in case it went ballistic. The idea was outstanding, quite brilliant for its time.
‘This is the future,’ Michael said. ‘This is what is happening.’
This time I took more than ten seconds to consider it. The idea had promise. Hardly anyone had any idea how big the internet would become. I certainly didn’t. But I sat and listened to Kroger and his offsiders, two young men called Ben Burge and Jason Aldworth. And it struck me that there might be something in what they were saying.
So this time I agreed. I told them they could use my name, as well as access to our very substantial group of clients. In almost record time—a space of about a month—we put together a company to be floated. We raised many millions of dollars from investors. It wasn’t hard to persuade them to come on board: it was the middle of the dot-com boom when vast fortunes were being made overnight, like a modern-day gold rush. The only difference was that the gold rush produced gold. You could touch it and feel it.
What did the dot-com boom produce? No one was quite sure. I thought it was a good idea because the digital world was clearly going to be powerful. It would mean you could talk to individuals directly rather than rely on the mass media, as people had for more than a hundred years. It was a whole new way of communicating ideas and commercial messages. The big media owners didn’t think it meant much so they were largely ignoring it. Rupert Murdoch famously said that he thought the dot-com boom would bust, which it did. But that didn’t mean the internet wasn’t going to change all our lives and provide a cornucopia of business opportunities.
In 2000 we listed our digital media company, emitch, on the Stock Exchange and shares went to $3.50, a 600 per cent premium to its fifty-cent issue price. It traded up to $3.70 before settling back to close at $3.02. Overnight, quite a few people had become millionaires. I became chairman of Australia’s biggest media-buying company with $900 million in annual turnover. It was a proud day.
Its listing meant that our family, which owned 44.6 per cent of emitch, was reportedly $189 million richer. We made $11.5 million in cash, overnight. It was a strange, unreal feeling. That night, instead of having a big dinner, on the way home in the Friday night traffic I picked up $15 worth of fish and chips, which I shared with my wife. I couldn’t conceptualize that much money. In my mind it had about as much value as the paper the fish and chips were in.
The company would buy online advertising space for our clients. Initially we owned 40 per cent of it. It fell to me to find the other takers. It was easy: I got in touch with all of the people I dealt with, the big media owners. James Packer’s own private company bought in, rather than the family company PBL. James had a shareholding approaching 5 per cent, which he bought at 50 cents a share. In the space of a few months he had sold making a profit of around 400 per cent. So he was happy. I approached News Corporation, where Lachlan Murdoch was running the business. Lachlan was in.
The parallel between James Packer and Lachlan Murdoch, the two sons of the fathers, was interesting and instructive. James said yes very quickly, took the shareholding in his own name, sold it three months later and made a lot of money. Lachlan said yes nearly as quickly but took the shareholding in News Corporation, the company of which his father and family were in control. He kept the shares for seven years. They were loyal and good supporters. They still made money. But one was for the long term and the other could see a quick profit.
The Ten Network—through chief executive Nick Falloon—and the Seven Network—through Kerry Stokes—also bought substantial shareholdings. I found out later that the shares were spread across a few senior executives at Ten, who probably all bought swimming pools at my expense when the share price went from 50 cents to more than $3. I was very happy for them. James Packer’s private company, Kerry Stokes’s Seven Network and News Limited’s News Interactive were all $17.6 million richer for their initial $3.5 million investments. Ten Ventures, the venture capital arm of the Ten Network, sat on $12.6 million paper profit after investing $2.5 million to secure 3 per cent of emitch. Michael Kroger had done well out of it, too, picking up 20 million shares which I gave him—a very substantial merchant-banker fee. At one time, when they were $3 a share, he was $60 million ahead.
And then, the rollercoaster. From the $3.50 listing, the share price plummetted at one point to 2.5 cents. Two of Kroger’s people—Ben Burge and Jason Aldworth—were running the business, and I didn’t believe they knew how this business should make money. All credit to them for the idea and for driving the start-up. It was the ‘What now?’ that concerned me. So we decided to remove Ben and Jason.
It was very small and losing money but had plenty of cash. The original shareholders were very happy because the share price was booming. But I knew, deep down, that businesses don’t survive unless they make money. I decided I had to make some changes, so I called a meeting with Kroger’s boys and my lawyer for a Sunday night. It was a very tough meeting because these were young fellows who thought they had invented a new universe. We were represented by our company lawyer, Rod Lamplugh. They were two incredibly clever young people. Ben Burge graduated from his VCE year among the best students in the country, and Jason Aldworth has been touted for a political career. I felt they didn’t know how to make a profit from this great idea. So we had to part ways.
Everyone was caught up in the excitement of the dot-com boom of 2000, and emitch was valued much higher than was appropriate. When emitch launched it had a value of 50 cents per share and $90 million in value, so I was not surprised that shares plummeted to 2.5 cents. What we had in our favour was a lot of cash underpinning the business and a strong, old-fashioned approach to new world media.
There was no doubt the second dot-com boom was going to stick around longer than the first. As Crikey.com reported in December 2006:
Proof of the second internet bubble comes from the fact that emitch closed with a value of $289 million last night, even though it only billed $35 million in 2005–06. Mitchell & Partners is projected to make earnings before interest and tax of $11.56 million in 2006–07 but is being sold for just $100 million even though it handles $900 million in annual billings. The combined business will book more than $1 billion of advertising in the 2007 calendar year.
Many people got caught by the dot-com bust of 2001, when the bubble burst spectacularly. I wasn’t too worried when the share prices were plummetting. I just concentrated on holding the company together, keeping the cash in the bank and waiting for better days, which I knew would come.
Was the dot-com boom too good to be true? Were people getting carried away too early? No and yes. Dot-com businesses were in their infancy. They weren’t doing any business yet. The excitement was over their possibilities, and in 1999 that appeared limitless. There were, understandably, plenty of sceptics in the media about the dot-com boom. Terry McCrann of News Limited was one of them. He wrote in the Sunday Herald Sun on 12 March 2000:
Instantly on listing, emitch was worth over $500 million. That puts it in the top 200 companies, almost as valuable as big businesses like the Foodland supermarket chain and George Weston biscuits. All for a company that has just $28 million in cash—raised in the public float—and not much else at this stage other than an idea and a name. So is this just further evidence of the absolute craziness of the internet boom? A $500 million value for an advertising business that predicts just $2.8 million in billings this quarter? … It’s all terribly unfair. Your average citizen must work a lifetime to pocket just $1 million. What all this is showing is how [Michael] Kroger turned essentially just an idea—a very good idea—into half a billion dollars.
McCrann then made a pretty good prediction. ‘Even though succulent bucks are being made, trying to “play” Internet stocks will be a recipe for disaster. Especially before the bubble bursts. As it will.’
In February 2001 I commented to the Australian Financial Review about the extraordinary share price at our float: ‘When we floated at 50 cents a share, we were happy with the value of that. What was unfortunate was that the sharemarket took it to more than $3. We didn’t do that—the market did—and I feel sorry for the people who bought at the higher levels (the stock was trading in January 2001 at less than 3 cents). But it’s a very strong company, it’s got plenty of cash and it’s got a good business base.’
Companies were appearing and being floated, and people were doubling their money overnight. But the dot-com boom was starting to prove something, and that was that the only thing people had was a good idea, not a business. And there were certainly a lot of good ideas about. Question was, how do you make money out of them?
It took some years for the internet to show profits. For us, it had been a slow burn. The crazy days of 1999 were over. Eight years later, cooler heads prevailed. In December 2006 I told the Australian Financial Review: ‘Online has become critical in the growth of all marketing businesses and this puts it at the very front of what we are doing … the internet has gone, in five years, from nil share of advertising dollars to over 10 per cent. We are reading the signs of the future and getting right behind it.’
When we sold Mitchell & Partners to emitch in May 2007, I told the Australian Financial Review I had more confidence in the internet. ‘This time the internet is real … There is money moving from mainline media into the internet. The internet’s become a force it wasn’t in 2000.’
As challenging as it may be for those of us who began our careers in the age of linotype, the internet is to be embraced, not feared.