Asurion: The Flywheel Era (‘01-‘07) with Kevin Taweel

Asurion Rebranding

[00:01:37] Will: Kevin, in our last conversation, we talked about the first five years of Asurion’s history from the acquisition of Road Rescue in 1995 to TA coming in as a director in very early 2001. Put some numbers around that. You started with $8.5 million of revenue and $1.2 million in EBITDA coming entirely from the roadside assistance business. In 2000, you had $78 million in revenue and $25 million in EBITDA with around 35 percent of that coming from handset insurance. Okay, so we’re now officially in the TA era, early 2001. And it just seems as though that early 01, 02 era represents a step function change for the company. A lot of transformation then. And maybe a place to start, Kevin, if you don’t mind, is with the actual renaming of the company. How did all that come about?

[00:02:24] Kevin: The story of our names is an amusing one, if anything. When we bought the company in 1995, we bought Road Rescue, Inc. We were known as in the marketplace, Mr. Rescue, but it was Road Rescue, Inc.

When we bought the Merrimac Group, we merged the two companies together. It was one holding company and we come up with the very creative name, Road Rescue Merrimac. It clearly didn’t roll off the tongue. It was a pretty straightforward process, Will. We realized that that was not a long term name. It’s entirely unrelated to TA Investment, but we did need to come up with a name that represented who we are and who we wanted to be.

And we hired a marketing firm, and they helped us lead us through a process. Asurion was the winner of that process. There were a handful of others that were similar sounding. But the idea of “assure,” “assurance,” “to protect” resonated with us. And that was also a time when URLs were difficult to find. So, we were pretty happy to land on Asurion and it stuck and we’ve been excited to continue with that name ever since.

Building the Team

[00:03:28] Will: Let’s maybe talk a little bit about the senior management team and the overhaul there. Maybe go back, touch on Gerald and we can go forward from there.

[00:03:30] Kevin: The hiring of Gerald Risk was a seminal moment for me personally. It was where I truly found or saw the power of hiring a 10X person. Our previous CFO was a talented CFO who filled the role at the time, but when we transitioned him out and Gerald into that spot, Gerald didn’t come from a CFO background, but you could tell he had the same hunger that Jim and I had. And I want to say it’s rare, this sense of, “I just want to win.”

Today, I call them drivers and stewards. I mean, you want drivers to just accelerate the business, take it further. You don’t have to push them. These people are excited to win and to grow and succeed. And others are content to manage and report and be custodians and trustees, if you will. When you interview somebody, and you see it in their past, these examples of overachievement, of attaining high levels in whatever they do, the sense of wanting to win. And we saw that in Gerald.

And the impact of the organization was immediate and surprising, because he was our first big hire. He not only took on finance and handled that almost instantaneously, he took on parts of operations, he took on information technology at the time, and he took us to places from a strategic perspective that we probably wouldn’t have gone otherwise because Jim and I really saw him as a true partner as we moved on from roadside assistance into handset protection. It was a big wow moment for us.

Along the same lines of importance of 10x type managers was the hiring of Brett. Jim wanted to wind down his day to day activity within Asurion, and he was moving on to teaching at Stanford. And Jim and I went out to look for a Chief Operating Officer. Someone essentially would report to me who’d help get the trains running on time.

I think before that, Jim and I, we were good doers. We knew what to do. We were actually pretty competent. We were good salespeople. We could get the basics done. But we weren’t necessarily skilled at managing, driving, inspiring a team. And we went out looking for someone who had done that before because we were growing and scaling quite rapidly. Finding Brett was, it was lucky that we found him. We were introduced through a mutual friend. He and I and Jim hit it off right away. And we realized given his experience at West Point running a couple of other companies in the past that he had the skills we wanted and needed to grow our business.

[00:06:40] Will: Where did he come from, who was the referral, and what were a couple of the things he did before you ran across him?

[00:06:49] Kevin: He was introduced to us by Bill Lazier. Bill was a professor at Stanford. He’s one of the three people I worked for as a case writer when I finished my MBA there. And a dear friend. Turns out he and Brett were close. They had a relationship. I think it was through his son in law. Brett had graduated from Stanford a few years before me. And we reached out to our investor base, our network, looking for people who filled this profile and Bill connected us and we hit it off right away.

Brett’s background was West Point. He did five years after West Point in the Army. He did not finish top of his class. He finished number two at West Point, a point which I continually give him a hard time about. He had a couple of really senior leadership positions. I think he was the chief operating officer at Risk Management Solutions, and then he was the CEO of another small software startup that had just recently been acquired by Excite@Home, if you remember that company, from the Wayback Machine. We just caught each other at the right time, and he came on board.

We were looking, as I said, for a COO. We were never going to get him with that title. So, Jim and I were super flexible on titles, and he took the CEO title. I had already had the chairman title, and that was really the beginning of another amazing partnership of mine.

[00:08:15] Will: Was he a board member from the outset?

[00:08:17] Kevin: Yes. We brought him on to the board right away. What he brought right away were leadership skills in terms of managing a team that Jim and I, but particularly I got a chance to learn from over the next several years. He and I were partners, and we would talk every day, multiple times a day, much like Jim and I had. And we were giving each other advice. It was really a great opportunity for me to watch him, to learn from him, and eventually to improve myself along the way.

I think about where he was really strong. It was inspiring, leading a team. It was focus on the customer – really understood what the customer experience was and drove that through the entire organization.

And then one of his superpowers is relationship management. Beyond being just a great leader, he is one of the best client relationship management people on the planet. And there’s some great stories about how he built some relationships over time, which are true and amusing.

[00:09:22] Will: I mean, first of all, it’s kind of amazing if you think about it, you going from one super close, productive partnership with Jim almost seamlessly overnight to one with Brett. Talk a little bit about some of the mechanics of that. What time did you guys get started?

[00:09:40] Kevin: It is true. I mean, I lucked out. I feel very lucky to have had a handful of great partnerships over the years. It’s so much more fun to do it with somebody. And I think about the relationship that Jim and I had and the relationship that Brett and I had.

Two things that stand out the most about each of those that were common, we talked all the time. We reached out to one another all the time. The second thing was we pulled the others in. So, with Jim or myself or Brett and myself, we were always looking to the other for advice, for help. As opposed to pushing the other person away and saying, “Hey, this is my sandbox, you stay out” type thing.

But Brett took his military training and applied it to Asurion. So, I thought I was an early riser and getting going seven in the morning. And sure enough, nope, I think Brett started as early and probably get up at 4:00, 4:30 every morning and was in the office by 5:00 and that, I mean, it’s such a talent. People see that. They see somebody getting in early, working hard, dedicating their time to this adventure we were on and it’s infectious. He did it. And so I was there too, that sort of permeated through the management team.

[00:10:56] Will: And can you talk a little bit about culture as you guys are building it and hiring and talent management as you and Brett and team began to build off of that together as a partnership?

[00:11:10] Kevin: It certainly started with Jim and I and Gerald and then continued with Brett and I and Gerald. The term we use to define the culture of Asurion is divine discontent. And it’s a term that was coined by David Kirk, a former McKinsey consultant, but before that he was the captain of the New Zealand All Blacks world champion rugby team.

He wrote this paper on high performing teams, and he described his experience with the All Blacks, and Gerald actually read it, this article, and he brought it into my office. I’ll never forget. He said, “This may not be who we are today, but it’s who we certainly aspire to be.”

And what that means, divine discontent, is this idea that you’ve got a team of people who are incredibly talented, you’re really excited to be around and be interacting with one another. And together, you set really high goals. A high bar, high objective for yourself, and you work like heck, and you go achieve those goals, and then once you’re done, you don’t rest, you do a post mortem, you look at what you did, can you do better, what were the mistakes, because there was always mistakes, and how do you improve upon those, and there may be competition along the way, but you’re really not so much focused on the competition, you want to use those as opportunities to get better, to actually improve yourself. And then when you reach those goals, you actually put up bigger goals. And you just keep going. And that sort of drive excitement really permeated the culture of the organization. And the people saw that we talked about it. The management all knew it. Even today, you can ask managers all the way down the organization. I think people certainly they understand divine discontent. I think they hopefully practice it. We’re a bigger organization. I know that isn’t as broad or widespread as it once was, but that core of divine discontent is certainly still there.

Building the Culture

[00:13:08] Will: It reminds me a little bit of that story about in the early days, arriving at core values and the definition of fun and you and Brett working through that. Could you go through that story a bit?

[00:13:19] Kevin: We hired a third party and brought together a broad cross section of our senior team with the objective of defining Asurion’s core values. It was a process that we were broken up into groups and those groups would work together for a period of time and we’d have their ideas, and we’d come back and, you know, it was sort of interesting how this sort of emerged. People were voting on it. So, there’s some sense of, “Oh, we’re going to vote on our core values.” Which with the benefit of hindsight was not probably the way to go. Because they are what they are. It’s not like what you think they are necessarily.

And we went through the process and one core value that emerged on many peoples’ list was the idea of fun or the core value of fun. We want to have fun in what we do, and want to enjoy it, want to be excited by it. And while a number of routes put it there, it just didn’t feel right. I was like, “I’m not sure that fun is what we’re trying to do.” And then one of our longstanding employees, a gentleman named Rodney Schlosser had been with us for a long time, he raised his hand and we were talking about fun. He’s like, “Look, this is not fun. That’s not the right word. It’s winning. Winning is fun. Like we want to win. Let’s not sugarcoat this or try to put a different face on what it really is. We’re here to win.” And there was sort of a ah-ha moment there of like, yes, and it connects with divine discontent. It’s interesting how the true core value actually does emerge. It’s about who you are, not the name you might put on it. It was interesting how that just emerged from that process.

[00:14:56] Will: And then there was also kind of an honesty in your culture and specifically, maybe as it related to people finding their long term roles and how you thought about giving feedback to people?

[00:15:10] Kevin: One of the things we did well over time was we had a strong discipline around talent management. We recognized we were on a rocket ship. We had a team that was driving, in some cases holding on because it was growing so quickly. And we knew intuitively that people who are in those seats were not necessarily going to be people who could take us to the next level.

And one of the things we did really well is we were honest with ourselves and with our team about the roles they were playing now and would they be in those seats in the next couple of years? And it turns out we ended up switching over the entire management team about three times over the course of seven years. And it was mostly proactive in the sense that we knew that the people in the world couldn’t take us to the next level.

I mean, sometimes we obviously made personnel mistakes where we had the wrong person in the wrong seat and we had to address that, but we were pretty rigorous about that. I’d give us pretty high marks because when you hire into a role, chances are you got maybe a 50/50 chance of actually making a great hire and I think it’s as important, if not more important, to correct that mistake as quickly as possible.

That really did allow us to take full advantage of the opportunity, because the industry was growing so fast. We had opportunities both domestically and internationally, and we were integrating vertically in the value chain. So, so much had to be done that it was critical for us to get the right people in the right seats during that period of time, or we wouldn’t have nearly taken as much advantage of the opportunity that we had.

[00:16:58] Will: I mean, those are not easy conversations. So any lessons learned in handling those?

[00:17:03] Kevin: The best advice I’d have and what I try to do, but as is always the case, we never do as good a job as we want to, and that’s being consistent and constant in your feedback and having an open dialogue with your team members. So that there’s not a lot of ambiguity between how you think he or she’s performing and how he or she thinks he is performing. So having those constant conversations makes the ultimate conversation around it’s time to leave a lot easier, because you almost arrived to it at the same place at the same time.

And just being honest with yourself and being honest with those people and having the courage to actually have that, because those are difficult conversations. We know, we avoid them, we don’t like having them, but it’s the right thing to do at your job. It also helps the employee because if they’re not performing, they need to know. Otherwise, they have no chance of redirecting or addressing that. And I think as long as you’re having those conversations on a regular basis, it helps you hold your feet to the fire and taking these actions that should be taken on a timely basis.

The other thing that was helpful, and is helpful having a partner, is holding each other accountable. If it’s just you, then it’s easy to push off or allow somebody to stay in a spot thinking he or she may improve over time a little bit faster. And it’s always great just to have, in this case, we were partners, effectively operated as partners. So being able to hold each other accountable for our team was really helpful.

If you don’t have that person, then having a board member or an executive coach or a mentor really is helpful in prompting you to see clearly what’s happening.

[00:18:53] Will: Did you and Brett, as you were sorting through that, ever disagree?

[00:18:57] Kevin: We rarely disagreed. One of the things I liked about our relationship was we didn’t get stuck in a specific point of view or position. I think both of us were pretty good about allowing the data or the information or new information to change our minds. We may have had differences in small areas now and then. We would allow the person who really had key authority over that domain to make the decision.

I think only once, Will, there was a time it was about a specific individual where we disagreed on whether to keep this person or not that went on for six months. It was a situation where I thought this person needed to exit the company and Brett wasn’t quite there yet. How we managed that was really more us continuing to converse about it. It took, I think, six months longer than it should have. And eventually that person did exit the company.

The way we ran the company, if one of us really believed that somebody needed to exit, it had to happen because once that person has lost the confidence of one of us, then it’s ultimately not going to work out. We worked our way through that, I’d say slowly and carefully. Because you want to be careful because you’re protecting an important relationship. You want to do what’s right for the company, but the relationship that he and I had together, our working relationship, it was pretty instrumental to how we operated as a company and doing that well could take the company in a positive direction or a negative direction.

Talent and Compensation

[00:20:34] Will: A related thing is this idea of lack of hierarchy. I think it was one of these TA years, 2005, something like that, the company added 50% more employees in a single year, right? How did you keep from hierarchy creeping in?

[00:20:52] Kevin: You do the best you can. Of course it’s going to seep into any organization. You try to model it as best you can. Having a low ego or being humble was an important part of the ethos of Asurion in that you’re setting high goals together, you’re working together to reach those goals, but you’re also open to constructive criticism. And when you do those postmortems to get better, it does people letting their guard down, being comfortable, having constructive criticism directed their way.

So, that does help from a hierarchy perspective. In growing companies, managers, leaders set of responsibilities get divided all the time. And so people seeing that a senior leader as the company grows might have a section of his or her responsibilities cleaved out and given to somebody else, not under them, but beside them. Those are always challenging conversations. People feel like you’re taking responsibility away from them.

But it’s necessary in a growing enterprise to have great people focused in key areas and particularly as the scale underneath it is increasing at the same time. That was how we thought about the example we tried to make.

I think one of the mechanisms we used to promote that was a mechanism we call “Power of 10.” It’s an exercise in focus and prioritization. But it helps people to see that this is not about hierarchy because what we would do, is we take every so often for a really important event, it could be a contract renewal, could be going after a new client, it could be some other negotiation, it could be a supply chain problem, or an operational glitch. And we would pull together a handful, maybe a half dozen people who had knowledge and something to contribute to that problem or issue. And it didn’t have to be the CEO or the head of that client. It could be somebody who is lower down in the organization, who actually had the details and understood it at a deeper level.

And we would bring that group together in focus time, call it two to three hour increments, maybe do it two or three times and have prep material in advance to allow people to think about these issues. And I know it sounds simple, but it’s wildly effective at just getting a handful of people, the right people, at whatever level in the organization, focused on a problem, not worried about the meeting that came from the meeting going to. And we found, you always, in every instance, will come up with alternatives that individually you never would have got to. It’s a powerful mechanism. We still use it today.

[00:23:45] Will: Can you talk a little bit about organizational mobility as kind of a principle for top talent?

[00:23:52] Kevin: We believed in terms of the best way to develop your people is to give them a wide range of responsibilities across the organization and in particular for your high potential leaders. Those that you want to continue to rise up in the organization. I will tell you, it’s really easy for them to rise up in their functional area, but to give them cross functional experiences to meet other people and network within the company. Longer term, that has a much greater impact on the business. In fact, when you look at our executive committee, Will, I think the average tenure may be approaching 10 years and some 15 to 20. It’s a long tenured group of people.

[00:24:40] Will: Across a breadth of roles.

[00:24:42] Kevin: Across a breadth of roles, yes.

[00:24:43] Will: Compensation. Can you talk a little bit, Kevin, about specifically equity compensation and how you’ve evolved your approach? I mean, you started out as a search fund, right? A rigid mode to that. How’d the company’s approach to equity compensation evolve over time as you’re bringing in these A players?

[00:25:02] Kevin: This is where we benefited early on from having a tremendous board of advisors, directors who could help us think about these types of issues. And while it is certainly important from a shareholder return perspective to shepherd equity very carefully, part of the ethos early on was you need to reward management team and have them aligned with the shareholder base. And that meant distributing options as a key part of the management incentive plan.

And that was built-in early on as part of our comp structure. It certainly was for Jim and I. And in order to attract the very best people, like the Gerald Risks of the world, to pull him out of his current role at a much lower salary, we needed to use equity and the promise of that as a key factor in bringing him in and other important leaders of the organization.

It connected to being able to get great people, really, because when you’re a small company, you’re getting these really talented people to come work for a small roadside assistance company in Houston, Texas, or a cell phone insurance company in Nashville. Why would they do that? Well, you’ve actually got a great story because you get to be part of this leadership team, as opposed to being a cog in the wheel in a large company. You get to be part of a leadership team. You get to be in on the decision making. And we’ve got this great vision that we’ve laid out. To the extent we work hard and reach those goals, you can not only be part of that, you’re rewarded by it as well. And we tried to push this as far down in the organization as we could, and it had fits and starts over time, but we ended up pushing all the way down to the manager level. So those people who come in right after business school in particular get slugs of equity right away.

[00:27:00] Will: When did that happen? When did that pushing down deeper into the organization occur? Was that a TA era thing?

[00:27:06] Kevin: It was really a TA and Brett era thing. We believed in it and certainly needed equity to hire the key senior managers. But once Brett came on board around 2001, 2002 timeframe, I think we were much more rigorous in our thinking about how to drive that down further in the organization and get people at the VP, Director, Manager level aligned toward these goals.

Another interesting aspect of our compensation, Will, was this idea of full potential. So consistent with divine, just content, like reaching for those goals. We’d have a bonus plan that was a fair bonus plan that people would strive for, obviously, but we’d always have this suped-up or supercharged bonus plan for hitting full potential. Because we didn’t want to be that company that put out low targets and beat it. By the way, in any organization, that’s sort of the natural state or people will tend toward that as you get more and more people because it’s easier. Everybody wants to hit their goals, so you set a lower one and if you beat it, nobody asks questions. And that’s the road to mediocrity, honestly. Then you’re just maintaining. You’re not really pushing yourself. So, we’d always have this full potential bonus that was something that was stretched in orientation. We would never really hit it all, but I can tell you, it helped get us well beyond the reasonable plan we put in place and well toward the full potential of what we could be. You saw it in the results. I mean, the growth in the 2001 to 2007 time frame was incredible.

[00:28:49] Will: And super roughly, where did that kick in?

[00:28:51] Kevin: If budget was a hundred, then the full potential, it was really unbounded but think about a hundred and fifty. The bonus would accelerate after the hundred. And as a rule of thumb, for every dollar above hitting that plan, management will get a third of all the dollars that we made in that year. So an outsized portion of that pool over budget came to the management team. So, it was a incredible motivator to really achieve full potential.

[00:29:22] Will: How’d you guys think about providing liquidity to shareholders, to management owners?

[00:29:28] Kevin: It’s an important consideration, particularly as a private company. And we never really had a desire to be a public company and still don’t. That said, if you’re a private company and you’re incenting people with equity, you do need to find ways to get not only your employees equity, which is important, but your shareholders as well over time.

And we’d endeavor to have some sort of liquidity event every couple of years. What we found, particularly with our management team, was that equity incentives really worked, but if they don’t see liquidity within a three year period, then the value of that incentive actually tends to start declining because they’re wondering, “Is this really a value? Is this really here?”

And having some level of consistency and track record of liquidity events is actually important to maintain the value of that incentive. So, we would have either a debt recap or a debt and equity recap or sometimes dividends along the way.

A lot of shareholders did well by Asurion, but I will tell you, Will, the thing that feels really good is you have that conversation with the director level person who may have made a few hundred thousand dollars on a recapitalization where they sold some of their equity and they’re set up for retirement to put the kids through college. To be able to have that kind of impact on your employees lives is really gratifying.

Giving Back: Compassion Forward Program

[00:30:57] Will: Can you touch Kevin on the Compassion Forward program that you guys started?

[00:31:01] Kevin: Compassion Forward project is a philanthropic organization that we created internally at Asurion. And it was giving by Asurion employees in support of Asurion employees. We want to, like most organizations, want part of the ethos to be giving back and helping the community.

We happened upon it, it was one of our mid-level managers who came up with this concept of Compassion Forward. And we realized we have tens, well, we have 23,000, but we have so many employees who are hourly employees. And if they have a traumatic or problematic or big issue in their lives, then they might not have the money to pay for it. It could be additional healthcare costs for that person or somebody in their family. Could be a death in the family and just being able to bury them. I mean, there are events in people’s lives where they just need financial help. So, we created this fund and the company seeded it and eventually employees can deduct from their paycheck and put into it. And then it’s managed by a group of managers who get applications from people who have issues. And we gift and donate money to these individuals on a regular basis.

It’s really helpful. We’ve got thousands of employees in the Philippines and whenever there’s a hurricane there, a lot of people are displaced and put out of their homes, and they have to rebuild their lives. And we use the Compassion Forward Fund for that as well.

So, it really helps build community and connection within the Asurion network. It’s something we think is pretty innovative and helps tie that team feeling together. We try to promulgate this to companies. We’ve got an evangelist who will go out to other companies and describe Compassion Forward and how it works with the hopes that other companies do this as well.

[00:32:54] Will: And that’s very cool.

Customer Concentration

[00:32:55] Will: All right. So shifting gears for a minute, going back to that TA ‘01 period. One of the trends during that period was industry consolidation, right? So, could you touch on that a little bit? And basically that’s taking the customer concentration issue, which is central to the business and if anything, extending it, emphasizing it. Could you just talk a little bit about that trend?

[00:33:19] Kevin: We benefited greatly from being attached to the wireless industry, obviously. That where the number of customers with wireless handsets grew from 10 million when we started, I think in 95 to ultimately over 300 million. And when we started out, there were scores and scores of wireless companies. They were set up almost by MSA. But like a lot of industries like that, it just consolidated really, really quickly. So, I think certainly by 2000, the top three to five carriers would own 70 to 85 percent of the market.

So, it was clear back in the early 2000s, we were going to be in a consolidating industry. That’s just really the way it had to be for the economies of scale to work for them. Which meant customer relationship management was going to be critical. It was always important, by the way, to be working with the acquiring company because if company A acquired company B, then the vendors and partners of company A would tend to win out as well, and that worked largely in our favor in the early 2000s.

But we knew then that it was a concentrated industry, and we really did two key things. One was focus on client relationship management, keep them close, and keep them happy. And two, diversify. So we’re always in this search to look for growth outside of the wireless industry or in different areas of the wireless industry in order to lower the risk that comes with concentration.

As it turns out, working within a concentrated industry can be a good thing. It allows you to focus. And if you’ve got a great product and you’ve done a good job of managing client relationship so that they view you, your company, your product as strategically important to them, which was one of, again, back to Brett’s superpowers, one of the things he was able to do for us, then you embed yourself in that organization and are able to continue to grow along with it. We’ve been successful at doing that over a long period of time in a consolidated industry.

[00:35:34] Will: As it relates to Brett’s time in managing that increasing, growing, already high customer concentration piece. How did that affect the way he spent his time as CEO?

[00:35:45] Kevin: At least a third of his time, if not more, was spent on client relationship management. I can say the same for myself.

It was important for us to get to know the most senior levels of our clients. If you’re successful at doing that, then you have a seat at the table to pitch them new ideas, to help continue to grow with them and evolve your product suite with them in a way that’s more difficult to do when you’re down at the mid levels. And we were effective at doing that over time.

There’s a great story of Brett wanting to meet the then CEO of our largest carrier partner. And he was very strategic about it. He found out through the CEO’s assistant that he liked to work out at five o’clock in the morning whenever he was traveling for these conferences. So Brett, who really didn’t work out as much before this, started working out at, shockingly, five in the morning. And he would meet the CEO. They’d be the only two people in the gym. They’d be there successive days in a row. They’d get to talking, and know each other. And that’s the start. It’s very creative. It’s thoughtful. The time you spent to figure that out was critically important.

As important, if not more important, Will, is, okay, now that you’ve got the audience, what do you say? What do you have to contribute? And Brett was always prepared. So, he knew how to position our product to make it strategically important to the wireless carriers. And it was really all about providing an amazing customer service, driving loyalty and reducing churn for them, as well as revenue generation. And given our place in the industry, we were able just to do that in spades for these carriers and, become a real important strategic partner with them.

Crisis Management

[00:37:33] Will: When you look back at that period, it seems like there was at least one period very early on where there was some risk, some scariness, which related to that sort of early claims process system implementation in 2004-ish. Can you talk a little bit about what that was like, company’s growing super-fast, but within that you got a kerfuffle.

[00:37:58] Kevin: We’ve had a few of those. I certainly remember the claim system failing that almost brought us down. I think we were down for two weeks and doing things manually.

In the early days, particularly in a concentrated industry, a few bad moves can derail the entire system. As a manager, you want to be taking risk out of the system wherever you can. The claim system problem, that was just self-inflicted. That was, we made the classic mistake of moving from an old system to a new system without the ability to fall back if things didn’t go well. It was as basic as that, and the new system didn’t work. Everything went to manual for about two weeks. It was all hands on deck. Every manager, every person in the organization.

[00:38:44] Will: How did you guys personally deal with that?

[00:38:47] Kevin: In the call center, helping people literally on the phones, taking claims, everybody knew what to do. Certainly, there was making sure that the IT system was getting worked on in the background, but no, we were there, sleeves rolled up, we had to be there. And it was a tense time, because we were getting calls from our clients at the same time, “Hey, what’s going on?” And we needed to be taking care of these customers who are used to very short hold times, very short cycle times in terms of getting their claims processed. And now they go for minutes into days, and you get some angry customers, but we worked our way through it. We had built up a reservoir of goodwill with the clients such that we were able to manage our way through that. I can tell you we’ve not made that mistake again.

Strategy by Experimentation

[00:39:31] Will: Can you talk a little bit about the approach over the years you guys have had to testing and learning new products?

[00:39:38] Kevin: As I look back over the course of time with Asurion, you can see this nice curve where things have gone up and to the right. We made some good strategic moves along the way. It’s funny, people ask, “Did you envision all this? Did you have this strategy from the outset?” And the answer is absolutely not. I call what we’ve done strategy by experimentation. We were in the flow, we attached ourselves to a great industry. And while we knew directionally where we wanted to go for the most part, we didn’t know exactly what was going to win or not. So you’re always placing bets. You’re always placing, not an infinite number, but a handful of bets. And you want to execute those bets well. And importantly, you double down on the ones that work, and you kill the ones that don’t. And we’ve had a number over the years that have not worked. Fortunately, we’ve had enough of the bets do work along the way.  And I think of that, not just in products, but in acquisitions.

When we bought the Merrimac group, Will, that was making a small bet in a new product to the same channel of distribution. It wasn’t betting the farm. And then through the course of the early 2000s, we were betting in another way to diversify is other products sold through the wireless channel. We developed a product called Pay Assure, which was to help carriers attract credit challenged customers, which they weren’t bringing on at that time. It was really a little before the prepay era.

We had another business called Asurion Managed Wireless, where we would take over the management of all of the handsets for an enterprise. And so there’d be a lifecycle management as well as tracking of those devices. And we got them up and running, we stood them up, and both of those turned out for different reasons not to work out, so we shut them down. But others, along the way, were successful in addition to handset protection. We’ve made little bets in integrating into the value chain, whether it was getting into the reverse logistics or repair business. And once we found that those worked, we were able to grow. We have a long history of just testing and learning.

Acquiring Lock/line

[00:41:48] Will: That’s an almost perfect segway, I think. We’re going to return to the M&A topic, which we’ve touched on before, and this is an 800 pound large bet. Let’s shift and talk a little bit about Lock/line and how that unfolded over time, maybe from earliest days when you guys came across the company.

[00:42:08] Kevin: Yeah, so Lock/line was in our sights right from 1999 when we started looking at handset protection. There were three players. We ended up buying the Merrimac Group, but we talked to Lock/line we saw it there, and there was Signal out there as well. Once we completed the acquisition of the Merrimack Group in ‘99, and we never lost focus on one of these others, and we re-initiated conversations with Lock/line more substantively in 2002.

They were owned by an insurance agency in Kansas City. We put in a bid. They took themselves out to auction and we thought we had a generous offer in there. They were telling us that there were other bidders, we didn’t believe them, and we were wrong. And another Kansas City based company ended up buying them for maybe 10% more than we were offering. It was such a disappointment to have that slip through our fingers and we could have easily paid that and more. I think we were obstinate and overly confident in our position that we were the logical buyer of this and who else would buy this? Well, turns out we were wrong on that. So that went away. We re-engaged them two years later.

[00:43:29] Will: The buyer who prevailed in that process before, strategic or financial buyer?

[00:43:32] Kevin: Somewhere in between, it was a company called DST Systems. They’re also based in Kansas City. They had a history of investing in companies outside of their core business. They weren’t a private equity financial buyer. Typically, that is essentially what they were doing in this case, because there were no obvious synergies between what Lock/line did and what DST did. And for that reason, we thought we could pull it out again at a much higher price than what they paid for.

The conversation started. It was clear that I was not going to make headway with the CEO of DST.

[00:44:09] Will: How would you summarize why?

[00:44:11] Kevin: Different generation. The CEO was older. He’s certainly well established in the Kansas City community and known somewhat nationally. And in some ways I was beneath his station.

So, we brought in the big guns. We brought in Irv from the board and our general counsel, consigliere, amazing attorney, Dick Floor from Goodwin Procter. He and Irv and the DST Systems CEO were all of similar age and stature, and that helped us get in the door. I think it played to their ego, which was a factor. It got us to the table where we started the discussions, and there were some long negotiations, but it came to a head in 2006 when we were able to bring it all together in a transaction where we bought Lock/line largely for stock and DST ended up owning almost a third of the company.

[00:45:04] Will: Explain the location wrinkle.

[00:45:07] Kevin: One of the great things about Lock/line is we were in the industry together. We probably knew as much about them as they knew about themselves. And there was such a great value to be created by putting the two companies together because we could take their business model, apply ours to it, and create tremendous value because we had this vertically integrated approach and we could increase their EBITDA x-fold almost on day one.

We wanted this to happen because we knew value is going to get created. That said, it was a stock deal. We’re marrying these people and DST would have two board seats and a third of the company and negotiations during that time are, they’re always challenging, but they were fraught a little bit by the fact that you’re negotiating with one another, but you’re also seeing how the other person is treating you along the way, because you’re going to be partners.

And right at the last minute, at the 11th hour, we’re about to sign a deal and lo and behold, a wrinkle emerges. The seller wants to ensure that we maintain a presence in Kansas City, a physical presence for a long period of time because it was important to him that jobs stay in the community. And this was going to have an impact on the synergies because we had imagined contracting materially. So we went back into our own room and thought about it. It became clear the loss of that synergy wasn’t going to be enough to derail the deal in any way, but how we are being treated along the way, didn’t feel good. So, I reached out to Irv and got advice from him. He wisely said, “Look, now, you know, at least who you’re dealing with, and this is somebody you’re going to have to deal with for the next years. Are you sure you want to go through with it?” I didn’t even hesitate. I can endure a lot of pain if the value is there. And we just knew the value was going to be there. That’s why we’re willing to stretch in terms of the size of this deal as a percent of our enterprise value.

And we were marrying this organization. I knew there were going to be challenges with it, but I felt like we’ll figure that out in the future. But let’s create value in the near term. And lo and behold, we went ahead and closed the deal. And fortunately, both things came true. We created a lot of value and the marriage was fraught. It didn’t work out very well.

[00:47:28] Will: Quick math on that is enterprise value is just over $400 million, $408 million. DST takes that all in stock, a little over a third of the company. So big, chunky bet valuing their business at about 50 percent of enterprise value beforehand for the company, right? So that’s a big bet. As a multiple of cashflow, that’s around 10 times trailing EBITDA and about seven and a half times the projected EBITDA for next year. But that’s before synergies, which even after Kansas City are gigantic here. If you sort of factor those in the multiple paid is sort of six, six and a half times EBITDA just to frame all that.

Integrating Lock/line

[00:48:09] Will: Can you talk a little bit about the integration process, how that went?

[00:48:11] Kevin: That went shockingly smoothly. We had a couple of months before close to line that up. And this was a big deal. We hired some advisors and experts at Bain, and they helped us with the merger integration process and how to manage that because we hadn’t really done anything this big before.

And probably the most important element of that integration being successful was getting aligned with their CEO, Chuck Laue. Som Chuck came with the company, he had led the company, and he was going to come in and partner with Brett and I as really a tri-guy in terms of managing the business, and he was all in.

And once his management team saw that he was in, we were aligned, everything else fell into place. It made all the other decisions easier. And we knew how we were going to integrate these two companies. It was going to happen day one. So the day the deal closed, we had the org chart set out. We brought in every manager one on one. Brett and Chuck and I spoke to each of them individually, “You’re in this slot, you’re in this slot, you’re in this slot.” A few people didn’t have slots and those were tougher conversations, but we made them.

And so we got the org structure done day one and it took a couple of weeks, but we got alignment on the approach we were going to take. Part of it was operational, which wasn’t as important, but it was really a client management getting aligned to that. And basically the big win was taking their client base and converting it to our business model and doing that sequentially. And that served to generate increasing amounts of EBITDA over the next few years.

[00:49:53] Will: Just a super roughly, I mean, this is inexact, but if you looked at the value creation from that, again, enterprise value paid was $400 million roughly. EBITDA created from that is probably two times that amount at minimum. So really glad that deal happened, that’d be fair to say, Kevin.?

[00:50:15] Kevin: It was a pretty seminal transaction for us. Now, we would have loved to have been able to purchase a company for $200 million a few years earlier and gotten these synergies sooner. But it was a huge win for certainly the shareholders, company, and I think for customers and the carriers because we became a stronger partner to the carriers and were able to offer more services over time.

Capital Allocation in the TA Period

[00:50:38] Will: All right. So, let’s shift to capital allocation in TA period here. If you look at the data for the first four or five years after Jeff and TA make the investment, leverage is pretty negligible, pretty low across that period of time. Is that fair to say?

[00:50:56] Kevin: It is fair to say, yeah.

[00:50:58] Will: And business is just generating so much cash, it’s able to fund its growth that you guys were just focused elsewhere. So, the first thing that happens after a long period of time is there’s a dividend recap transaction in kind of the middle of ‘06, almost exactly five years into TA’s ownership. It’s big. 750 million dividend recap financed entirely with debt. It takes leverage overnight to just over four times EBITDA, 4.1 times. Do you remember all that?

[00:51:26] Kevin: It was our first large transaction since TA. And in the preceding three or four years, our focus was so much on just holding on, scaling, managing this business, that not a lot of time and attention had been put on optimizing the balance sheet. Because along the way, with the benefit of hindsight, we should have been doing some share purchases. That would have gotten people liquidity and those transactions are highly accretive to remaining shareholders.

I think two reasons. One, we’re really focused on the core business, and it was growing really fast. But two, nobody wanted to sell. It’s not like there was a desire of shareholders in this time frame to sell because everybody saw what was going on, so they were excited to be part of it. And then even more so when we closed the Lock/line transaction earlier that year in 2006. And then so, all right, we fast forward, we get through that. Still, nobody wants to sell shares, but they recognize that, look, we’ve got plenty of capacity on the balance sheet here to lever up. Get some returns back to shareholders, and that’s when we did a pretty big dividend. I think it was a little over a third of our enterprise value at the time and basically ended up dividing $750 million out to our shareholders.

[00:52:43] Will: On the share repurchase front, there’s one other event that was kind of midway through October ‘04. You guys bought in about 25 million worth of stock, which was about 6 percent of shares outstanding, right? So that first one in ‘99 that we talked about was about 10%, but this was another 6%. Returns on that piece have been also pretty extraordinary, a 70 times multiple of invested capital and a 56% IRR over 17 years. That was definitely worth doing. That’s the thumbnail summary on capital allocation in the TA period.

2007 Equity Recap

[00:53:16] Will: And the next event is ‘07, the equity recap. Can you talk a little bit about the timing for that, how you guys thought about that point in time?

[00:53:25] Kevin: There were two things happened. There were two reasons we ended up doing the transaction. The market was incredibly frothy. I mean, this is leading up to the financial crisis. Our timing couldn’t have been better, honestly. But not that people wanted, I mean TA was six years into their transaction. So, it was from their perspective, “All right, we’ve been in, this has been a nice ride for us. Let us take our chips off the table.” So there’s some like interest level there. And then you combine that with the market being incredibly strong at the time. It was a topic of discussion.

What really drove it from my perspective, it gave us an opportunity to get DST liquidity. And that’s a euphemism for get them off the cap table. Look, the marriage didn’t work. As I said, we created a lot of value with the merger of Asurion and Lock/line, but the board dynamics were challenging. I didn’t get along with their two board members. There was constant friction there. Other board members didn’t get along with them. And I just knew this was going to be better longer term if we got them liquidity and got them the chance to move them off the board.

It was really those factors coming together where we decided we’re going to run a process here and we ran a process. I remember going through it. This is how frothy times were. We were interviewing private equity firms. So, we would go out and see if we’d even let them into the process. It was certainly a heady time. We were walking into conference rooms and the first thing that some of these partners would say to us, like, just name your price, I’ll pay whatever. And certainly that felt great, felt validating. The process ended with us picking one party to negotiate with. One winner, if you will. Highest price, we wanted to negotiate some of the terms, then once we finished negotiating the terms with that private equity firm, we told them, look, you’ve got lead and we’re going to give you this much allocation, but I’m going to take the same deal and give it to the other two finalists and give them the option to join the party.

And here’s why. We don’t want one private equity firm controlling our direction. It was important to us that we had a group of people around the table who were ultimately looking out for the best interest of the company long term and not necessarily one particular fund. So, we ended up negotiating originally with Madison Dearborn, but we brought Welsh Carson and Providence Equity into the deal.

All the time, interestingly, Irv was in the background saying, “This is a really frothy market. I would encourage you to work as fast as you can. Get through this process.” And his words couldn’t have been more prescient, because our debt deal that went along with the equity was the second to last deal in early July 2007 that closed. And then I think one deal the next day closed, debt deal, and then the window shut for quarters and quarters. I don’t even know. It was certainly over a year while the window was shut and we managed to get that transaction done. And that turned out to be a pretty seminal transaction for us for a number of reasons.

[00:56:41] Will: It’s really impossible to overstate how rare that cap table is. If you sort of look at the final ownership post transaction, the original investors and management team continued to own 40% of the company. Madison Dearborn owns 22%, Providence Equity owns 22%, Welsh Carson owns 11%. So, the private equity group collectively, club so to speak, is 55% controlled, but just barely, and DST continued to own 6%. So those sorts of transactions, those club transactions are very common in venture capital. They’re very uncommon in private equity. So, definitely a mark of the times.

A few other points around that, just bringing the information together. So, the total enterprise value for that ‘07 transaction was $4.1 billion. $3.4 billion equity value and TA exited their position entirely. So, for TA that gave them an even 12x return on their original $60 million investment or just over 49% IRR. A lot of the original search fund investors ended up exiting in ‘07. Not all of them, but a healthy chunk of them did. And if you look at their IRR math, from the 1995 original transaction through ‘07, that’s a 468x outcome and a 72% actually slightly better IRR, so reasonably good outcome.

And if you look at the TA period and just look at the operating math, it’s kind of interesting where revenues go from just over $110 million when they join to just over $1.2 billion. So, it’s a 10x growth in revenue. And the EBITDA goes from $30 to just over $300. So again, 10x growth in EBITDA, 10x growth in revenue. So that’s a pretty good six year period of time.

[00:58:43] Kevin: We certainly had a good run during that period, that’s for sure.

[00:58:45] Will: That was a pretty good run. Thank you, Kevin, for your time and what an incredible story. Thanks so much for sharing.