Making Don Malone an offer he can’t refuse

This week we’re running a series of articles looking at why it’s unlikely that iiNet will be acquired anytime soon, despite Amcom’s decision to divest its 23 percent stake in the ISP. Yesterday we looked at potential buyers; today we’re looking at iiNet’s executive team.

opinion In Francis Ford Coppola’s 1972 cinematic masterpiece, The Godfather, there is a moment which tends to cause a chill to run down my spine whenever I watch it.

In the scene, The Godfather’s chief advisor, Tom Hagen, attempts to explain to recalcitrant movie director Jack Woltz precisely who Don Vito Corleone is. “Mr Corleone is Johnny’s godfather,” he tells him, referring to the famous singer. “To the Italian people, that is a very religious sacred, close relationship.”

The scene is chilling because of the implied threat it contains. To Woltz, Corleone is a nobody, a putz from the suburbs. But to the people who know him — especially the Italian community — Corleone is the Godfather, the arbiter of all that happens in their world, the ultimate power and the mafioso with his hands in every pie.

Now, it would not be drawing a long bow to suggest that, in many ways, iiNet managing director Michael Malone has become the Godfather of Australia’s Internet service provider industry — virtually unknown outside the sector; but having become a figure of legend within it — and holding absolute power over his own organisation, with a wider circle of influence extending out for some way.

Arguably, Malone has partly been able to bring iiNet to the point where it is today, number two in ADSL broadband in Australia and lighting a fire under Optus and Telstra, through the same two factors which took Corleone to the top. Like the Godfather himself, Malone came from humble roots; with its first steps being taken in a suburban garage in Perth in 1993. However, Malone and his growing team gave no quarter as they rapidly expanded the ISP; expanding their operations interstate and voraciously buying up every rival they could get their hands on.

Wantree, Omen, RuralNet, Tas Access, Granite Internet, RockNet, Hartindale, Country Netlink, Origin Internet, Froggy Internet, Virtual Communities, iHug, OzEmail, Netspace, AAPT, Westnet. These are just some of the names of rival ISPs which iiNet has swallowed up over the years, as Malone’s quest to dominate the Australian Internet has gained a full head of steam.

In addition, like Corleone, part of Malone’s success has been the extremely tight group of lieutenants which he has kept clustered around himself for years.

iiNet regulatory chief Steve Dalby has been with the company since 2003, leaving a 32-year history at Telstra behind to join Malone’s crew. Chief technology officer Greg Bader joined iiNet at the same time, after a history with vendors like Ericsson, Nokia and Lucent, as well as assisting Optus with the rollout of its mobile network.

AdCorp MD Peter James has also sat on iiNet’s board since 2003, while others such as iiNet chief customer officer Maryna Pienaar can trace their history back to about the same date — arriving at iiNet with the acquisition of iHug.

Sure, there are other executives who have joined iiNet more recently — finance chief David Buckingham, for example, sales and marketing chief Sam McDonagh and current chairman Michael Smith have only been with iiNet for a handful of years each. Yet somehow, and despite the low level of executive churn within the company, whenever iiNet is involved in anything high-profile and important, it’s always executives like Dalby, Bader, and of course Malone himself, that pop up in the limelight. The more recent additions to iiNet’s executive team always take a back seat.

“Never tell anybody outside the family what you’re thinking again,” Don Corleone tells his son Sonny at one point in The Godfather. It takes time to trust — a lot of time.

Then, too, Malone holds close to what is his.

He’s owned much more in the past, but iiNet’s most recently published list of its top 20 investors shows Malone still holds 11.85 percent of iiNet. That’s not enough to block a potential takeover of the company, if there was substantial shareholder support for a buyout — but it does represent an important factor in any buyout of iiNet.

With Amcom offloading its 23 percent stake in iiNet, Malone is set once again to become the company’s largest shareholder. That shareholding, combined with his existing executive powers and substantial personal wealth that would allow him to quickly buy back substantial chunks of iiNet’s issued capital if he chose to — meaning the executive will continue to be a force to be reckoned with in iiNet’s future.

Any company which wants to buy iiNet — no matter if it’s a hostile takeover or a friendly merger — will need to consider what Malone’s opinion of the situation would be.

At this stage, for all intents and purposes, Malone IS iiNet. To other major shareholders in the business, iiNet’s customers, its staff, stakeholders and suppliers, iiNet is a company focused around one man, with a certain degree of control devolved into a couple of key lieutenants who are also inseparable from Maone himself. In other words, if Malone set out to block a takeover of iiNet … it is very possible that he would succeed, no matter what other factors were involved.

Furthermore, there is substantial reason to believe that Malone would indeed block most takeovers of iiNet.

If you meet Malone in person, it’s easy to be struck by how incredibly engaged in his company’s affairs he still is, despite having run iiNet for almost twenty years now. On one memorable occasion, after iiNet’s initial court victory against AFACT in February 2010, we interviewed Malone in iiNet’s Sydney offices.

At that stage, the executive was the very picture of a young (we believe him to be in his early 40’s) leader; he knew the names of low-level staff around him, he was touting an iPhone and swallowing gulps from an energy drink, speaking excitedly and at length about the fantastic future of the telecommunications industry.

Hardly the picture of an executive who would simply roll over and let a larger company acquire the ISP he has built from the ground up. In fact, we would expect Malone to greet most acquisition offers for iiNet with laughter and a request for the price to be doubled — and even then he might not consent to a sale.

Yes, the only way to arrange to buy out iiNet in a way that would be reasonably assured would be to go around Malone in the first place. Speak to iiNet’s other major shareholders behind closed doors. Get them on board with an offer amount which would be high enough to ensure they were more than sufficiently incentivised to weather any turbulence. And then embark on a massive marketing campaign to sell the deal to iiNet’s retail shareholders as a hugely synergistic play when the planned buyout was finally revealed in public.

In short, the only way to get around iiNet’s Godfather and get an acquisition across the line would be to present Don Malone with a fait accompli — a deal so good that there would be no way for him to turn it down.

Like Corleone himself, Malone has proven himself over the years to be a man of strength and integrity. The only way to get him on board for an acquisition will be to make him an offer … that he cannot refuse.

Image credit: iiNet