Asurion: Retracing the Path to 100 times 50x with Irv Grousbeck

Irv Grousbeck Introduction

[00:01:37] Will: As I mentioned before, there have been two constants at Asurion over the last 28 years. Co-founder/CEO/Chairman Kevin Taweel, whom we met last time, and Irv Grousbeck, a lead board member and investor since the original acquisition. Irv has had two distinct careers. First, he was the co-founder with his partner, Amos Hostetter of Continental Cablevision, a pioneering cable television company. Irv was the president of Continental from 1964 to 1980, and remained a director, serving as chairman for a time after that.

And so just to take a minute on Continental, basically everyone in the cable television business in the 1960s, 70s, and 80s did well. However, there are two records that stand out, one public and one private. The public one belonged to John Malone at a company called TCI. The other one was lesser known and belonged to Irv and his partner Amos at Continental.

The company had a reputation as the best run in the industry, and it also had phenomenal returns. The company, as I mentioned, was founded in 1964, and its IRR over the ensuing 35 years was over 30%. With total multiples of invested capital for the shareholders who held their stock of over 5,000X. So again, not too bad.

By the way, when Irv and I first spoke about this podcast, I told him about 50X and he jokingly mentioned that the title was kind of wimpy. After all, he had been involved with two companies that are around 100 times 50X. So again, that’s a pretty reasonable background for this podcast.

Anyway, following Continental, Irv became a professor. First at the Harvard Business School and since 1986 at the Stanford Business School, where he has been one of the most acclaimed teachers for over 30 years. He’s the co-founder of the Center for Entrepreneurial Studies, which now accounts for almost half of the courses in the second year curriculum at Stanford.

On a personal note, Irv has been a key advisor to me for the last 30 plus years. I would describe him as my personal board of directors, which is a very elite group, as Irv is the only member, and it meets once a year at his house, typically in New Hampshire. And I can say that on several occasions, that advice has been pivotal for me in my career decisions.

It’s also worth noting, in an early echo of this podcast, that Kevin Taweel and I audited Irv’s class at Stanford in 1992 due to low lottery numbers, which prevented us from gaining normal entry. All right. So Irv, thanks very much for joining us and let’s dive in.

[00:04:09] Irv: Will, thank you for those kind words, some of which are deserved and almost all of which are accurate.

And I just want to point out that the Continental Returns don’t hold a candle to the Asurion returns.

[00:04:23] Will: It’s a pretty rarefied zip code.

Irv’s Background with Continental Cablevision

[00:04:25] Will: If you don’t mind, Irv, let’s start with a little bit of your background from the early days before you became a professor, maybe starting with how you and Amos found your way into cable television after your initial search.

[00:04:37] Irv: So we were friends and fraternity brothers from Amherst College, and I graduated from HBS in 1960 and he graduated in 1961. He’s two and a half years younger than I. We were conducting separate searches for a company to start or buy and just comparing notes with each other. He was working then for an individual investor in Boston, and I was a case writer at Harvard Business School.

This is during the period 1962 to 1964, and the investor for whom he worked had made a modest investment in the cable television system in Keene, New Hampshire. It’s through that connection that we first, or I first, heard about cables. Just prior to that, we decided to start working together as partners rather than just comparing notes as friends.

It was the most ridiculous, actually, in retrospect, search with no framework at all, despite our education and alleged intelligence. We looked at plastic inflatable toys. We looked at indoor tennis centers. We looked at residential fuel oil. It was just, “what could we find that might be interesting?” Then when he heard about cable television, it turned out that there was a company called Spencer Kennedy Laboratories, which was about a mile from Harvard Business School, and they made electronics for the then nascent cable industry.

It was hardly an industry. There were just pockets of activity where the terrain was mountainous, in places like Pennsylvania and Oregon. And a fellow named Bob Brooks, who was a vice president of Spencer Kennedy Labs, kind of took us under his wing, partly because he was a nice person, and partly, I suspect, because he thought if our crazy idea of starting a company ever materialized, maybe he could sell us some electronics equipment amplifiers, specifically.

So he helped us understand the industry. He told us a few states to look at, which included North and South Carolina and Ohio, where we eventually ended up and some other states. And we took to doing an analysis of the propagation of television stations and population pockets. So we’d get a map and take a protractor and we’d apply a circle on that map as to what the A coverage and the B coverage of the television broadcast stations was, and we would look for places where there were opportunities.

And we eliminated North and South Carolina. So finally, Amos  and I decided that I would go to Ohio and we would split the cost, which was important to me since I had no money. And I would make a little foray out to Ohio, and there were some cities we had targeted out there to take a look at and really see what the lay of the land was.

[00:08:14] Will: While we’re on that, Irv, do you mind just telling the story of Tifton and those first systems and how they arose from that?

[00:08:20] Irv: I went to some promising cities that we had uncovered, one of them was Mansfield, Ohio, and in my infinite wisdom or lack thereof, I decided, no, there’s an awful lot of what we called free signal, meaning available broadcast signal off air.

Uh, no, I don’t think so. Well, of course, since then, someone else came in and built a wildly successful system in Mansfield, Ohio. So that’s boat number one we missed. Then I drove to Lima, Ohio, where there was a cable system under construction, and then I went to Finley, Ohio, Lima, Finley, Tiffin, and Fostoria, where we ended up, were all in northwestern Ohio, south of Toledo, near the Indiana border.

So Finley had a franchise process that had already been started. A franchise means just a local ordinance that gives you the right to cross the general easement over the right of way to hang your cables and electronics. They hadn’t granted anybody one there yet, but there was one in process. So then I went up the road to Tiffin and Fostoria, Ohio, which were in the range of 12 miles apart, maybe 14, and together they aggregated a population of 40,000.

So, we started the franchise process in Tiffin and Fostoria by hiring local lawyers and making our case that we had half an idea what we would do, which was not true either. But we had an idea, but we were a little lacking in the execution department.

Meeting Kevin and Jim

[00:10:09] Will: Well, I think come back to Continental at different points along the way here, but maybe let’s talk a little bit about Kevin and Jim Ellis and how you came across them as case writers and how they came together as partners.

[00:10:23] Irv: So I was interviewing in, I think it was the spring or maybe the winter of 1992, the year that you graduated as well, Will. I was interviewing people who had applied for case writer and some of them had been in my class.

But as you mentioned earlier, Kevin had not been in my class, but he showed up and said, I want this job. And my recollection, which could be retrofitting history, but he said, I want this job because I need this job and I don’t have another job. And I think I’d be good at it. And I think I might want to be an entrepreneur, something along that line.

So fortuitously, I hired him and he became a case writer from 1992 to 1993. Then Jim Ellis, as you mentioned, took that role. He graduated in 1993 and took that role from 1993 to 1994. And of course, I don’t know when they first met each other or how they became acquainted, but by the time Jim had taken over and was partway through his one year term, he and Kevin were well acquainted.

[00:11:39] Will: And do you remember the story of how they found Road Rescue?

[00:11:42] Irv: I do. I’m not the one to tell it, but I’ll tell you my recollections are that, like Amos and me, they were coordinating their efforts but separately looking for something to buy, and they had studied the towing industry. So, Kevin wasn’t as enthusiastic about towing business and towing related businesses as Jim was. Jim persevered.

And Kevin showed up one day and said, I found a business I think I might want to buy. It’s a physician practice in Miami, Florida, and it serves the Hispanic community and the doctor who’s willing to sell it to me for a reasonable price is Hispanic himself. So everything is conducted in Spanish.

Then sometime later, Kevin came back and said, well, wait. I don’t know that I want to do that. He said, I talked to one of my prospective investors, Bill Egan, and his first question was, do you speak Spanish? When I had to confess that I didn’t speak Spanish, Bill said, you might have a pretty uphill fight figuring out how to buy and operate that company and he said that turned the tide with me and maybe there were other steps that intervene. But then he and Jim reunited and Mr. Rescue, as I understand it, was an offshoot of learning about the towing industry. That opportunity came up in connection with their examination of towing.

[00:13:22] Will: At that time, it was an offshoot that was growing very rapidly. Typical search deals, as I recall it in those very early days, were generally targeting more stable businesses.

[00:13:33] Irv: Right.

[00:13:34] Will: Businesses that could, quote unquote, go once more around the track.

[00:13:37] Irv: Exactly.

[00:13:39] Will: Yep. And Road Rescue obviously was a completely different kettle of fish.

[00:13:43] Irv: I remember my question to Kevin was, well, wait. Most people belong to AAA, and then when you buy a new car, if you do, you get free roadside assistance, why are they going to pay you for that? And he and Jim had a list of reasons why that was going to happen, which included better service, broader service offerings, and so forth.

In any event, I was not part of their search fund, either of their search funds, which they then combined. I was not an investor. They just were talking to me from time to time about what was going on.

Investing in Road Rescue

[00:14:22] Will: Can you talk a little bit, Irv, about how you came to invest?

[00:14:26] Irv: My recollection is, they pursued the acquisition of capital to buy Mr. Rescue. And they came back and said, we’re $300,000 short. Would you want to put in $300, 000? I said, you know, really, that’s not good for me. It doesn’t really work. And they said, well, what would work? And their capital structure, as you well know, was half debt and half equity. And I said, well, if that $300,000 would be divided 150 and 150, I said, I’d really like to get 500 of equity, but that doesn’t sound like that works.

So, I’ll help you find the other 300. They came back a while later and they said we’ve decided there’s room for you to put in the amount that you specified. And will you join the board? And I said, sure, I’d be glad to. And that sounds fine to me, even though I was extremely skeptical of the whole business.

I thought these two people were triple-A people and that’s really what I was investing in, but I thought their idea was close to crazy. That they were going to provide services to wireless industry customers that nobody knew much about at that time, and they were going to provide the same service for a fee that was being offered for nothing.

I thought, boy, these guys are going to have to wave a magic wand to do anything. But, I’ll put my ante into the middle of the table and see what happens.

[00:16:10] Will: As Kevin and Jim describe it, the minute that they knew you were on the board, all the other search investors were very comfortable carving their investment back to accommodate you at that level.

And one of those investors, was a guy named Paul Ferri, who’s the founder of a very well-known and respected venture capital partnership, Matrix Partners, who is I believe a longtime friend of yours, or do you mind telling the story of his investment in that company and Road Rescue?

[00:16:39] Irv: Yes, Paul and I were longtime friends. We were neighbors, lived about a mile apart in Weston. We had gotten to know each other. I was not an investor with him, but we were good friends, and we talked a lot, and I had a lot of high regard for him. And so, this sounds a little self-promotional, but my understanding of the story is that Kevin and Jim sent him a FedEx package full of their PPM and arranged a meeting with him and went to Boston to meet with him.

I don’t know if this is true or not, but they got there and there was the package unopened on his desk. They thought, oh no, this is terrible. Oh, this is just going to be a courtesy meeting. And Paul said, “Well, okay, give me your story.” And they gave him the story. And then he said, “Who do you have for investors?”

They gave him the list of investors, which at that point included me. And then he said, “Well, is Grousbeck going to be on the board?” And they said, “Yes.” And he said, “I’m in.” That’s what I heard. I don’t know if that’s apocryphal or true.

[00:17:49] Will: That is verbatim Kevin and Jim’s version too. And Paul once told me that Asurion was maybe the best return, the best investment he’d ever made partly because of the returns and partly because you had been involved and he’d never had to go to a board meeting, which of course he liked very much.

[00:18:09] Irv: I mean, anybody involved with Asurion has never touched their returns in any other thing they did, I’m fully confident. So, we’re all in the same fortunate boat.

[00:18:21] Will: Exactly. So Kevin and Jim buy the company and, Irv, can you talk a little bit about that board coming together? So you were front and center in that, obviously, and the search doesn’t use this term, but effectively, the chairman, at least in Kevin and Jim’s mind, and I think other investors. But Bill Egan, Bob Oster, Joel Peterson, and David Dodson were the others. So can you talk a little bit about that group and what made it an effective board?

[00:18:51] Irv: Well, first of all, the size. I love smaller boards for small growing companies. Why populate it with eight or 10 people when you can have five or so, plus the principals. It’s just so much easier to manage and schedule and have discussions and have impromptu conversations as needed and get things done.

And then secondly, when you look at those four individuals. They were all experienced in some respect. David Dodson was the youngest, but he had bought a company and operated successfully. It produced good returns, and he had learned a lot about on the ground operation of a company that was in the alarm business in Texas. So, he had operating skills.

Obviously, Joel Peterson is a highly accomplished person as is Bill Egan. Bob Oster had a lot of experience as well operating companies. I think he was just beginning his record of investing in smaller enterprises, but he had a very practical turn of mind and was a no nonsense person and said what he thought, and often it made a lot of sense.

But they were people who really cared about trying to help Kevin and Jim build a good company. They weren’t all about themselves and their backgrounds, and, oh, I’ve seen this before, and there was no conversation like that. It was all people just trying to pitch in and help.

Early Success: Hold or Sell — Pivotal Moment?

[00:20:35] Will: Pretty early on, the company had an opportunity to sell itself at what would then have been a big multiple of capital, sort of a double digit multiple of the equity invested to a company that no longer exists called CUC. What was the discussion like at the board level in sort of sorting through the decision whether or not to pursue that?

[00:20:59] Irv: I have a general recollection that there were different points of view based on the backgrounds of the individuals.

We all tend to speak from where we’ve been to some degree. I mean, I think part of the art of advice is trying to get outside that frame of reference and listen and think about things and be helpful to people irrespective of where you’ve been. I don’t mean to pontificate, but I do think that’s helpful to people. But I didn’t do that, I spoke from where I’d been and Joel Peterson was an advocate for where he’d been. So he’s a world class person with a unbelievably successful track record in a transactional business, which was real estate. His position, as I remember it, was, wow, somebody’s offering you, was it $75 or 100 million? You’re really just kind of getting started and somebody thinks you’ve got something here.

Sell. Take your profits. You’ll have investors for life. The world will be your oyster. You’ll be investable as entrepreneurs. You’ll have plenty of other opportunities. And my point of view was different, which was, I wasn’t saying you shouldn’t sell, I was saying that the way I would make the decision is to think about what the runway was for you and the business ahead, and what the risks were of that path and make a conscious decision as to whether you want to stay on that runway and path for the foreseeable future or not. And if you see the opportunity, there’s tremendous advantage in accrual of value. And if you see your way clear, it’s not going to be that easy to find another venture and you’ll pay tax and have less to invest and so forth. So I guess I was subtly in favor of, but not strongly in favor. I was just in favor of analyzing the situation and not just taking a price that would have been an amazing return. Although over a very short period of time,

[00:23:18] Will: As Kevin and Jim described it, that was a very healthy conversation and ultimately, of course, that perspective prevailed. And shortly thereafter, there came an opportunity to buy Merrimac, which really had the potential to transform the business beyond just roadside assistance. But again, that was, as I understand it, something that was not unanimously supported at the board level. Do you remember that transaction and how that all unfolded?

[00:23:48] Irv: My recollection is that they had already built insurance into their offering to customers. They simply contracted for that insurance with an existing company. And they felt that the premiums being paid were higher than necessary for the risk that was being taken. So, then they had a chance to acquire what would become a captive insurance company.

And I remember some board members saying, that’s a bad idea because you’ll be valued like an insurance company if you own an insurance company, and that’s a totally different valuation metric than you’re hoping for. But I think the perception of Kevin and Jim, certainly, that some of us supported was that we’re not turning ourselves into an insurance company. We need an insurer, and it would be better not to have to pay the stepped up value to an outside insurer if we have an opportunity to attractively acquire a small sized company.

TA Investment

[00:24:59] Will: And the company, of course, did that. That was a launchpad moment. If you go back and look at the old board decks, which for this podcast I’ve done, you see, in those early days before TA got involved, sort of in the pure search period, you see this very consistent pattern of the company hitting revenue and sub count targets, which are very aggressive, but generally falling short, some years actually quite a bit short, of EBITDA targets, EBITDA of course growing very nicely, but not necessarily on budget. And talking to Kevin and Jim seems like that was a reflection of how they were allocating their time. Even with some of this operational messiness, Kevin and Jim were miles ahead of the original forecast they had used to raise the capital. In their original base case, Kevin and Jim expected revenue to grow from $8.5 million when they bought the company in 1995 to $15 million in 2000, a compound annual growth rate of 12%.

In reality, revenue grew from $8.5 million to $52 million, a compound growth rate of 43%. And EBITDA grew from $1.2 million to over $25 million, a compound growth rate of over 84%. At this point, Kevin and Jim want to take some chips off the table and end up selling 28.5 percent of the business to TA Associates. What do you remember from that transaction and how it evolved?

[00:26:19] Irv: Jeff Chambers, I had known before that he was the lead person for TA. I don’t believe there was any kind of major price negotiation. I think that there had been a price established and maybe agreed to, but some additional conditions were requested on the part of TA. And I think over time, as they were resisted by management, TA came around and decided to invest on the same terms as the rest of the equity instead of having some preferential terms. Jeff joined the board, of course, and was invaluable over the next few years.

[00:27:02] Will: That’s exactly right. And I believe the terms piece in which they had no preferred security, no special governance rights, it was highly unusual for TA at the time. Quite clearly, Irv, attributed to your involvement, I will say, with both Kevin and Jim, but a very good outcome for the existing shareholders, for sure.

[00:27:23] Irv: At Continental, we had had an original involvement with TA many years prior to that, but obviously not with Jeff Chambers. So maybe some of that was in the deep background, but I don’t remember specific conversations in which I was involved at all. So, I can’t imagine that I was anything other than a validator for the company.

Building the Team

[00:27:48] Will: Maybe this is a good time to talk a little bit about the building of the team at Asurion right around the time of the TA transaction. Do you mind talking a little bit about that?

[00:27:59] Irv: It had become clear that with Jim Ellis’ departure a couple years earlier, in the late 90s, I think, it became clear that the rate that they’re growing at, they were really thin at the top level despite Kevin’s enormous talents, and his energy level, and his good judgment. They needed more help at the top, and part of that was operational, but part of that was also recruiting. So, it seemed to me there were two significant shortfalls, both arising from a lack of top management breadth.

[00:28:40] Will: You know, it’s sort of a unique thing as you look back on it, you know, for Kevin, being able to transition between partnerships at the highest level relatively seamlessly and effectively. So it’s been obviously starting with Jim, the original partner, co-founder, and then evolving pretty quickly to a similar relationship with Brett. Is that a fair assessment?

[00:29:04] Irv: Yeah, and it’s continued in current years as well. Kevin’s amazingly skillful along many dimensions, but certainly one of them is he’s the best kind of conflict avoider. He knows where he wants the company to go, but it’s, this is my view from outside, is that he’s very graceful in his assertions and very respectful of other people he’s working with and there’s no top down sense. Although it’s clear that Kevin’s in charge and has the tiller firmly in his hand and is directing the direction of the company, it’s all done in a very elegant fashion. And that’s really stood him in wonderful stead. And it’s a quality that a lot of people don’t have.

[00:30:03] Will: Irv, if you sort of look at Asurion and you compare it to other companies you’ve been involved with from a culture, management, talent, attraction, talent building perspective. How would you compare Asurion to other companies more generally? What dimensions does it stand out on in your mind?

[00:30:23] Irv: Well, they say one of the hardest jobs of great managers is to terminate ahead of the curve. It’s hard enough to hire ahead of the curve, but it’s really hard to terminate ahead of the curve. In terms of the managers they hired, they were unafraid to say they had made a mistake. That’s a very subtle point, and it’s not talked about in management literature to any degree that I’ve seen. Not that I’m a comprehensive reader of management literature, because I’m not. People just don’t talk about it, and the reason is obvious, which is it’s unpleasant. Who wants to talk about letting somebody else go? But it’s so essential. The biggest thing that stands out at me is the absence of dead wood at Asurion versus other companies where managers are inclined to be kinder to people, in a sense, and reposition them elsewhere, and I mean, that’s how fat builds up in companies, and walking the line between being careful about this and being ruthless is not that easy. But they found a way to not be ruthless, but to really make performance oriented decisions, coach where they could, but then not spend time working on what they consider to be lost causes. And that’s probably the single biggest difference I see in their management style.

[00:31:57] Will: Do you mind talking a little bit about Brett as a member of the team and CEO and his sort of role in building the company?

[00:32:03] Irv: Yeah, I don’t have a real inside look as to how he and Kevin divided things up and how they work together. I know that the chemistry and mutual respect between them is very deep. It remains to the present day despite changing roles. They’re both really smart. They work hard. They’re honest. They have low egos. And they have different skills to some degree. I think Kevin is a little bit broader brush, and Brett is perhaps just a little bit more detail oriented, which doesn’t suggest at all that he doesn’t have an enormous intellect, because Brett does have an enormous intellect.

It has nothing to do with intellectual capability. It has to do with orientation and how you think about things and how much of your time you spend on broad gauge issues, strategic issues, financing issues, as opposed to how do you make the trains run on time? And Brett had a special talent for attracting people who could get the trains to run on time.

Capital Allocation in the Search Fund Period

[00:33:19] Will: I might skip for a minute to capital allocation. I was going to talk about the company’s share repurchases, and I think your fingerprints may be on this, but one of the interesting things about the early days at the company is that it made two share repurchases early on. The first in 1999, so before TA got involved, when it bought in 10 percent of total shares outstanding, you know, leveraged, financed buyback.

And then secondly, once TA was on board, they did a second buyback in 2004 of a little over 6%. The returns from those two buybacks, by the way, are just extraordinary. I mean, the first one is 41 percent over 20 plus years. The second one is over 50 percent over, you know, almost 20 years, but can you talk a little bit about repurchasing shares in private companies, which is something that you guys did at Continental over the years, and it’s pretty unusual, but something that has been part of Asurion’s playbook from early on.

[00:34:26] Irv: Yeah, we did it at Continental because both Amos and I thought it was a good place to invest. We had some free capital that was generated from time to time, and we thought, well, we want to for sure invest in the land grab, to use your phrase earlier in a different context, because the cable business was indeed a land grab for a long period of time. But we also want to invest in our own company. And it served two purposes. One to allow us to put capital to work and the other to offer liquidity to people who wanted it. And it was, of course, optional, people could take us up on the opportunity or not, and we tried to price it as fairly as we possibly could at Continental.

Well, that point of view, I’m sure, bled over into my conversations with Kevin, because I think it’s attractive. And by the way, back at Continental for one second, one of our major institutional investors was unalterably opposed to having us repurchase shares. And we had a terrible time convincing that person that it was a good use of capital. “No, you should be expanding, look at all the opportunity” and so forth. So, one of those investors wasn’t thrilled with what we did.

But even then being 2001 and thereafter seemed to be a very attractive use of any free capital you could scrape up because who wouldn’t want to invest in Asurion at that time, at least that was my point of view with all of the opportunity that lay ahead for them and the quality of their management and it just seemed like they were in a real sweet spot.

The Lock/line Acquisition

[00:36:22] Will: Would you mind, Irv, talking a little bit about the Lock/line deal and how that came about and that one you were very specifically involved in, as Kevin tells the story, with Dick Floor. Would you mind talking a little bit about that?

[00:36:38] Irv: Kevin and Brett were talking about Lock/line and then nothing happened and then it would come up a year or so later and nothing happened and it seemed to me it was a few years that they had wanted to acquire Lock/line and had been unable to and then what I remember is that they came to a board meeting and whenever it was and they said, “We just can’t connect with this guy. He’s impossible. We haven’t been able to do any good at all.”

So I think I remember going to Kevin after the board meeting and saying, “Do you want me to take a crack at this guy?” Whom I didn’t know. He lived in Kansas City, was running a small to medium sized public company of which Lock/line was a part. Kevin said, “Well, sure, go ahead.”

And I said, well, if I’m going to do that, I’m going to drag my friend, Dick Floor, who’s just an unbelievable individual. I want to go out there with him. Because one of my great talents is getting out of the way of smart people. And I knew that if I went out there with Dick Floor that I wouldn’t have to talk too much.

[00:37:54] Will: Would you mind doing just a quick summary on Dick Floor?

[00:37:57] Irv: Dick Floor and Bill Egan are both alums of the same college. Dick Floor went to Harvard Law School. He was a partner of Sullivan and Worcester in Boston. And he had one of the best minds of anybody I’ve ever come across. He was absolutely brilliant. Yet he was the most pleasant, self-effacing, practical, easy going person in the world.

So, Dick and I went out to Kansas City and we made an appointment with the fellow who was head of the parent company of Lock/line. And Dick proceeded to charm this person, absolutely charm him. It turns out the person who was the CEO was a Wharton graduate. Dick knew a bunch of people from Wharton. Dick found ways to establish connections with him, and he started out grumpy and ended up smiling. And I think that might have been the first time he’d smiled in quite some time. And that began a process, which resulted a few months later in this person agreeing to a deal in principle, not fully signed, but to a term sheet, as I recall, which was attractive for Asurion.

And I had sort of picked up the ball from that first meeting and started working with the guy along with Dick and we were trying to work on general terms and I would check with Kevin and then I would talk to this guy. I remember in my infinite wisdom saying to Kevin before they closed, “Are you sure you want to be in business with this guy?”

He was a dangerous cocktail of smart and nasty to my eye. Not overtly nasty, but just sharp, smart as a whip though, and just not the kind of director they had and he and his CFO were going to join Asurion as board members and I said, “Kevin, you should obviously do what you want to do. I’m just wondering, these people are really tough apples.”

Kevin said, I know, we’ll just have to live with them and of course, that was a great decision. I’m not sure what decision I would have made, but I did have reservations having dealt with the guy over a period of a few months, as I remember.

[00:40:39] Will: It’s funny you mention that Irv, Kevin tells a story about how late in the negotiations there, that CEO came back and said, “We need our team to be able to stay in Kansas City.” I mean, at the very 11th hour, which, of course, directly affected some of the economies and so forth that we were going to get by combining. Do you remember that piece of it?

[00:41:01] Irv: I remember last minute demands. I didn’t remember what they were. I do remember one funny story about them, which is the first board meeting that they came to at Asurion. I try to be early to meetings, but it seems to me this meeting, I was maybe barely on time or a minute or two late or something. And here were all the legacy Asurion board members sitting on one side and both ends of a table, big oval table. And here were these two guys over on the side by themselves, kind of getting settled in their chairs, and I walked in, and I thought, oh, this is really awkward, so I asked them if I could sit between them. I did, and I just felt that there was a chill to begin with in the very first board meeting, which we really didn’t want. And I don’t mean that in a self-laudatory way, but I have a distinct recollection that I sat between them at the first board meeting.

[00:42:08] Will: Broke the ice a little bit.

[00:42:09] Irv: Yeah.

[00:42:10] Will: Interesting. That transaction was large. The total consideration was about 50 percent of the company’s enterprise value beforehand. Fortunately, it was wildly accretive being able to combine those two operations and really grow that business. The 408 million valuation paid is less than half the EBITDA that Asurion now enjoys from that book of business. So definitely worth doing.

2007 Equity Recap

[00:42:37] Will: And not too much after that, there was the 2007 transaction, which I think TA was driving. They wanted some liquidity. They’d been in it six years or so, mid 2007. And it’s the dawn of the private equity group sort of getting involved.

The timing was extraordinarily good. That was a bull time in the market. Kevin credits you for being absolutely right about that timing and optimizing around it. Do you remember? That transaction and how it unfolded and maybe specifically the piece that allowed the company to end up without a dominant single private equity owner, which of course is unusual in a transaction like that.

[00:43:19] Irv: I don’t, and I appreciate Kevin’s compliment, but I have no recollection of being market prescient.

[00:43:27] Will: He’s very clear on that, by the way.

[00:43:29] Irv: How can anybody be market prescient? Well, what I remember about that is. Maybe not all, how many was it, four or five who came in?

[00:43:40] Will: Three major ones and maybe a fourth.

[00:43:43] Irv: I remember them separately wanting to talk with me and Kevin saying, “Will you meet with XYZ?” Well, sure, of course, I’d be glad to. And they said, “Well, what’s going on in this company anyway? It’s been private for a long time. When’s it going to be public? How are we going to get out? The valuations are pretty rich. We’re buying from an informed seller.” I said, “I don’t know. I think they have one way ahead. They’ve got great management.” They said, “Are you selling?” And I said, “No, I’m not selling.” And that was at the center of it. If I wasn’t going to be there, it wasn’t because of me, it was because of the signal that unloading a bunch of my stock would have sent.

Board Dynamics

[00:44:31] Will: Irv, maybe this is a good time to revisit the board topic, right? Because obviously after that transaction, the board changes pretty significantly. The private equity owners front and center in that. Can you talk a little bit about board effectiveness since that time and maybe how you’d compare the very different board groups.

[00:44:52] Irv: Well, you referred a couple of minutes ago to the fact that there was no one dominant investor. However, my impression is that they do act as a group on occasion, and they’re loosely referred to at Asurion as the sponsors. And the players in the sponsor group do change over time. But I wouldn’t say it’s just people with a series of minority investments. There is a coordination among them. They do confer fairly regularly. I would say it kind of straddles the line between having sold control and not having sold control.

I think there are times when to my eye, they seem to exercise their collective power and other times when they didn’t. They’re all high quality entities over the years and have all done well. And I remember having a conversation with Kevin at the time, just prior to the closing, and said, “Wow, you know, you’re selling 55 percent to this group of people, and there have to be some changes, and their agendas and yours won’t always match.” He said, “Yeah, I know, I understand. I think this is the right thing to do.”

Now, back to your original question, how have the board dynamics changed? My perception since that time in the last 16 years or so is that there’s kind of a leader of that group of people that lose confederation of people. It happens to be CPP now because they’re the larger shareholder. But there’s a presence there from people who all came in at the same time and all were acquainted with each other and bought the same security at the same price. So, it used to be people sitting around the table with no control, just the control that management had by dint of its execution and all of the value it had created. Since then, I think there’s a little bit more evidence of the respective agendas of the sponsors that is present in board conversations.

[00:47:18] Will: And if you looked just at value creation, help to management on the part of the boards, and you were going to compare those two groups, sort of the initial group, which I would say would include Jeff Chambers, and the post 07 group, again, with the lens of who can be most helpful to management in building a company, how would you compare those two?

[00:47:43] Irv: So, I’ll try to do that, but I would say at the outset that in a way it’s an unfair comparison because management needed more help before 2007 than they did after. The main way in which the sponsors have been helpful is the context that they have as a group and the collective experience they bring as a result of having invested in so many companies. The contacts are unalloyed benefits. No question that they know somebody somewhere almost whenever you need or wherever you need them.

The part about the advisory. I do see differing agendas at play from time to time. There is an inherent conflict of interest between serving one’s own shareholders and serving the shareholders of the company on whose board you sit. And I do see those conflicting agendas at play fairly often, and I see sometimes that decisions are made in favor of one’s own agenda. An example of that is I heard a comment actually during a board meeting some years ago from one of those sponsors or institutional investors to the effect of, “Gosh, we really don’t want you to branch over into that area. We have enough investment in that area. We think of you as an XYZ company, and we want you to stay there and keep doing what you’re doing. You’re doing a great job.” I found that difficult. I think that just is the cost of doing business with them. There’s nothing improper about it. There’s nothing hidden or nefarious in any way. They’re quality people and smart and they’re all successful. But sometimes the best interests of Asurion are not always served in those conversations.

Irv’s Asurion Investment

[00:49:44] Will: Very interesting. Okay. I’m going to shift topics if that’s okay. Would you mind talking a little bit about how you thought about managing your own investment in the company over time, across the series of transactions.

[00:49:58] Irv: It’s the same advice I gave them when they were thinking of selling for 75 million or whatever the number was in the beginning. If you see a runway ahead and you feel okay about the risks, why not stay and play? And it was a concentration for me, but it was a tolerable concentration. And since I’m opportunistic by nature, I thought there was a lot more bread to bake, and I was disinclined to be a seller despite the various opportunities.

I admire Kevin tremendously, and the job he’s done has been off the charts, as you have said. And I was thrilled to be an investor and along for the ride and grateful that I was lucky enough to be there. Actually, despite my own fecklessness in the beginning, I got lucky and they decided to allow me in under the tent and lucky me, so shut up and be a good person and try to contribute. And by the way, who wants to sell? What am I going to do with the capital, pay a big tax on it, and then figure out what to do with it next, and it probably won’t be as good as Asurion.

Lessons in Management

[00:51:13] Will: Two more questions, Irv. They’re both a little bit wider ranging. At a high level, are there any lessons you’d pull out of Kevin’s experience running Asurion, the Asurion team more generally for future CEOs, aspiring CEOs?

[00:51:30] Irv: Nothing compares to winning from the high road, and that’s what they’ve done. They’ve stuck with very high ethical standards. They hire smart people. They make changes where necessary. They treat their people generously. They treat their customers with respect and everybody that I’ve ever seen Kevin interact with, he’s treated with respect.

Another is you can’t overpay for good management. There’s no such thing. You also can’t overpay for a great acquisition, which they worried a little bit about with Lock/line. But it had such a growth trajectory and was so accretive that who even remembers the price unless you’re looking back at the records. And I think that’s true as well. You can’t overpay for good management. You can’t overpay for a great company. I think a mistake that a lot of us make is, “oh boy, that price, price for that, whatever it is, that’s just too much. I can’t bring myself to spend that much money.” Of course, the way to look at it is not today, but it’s tomorrow. And tomorrow, do I really know whether I spent 15 percent more or not to buy something great? So that’s certainly one of the takeaways.

Comparing Continental and Asurion

[00:52:58] Will: Okay. My last question, I’m going to return to a topic we hit earlier. So, Irv you’ve been involved in two companies that were participating in exceptionally fast moving streams in Continental and Asurion. How would you at a high level compare those two companies?

[00:53:17] Irv: Well, the similarities are both companies had borrowers personalities and weren’t afraid to use aggressive leverage techniques against a predictable background by leveraging up you’re not taking nearly so much risk as you are with a more volatile underlying P&L. That’s certainly one.

Another similarity is trying to attract and retain top talent. It took us a while to wake up to that. We hired bottom talent for a while and paid dearly for it because the mistakes we made in getting that company started are too numerous to mention. I mean, the first key engineering person we hired was not satisfactory. We turned on our first systems and we had to turn them off for three weeks. Customers were supposedly paying, and we said, “Whoops, we have some more work to do on our system.” And we thought it was going to be a few days. It was three weeks. And that was all because the person we hired was a very bad choice. We were both in our late twenties or I was 30 by then. And there was just bad judgment. Should have known better, but didn’t. And one of the things that both companies did do in its later years is try to attract and retain top talent and be willing to pay them in terms of both equity and current comp in ways that made it hard for them to leave.

Ways in which the companies are different is that Asurion is far larger. 21,000 employees now. We had, I don’t know, very few thousand employees. When the company was sold after 30 years – 32 years, it was sold in 1996. So, in a sense, we were much more capital intensive.

That also is something to watch out for. If you’re an MBA student, you’re told, but there are times it’s a good thing because it served to the structure of the industry being capital intensive, made it a unregulated monopoly in effect. And if you could raise the capital, which we were able to do, you enjoyed some of the benefits of no competition.

I guess other things where we guarded our ability to make decisions very carefully. That’s why I was concerned about the 55 percent ownership. I don’t think that’s affected Asurion in a major way, but at the fringes, it has had an impact. And Amos and I together for the first 16 years and then Amos alone for the last 16 years running that company were able to run it the way we wanted to run it. Making the judgments that we wanted to make within reason. I mean, we didn’t have people with other agendas. We had people questioning the decision making and the strategy, which they should as board members, but not with other agendas. The iron filings were all closely aligned. That’s not currently true with Asurion, but I mean, Asurion has so far exceeded Continental’s performance that they must be doing an awful lot of things right.

[00:56:51] Will: All right. Well, Irv, thank you so much for taking the time to do this. It’s wonderful to see you and a very fun conversation. Thanks very much.

[00:56:59] Irv: Well, thank you very much for including me. I’m very flattered and I’m thrilled that you’re doing this. I know a lot of people will benefit.