Internet industry leader and iiNet CEO Michael Malone says his world collapsed when he drafted a letter of resignation.
THE head of Australia’s third largest internet service provider has for the first time revealed how close he came to losing his job and the company he co-founded and developed into a major telecommunications player.
Speaking at a WA Business News breakfast last week, iiNet chief executive Michael Malone admitted that the first few months of 2006 were some of the darkest hours that he, and the business he started in his parent’s Padbury garage in 1993, had encountered.
“The board considered my offer to resign and after a lot of discussion and consideration they accepted my resignation,” Mr Malone said.
“You can imagine what thoughts were going through my mind at that stage; my world literally collapsed.
“This was all I had done for 13 years. I had no hobbies and all my friends were either current or former staff.”
That scene presents quite a contrast to the burgeoning iiNet of today, which employs more than 1,500 staff across three continents, has more than 500,000 customers on its books, and generates annual revenues of more than $500 million.
Mr Malone and his family currently have an approximate 20 per cent share in the Perth-based company (see Wealth Creators feature, pages 14-15), which has a market capitalisation of almost $425 million with shares trading around $2.90 this week.
But four years ago, he said, the company was in a precarious position, following multiple acquisitions and continuous rapid growth.
Mr Malone said the core issue was the discrepancy between the numbers produced by its finance and budget systems and the numbers in its billing system.
“By mid-March the figures came in for February and once again the budget and finance systems were saying the same number, about $18 million, but the billing system once again said less than $16 million,” Mr Malone told the audience.
“The Rolls Royce of technical staff couldn’t find an issue in the billing system, so we asked Ernst & Young to come in and help us.
“At the time we were convinced the money was there, somewhere, so we had to find it.”
Mr Malone’s fondness for a challenge heralded a return to his computer programming roots to determine what had caused the anomaly.
“I’d been a programmer in the early days but I’d been off the tools for a long time and, to be honest, I actually love a crisis,” he said.
“Crises are fun for managers because it means you can get back out there and do something, so getting in there and fixing the problem can be quite exciting.”
Unfortunately Mr Malone’s best efforts during the next few weeks failed to find a solution to what was becoming an escalating problem.
On Easter Thursday he met with (then) iiNet chairman, Peter Harley, to investigate the situation further, admitting they didn’t have all the answers.
“But we knew one thing, the billing system was accurate and the other two systems were wrong,” Mr Malone said.
“(At the time) we had decided to go on a spending program because we had been thrown off Telstra’s network (in 2005) so now (in 2006) we were trying to build our own network.
“So basically we’d been spending a heap of cash that wasn’t there, and never would be, and we were committed to spending more money over the next two months.”
Mr Malone said Mr Harley took the news hard during the pair’s two-hour discussion.
“You could see the realisation that we were in a really bad position,” he said.
“But I handed him one more piece of paper; I handed in my resignation.”
The board suspended trading of its shares on the Australian Stock Exchange and suggested Mr Malone exit the company as quickly as possible.
Meanwhile, Mr Malone began writing a statement for the ASX announcing his resignation, which he described as “writing my own eulogy”.
“Saying what a fine chap I was and the enormous contribution I had made to the company and how much we were all going to miss me, it’s a bit sad but it’s very therapeutic,” he said.
“It was the right thing to do, handing in my resignation, but I didn’t expect them to take it.”
It was an even tougher pill to swallow considering in retrospect he may not have listed iiNet on the stock exchange at all if he had realised then the incredible cost to do so (estimated at $1 million each year) and the “external concerns” that constantly take him away from working on, and in the business.
Shortly after the meeting with Mr Harley, Mr Malone received a phone call from Ernst & Young partner, Iain Burnet.
“And all I wanted to do was go home, sit in the shower and hold onto my knees and cry.” Mr Malone said.
“But he had an interesting angle so we took a look at it across the Easter weekend, trying to figure out what happened and trying to fix it.”
The board asked Mr Malone to complete the promising work with Mr Burnet, which involved bringing in Gem Consulting to get the business back on the right path while overhauling the business plan, ensuring the figures were accurate and then bringing in a partner to inject cash into the business.
The company decided to be completely transparent with the market when coming out of suspension in late May, detailing the problems iiNet had experienced during the first quarter of 2006.
“We made the decision to completely drop our pants and go public with every possible excruciating detail,” he said.
“Even so, shareholders couldn’t sell fast enough, so when we came out of suspension we were $1.90 but the shares were under a dollar within 24 hours.
“Amcom swooped in and acquired as much as they could; they ended up owning 19.9 per cent of the company with an average buy-in price of less than 90 cents.”
The following month he and his family sold their other investments and borrowed as much as possible, buying 6.25 million shares at an average price of 68 cents.
“That took us up to 19.97 per cent, precisely one share more than Amcom,” he said.
“On the back of this announcement the share price started to climb again.”
Around this time, the board decided Mr Malone should continue as chief executive, after which he shredded the draft letter of resignation.
Mr Malone said the next few years had delivered further personal and professional challenges, although the positives seemed to have outweighed the negatives.
“Australia is a better place because iiNet existed,” Mr Malone said.
“We have done some amazing things in Australia. We were the first to bring internet access into Western Australia and we’ve won some very big regulatory battles with Telstra.”
Introducing voice over internet protocol and flat rates for broadband and ADSL2+ were also significant milestones for the company.
And the man who now stands securely at the helm of the customer-focused outfit (having won numerous awards for customer service in the past year alone) said iiNet was now best described as a “consumer marketing company” rather than an ISP after shifting its focus from technology to the consumer amid increasing its diverse product offering.
