Economic pressures are set to accelerate convergence of telecoms and the Internet, affecting telecom services in unexpected ways in 2009, according to North American consultancy inCode. That’s good news for Vox Telecom CEO Douglas Reed, who has built a conglomerate that crossed the divide a while ago and is already maximising convergence. An entrepreneur at heart, Reed completed the first year of his BCom and followed this with a job on a North Sea oil rig. At the age of 22 he took over Sandton City Hardware, a career move that culminated with his appointment as MD of Mica Distributors. “I’ve always focused strongly on growth,” he says, referring to his early ability to grow retail stores by between 45% and 50% per year.
One of the first management lessons Reed learnt was that entrepreneurs have to be managed loosely but stringently. “That sounds like a contradiction, but the first MD I worked for was very clear on this. I had the freedom to run my store as I wished, but I was measured on four things – debtors’ days, creditors’ days, stock turnover and profit. Reed realised during these early days that leaders must have good benchmarks in place across all areas of management. “I was great at sales and merchandising, but not so good at accounts. Luckily, I learn very quickly, and my time with Mica Hardware also gave me a solid understanding of cash flow.” In his late 30s, Reed realised that he was wasting his time working for other people. He wanted to go into his own business, but could not afford to start at the bottom. He had also had enough of an industry that was confined to four walls. It was at that point that he got an offer from Control Instruments to head up its IT business DataPro, a company that had provided IT support for Reed’s stores. The incumbent MD knew Reed well and was moving into another area of the group. “I made the decision based on gut feel,” Reed says. “DataPro was a small company at the time, turning over R150 000 a month. I took a salary cut and bought 30% of the business.”
The move from hardware retail to IT was not too much of a leap. Reed had always had a keen interest in technology and had rolled out systems that were ahead of their time in the somewhat conservative hardware sector.
“My goal was to transform DataPro into a national Internet service provider. I took over a company that had no business plan in place. The first three years demanded 12-hour days, six days a week.” In 1998, DataPro launched Internet services aimed at small and medium businesses, and was the first company to offer cheap dial-up-based email. By the end of that year, monthly recurring revenue exceeded R183 000. DataPro had 257 business clients and 51 contract customers. In 2000, it was one of the first ISPs in the country to become cash positive. “This was a big thing for us,” says Reed. “Even when you have budgeted to lose money, it’s horrid.”
Control Instruments, an electronics company that dealt with aviation and vehicle tracking, decided it was time to sell DataPro. “We were not core to Control Instruments’ business, and it would have been pointless for us to remain within the group. This was Internet boom time and I wanted to grow the company.”
Reed approached three financiers. BoE Private Equity Investments took the bait and agreed to fund a management buy-out from Control Instruments. DataPro was sold at a premium: the company was worth R15 million at the time, but Reed and his team paid twice that, recognising the value of a customer base that no other ISP could match. The relationship between DataPro and BoE got off to a good start, with a five-year plan in place that would have seen the shareholders make R50 million, but then Nedbank took over BoE and, as Reed says, their objectives were no longer aligned. “The bank wanted to sell us to the highest bidder and we had no desire to be owned by anyone.” Fortunately, a R65 million offer from MWeb was turned down. But while the bankers focused on the numbers, Reed and his team were looking to the future and the relationship grew ever more tenuous. The company ended off 2001 with monthly revenue exceeding R890 000 and with first-tier ISP status. It seemed there was no stopping DataPro. A year later it was achieving organic sales growth of 218% and launched South Africa’s first SOHO leased line solution. It also switched its international links from satellite to fibre, boosting the speed of its services. Monthly revenue soon exceeded R3,8 million.
In 2003, the company launched a least cost routing (LCR) division, as well as a high speed Internet access solution for the hospitality industry, enabling in-room and wireless connectivity. This was also a year of rapid consolidation and rationalisation in the Internet industry, and DataPro emerged as a strong player with significant market share. In 2004, BoE and DataPro parted ways when the company reverse listed on the JSE’s AltX. Ask Reed what he learnt from the transaction and his answer is blunt. “If you ask for money from a bank, you’re screwed. But if there is no alternative, the best thing to do is hold onto as many shares as possible, and then double the size of the company so that your money doubles, work hard for five years and buy back your business.”
Shopping spree
In 2005, DataPro branded its voice division as Vox Telecom. A number of significant acquisitions followed: WickIT, a regional Durban-based ISP; @lantic, a consumer-focused ISP; Pretoria-based corporate ISP Netralink; Definity Telecom, South Africa’s fourth largest LCR provider; Orion Telecom, the biggest LCR provider in the country and consumer ISPs MJVNET, XsiNet and Shisas. “Every acquisition has been a learning experience,” says Reed. “These transactions have a major impact on both the company being bought and the buyer. Each time we conclude a deal, both sides stop in their tracks for a few months, which costs us a lot of money. It’s vital to plan everything in great detail beforehand so that you minimise downtime. Rather take longer to conclude the deal and have the ability to hit the ground running. When we bought Storm Telecom, we did not have enough time to plan properly and it took four months to get the business going.”
Reed believes in being ruthless. “If the company you take over is your core business, then people are not an issue and we take virtually none of them into the fold; however, if it’s not our core business, it’s vital to buy a company that is well run, which means we bring the people on board.” Having consolidated its position in the market, DataPro became the largest listed company on the AltX in 2007, with a market capitalisation of R2,3 billion. The DataPro Group changed its name to Vox Telecom that same year to re-position it as a full-service telecommunications provider.What kind of personality does it take to build a R2 billion business? Reed refuses to work with people who are not self-motivated and driven. “Experience and education come second for me, because managing someone has to be the biggest waste of time. I believe in strong controls, but few of them.”
This philosophy runs deep throughout the group, with all companies having their own teams and cultures. Some are conservative and process-driven, while others are far more relaxed in their approach. “I make snowballs, roll them down the hill with my team, and then others take over and run with them. Most companies in the group manage themselves, so I spend my time focusing on innovation and getting new ideas off the ground. We introduce a major innovation every eight months; it’s critical in our industry, but I believe it’s a strategy that should be applied everywhere.” Reed says he treats everyone in the business as a partner, and leaves the hiring and firing of people up to line managers so that each employee knows that they will be rewarded or punished by the person who employed them. He believes in continuous learning and reads a business book at least every two weeks. Among his favourite writers is John Kehoe, who appeals to Reed’s naturally optimistic and positive personality. He also enjoys stories about real entrepreneurs, rather than books written by “professional managers”.
Re-Writing the rules: The Vox Telepreneur Story
Reed is sanguine about the fact that all Vox Telecom’s products lose money for the first 12 to 18 months. “Six months before we listed, we went big on uncapped ADSL; we ran it at a loss, but today it accounts for 30% of our earnings. The reality of this business is that you launch innovative products that gain traction over time and then become hugely cash generative.”
That’s how Vox Telecom’s latest offering, Vox Telepreneur, came about. “I always had it at the back of my mind that telcos are particularly well suited to multi-level marketing – telecommunication is an annuity product and it’s basically a necessity,” says Reed.
Then he read Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant. “I realised we were on a hiding to nothing by selling what everybody else is selling. The book got me thinking about how we could differentiate and grow our market share by selling something different to different people.
Because Vox Telecom cannot compete with the service provided by tiny IT companies, or with the products supplied by Telkom, Reed decided to create a market segment that no-one else is in: “I saw that the best way to grow the business is to bring in customers as part of the team and to harness small entrepreneurs. If we could bring them in, we would have an 18-month lead on other companies by the time they caught on. By the end of January 2009 it will be a year since we launched Vox Telepreneur, and it has been our most successful start-up ever, with the customer base growing by 20% a month.” The business model aims to empower entrepreneurs to endorse telecommunication products and services through their own social networks and, in return, have the opportunity to both save on their telephony costs and earn residual income. It’s new in the local market, but has proved to be successful in the US and Europe, with companies like Sprint and MCI (now part of Verizon) having used similar methodologies to achieve great success.
Leverage and community are the two key elements.
Leverage, says Reed, is a particularly powerful method of harnessing entrepreneurial energy to achieve rapid market penetration. By adopting a referral-marketing strategy, Vox Telepreneur is able to achieve lower overheads and do something that no telco has done before – reinvest in its customers. Up to 57% of gross profit is redistributed to the communities that generate it, and up to 43% is redistributed to product-focused resellers such as small IT outlets and PBX vendors. Vox Telepreneur aims to grow its community to more than 300 000 customers by 2010, which will make it the largest reseller of telco services in South Africa.
Vox Telepreneur’s community of customers and dealers are at the heart of the business model. “Telecommunications has entrenched itself in the daily lives of people,” says Reed. But telco costs, particularly in South Africa, are still high. Add to this the fact that debt is rising, disposable income is shrinking and convergence is gaining popularity, and it is clear that there is a consumer need for choice – a lower-cost, cutting-edge, converged, easy-to-use choice.” The growth of this new venture proves one of Reed’s business tenets: “To grow, any business has to improve a little every day. Many become stale after a few years, not noticing that the window display is dusty and faded. To avoid this, you have to constantly keep up to speed with what is happening in your market, understand the latest trends, and know what the theoretical driving forces of the business you are in. Remember that you don’t have to be original; use ideas that have worked in other countries and make them work here.”
Why the listing
Fearing that the company was going to be sold to the highest bidder, Reed and his team wanted to make sure that DataPro remained independent. The reverse listing sped up the move to autonomy.
Reverse listing defined
A reverse listing is a complex transaction that occurs when an unlisted company uses an already listed entity as a vehicle to bring its assets to market. Rather than starting from scratch, the unlisted company sells its assets into the existing listed company. You have to comply with all the same requirements as a totally new listing. The big benefits lie in timing and discussing and transacting with current owners. By using an existing listed entity you have the certainty that you are already listed and you start out with an existing shareholder base. Even with the need to meet the JSE’s requirements, the process does not take as long. The costs of the reverse listing route are similar to those involved in a new listing.
How DataPro did it
The company listed at a premium with Reed and his team buying back the business from BoE and listing it for double the amount the next day. “We were lucky because deregulation had been announced just three weeks before,” says Reed. “We only had to raise R36 million, but because it was a reverse listing, it was expensive and no cash went into the business. Had we not reverse listed, we could have pumped R30 million into the company.”
What was involved in the listing?
Aside from raising the cash, DataPro also had to prove that its expensive shares were priced correctly. The share price ran on sentiment and it ran high. “We had to rapidly grow the business into the rating it had received,” says Reed. “As a result, we had to do exceptionally well just to remain in the same position. That took an enormous amount of time and money. We made a few mistakes which cost us in the short-term, but we also did a lot of things right.”
The pros and cons of listing
“The biggest con is that listing makes the company very visible,” says Reed. “It also means that you are reliant on others, which is not great considering that the stock market is based on fear and greed.” Reed also points out that South Africans view a long-term investment as six months. “That means you have to grow the value of the shares like mad and build a telco at the same time,” he adds. “All the while you are told what your gross profit should be and what is wrong with your business model. Brokers use your price to earnings ration (stock price divided by per share earnings over the previous year), but you cannot be measured by PE only when you are building a business for the future.” On the positive side, Reed and his team would never have acquired the business back without the listing. “Being public property is unpleasant, but we had to do it.”