Kevin O’Leary: The Natural

Kevin O’Leary is scheduled to co-host The Lang & O’Leary Exchange in 20 minutes. As usual, he’s running late. He’s not sure if there will be one or two guests on the CBC program today, or if they’re in the studio or appearing via satellite. He arrives in the makeup room, plunks himself down in a chair, and a makeup artist spritzes his bald pate with foundation. “I have a lot of surface area,” he jokes. The makeup is the only difference between the man in the chair and the one who fumes and belittles entrepreneurs on television. He is always ready for the camera – even if he’s unsure what he’ll be talking about, or with whom.

Currently, he is delivering a monologue to your correspondent about the spread of leftist politics. “Business schools in this country have swung too far to the left,” he says. “It’s not about corporate social responsibility. It’s about making money.” The makeup artist likes what she’s hearing. “I wish I had enough money to invest with you,” she coos. “You don’t want nice guys investing for you.”

O’Leary smiles. He has spent years on television building a reputation as a savvy investor and deal maker. He debuted on Report on Business Television (now the Business News Network) in 2003 and developed a following dispensing investing wisdom and attacking government. Dragons’ Den, the CBC program on which entrepreneurs seek cash from self-made moguls, later turned him into a household name. He is the most vicious of the bunch – “Money has no feelings,” he’ll snarl – and the most likely to reduce entrepreneurs to tears. His popularity is also growing in the U.S., thanks to Shark Tank on ABC.

That’s just a hobby, he says. His real job is chairman of O’Leary Funds Management in Montreal. After just two years, it has $1 billion under management, an astounding feat in a brutal financing climate. He downplays the influence of his name – “It’s not ’cause Kevin O’Leary is a big brand,” he insists – but brand has a lot to do with it. O’Leary’s business and investing expertise is reinforced every time his face appears on TV. Both The Globe and Mail and the Ottawa Citizen have called him a billionaire.

He’s wealthy, but not a billionaire. And despite the title of “renowned investor” on his company’s website, his investment work there pales next to his marketing efforts. He is a born salesman, and that helps explain his success across so many disparate fields. “He’s a fabulous, wonderful hustler,” says BNN general manager Jack Fleischmann. “That guy’s always got an angle. He’s always looking for something. He never does anything unless it pays off.”

Sometimes his angle blinds him to irony. He is the largest holder in each of his funds and points out he pays the same management fees as everyone else. “I’m just like every man and woman in Canada,” he says. He owns half of the management company, of course, and is a consultant to each fund. At other times, his angle causes him to gloss over history. When filming with co-host Amanda Lang later that day, they banter about Mattel Inc., the toy company that bought O’Leary’s software firm for US$3.8 billion in 1998. Lang teases that Mattel overpaid. “All of my shareholders are pretty happy with me,” O’Leary counters. Some Mattel shareholders were angry enough to sue over the sale, as it ended in disaster.

But these days he’s focused on building O’Leary Funds into a powerhouse. He wants to have $5 billion under management within three years and take it public. He’ll use his platform on television to help do it. And though his track record is more complicated than what can be gleaned from watching him on television, there is one indisputable fact in his story: Kevin O’Leary is excellent at selling Kevin O’Leary.

The season finale of Dragons’ Den in March examined how each dragon came to be. O’Leary returned to an Ottawa mall to recount the trauma of being fired from an ice cream store as a teenager for refusing to scrape gum off the floor. “I could buy this place today,” he said, eyes wet with tears.

O’Leary spent only part of his youth in Ottawa, and was born in Montreal. His father died when he was young and his mother remarried to an employee of the United Nations International Labour Organization. The family, including younger brother Shane, spent time in Cambodia, Cyprus and Ethiopia. “I can’t say there’s been a huge change in personality from childhood to adulthood,” says his brother. O’Leary could turn nearly any situation to his advantage. The brothers attended a Jethro Tull concert in Ottawa as teenagers, and while Shane was packed in with the huddled masses, his brother made it onstage armed with a camera and press pass. “That’s classic Kevin,” Shane says. “Always figures out how to get a leg up.”

In his personal life, he’s not quite the heartless pragmatist he appears to be. He works hard to keep in touch with friends and frequently extends invites to his cottage in Muskoka, Ont. “He’s actually quite a generous and kind guy,” Shane says.

Business – which runs in his family’s blood – is another story. O’Leary’s grandfather founded a clothing factory after arriving in Canada from Lebanon. His mother ran it for a time. Both brothers earned MBAs, and Shane is a career oil and gas executive. Kevin, meanwhile, worked briefly as a cat-food brand manager and co-founded a television production company that created vignettes for Hockey Night in Canada.

But his largest endeavour involved software. He founded SoftKey Software Products in 1983 shortly after meeting a member of a computer users group that designed a graphics program. O’Leary was floored. To obtain distribution, he approached printer manufacturers about bundling the program with their hardware. The gambit worked, and the company developed more products. O’Leary later ditched this strategy for something more cost-effective: licensing software and marketing it under the SoftKey brand.

He didn’t see much difference between selling cat food and software. Both products were dependent on branding and shelf space. In 1993, he elaborated for an industry magazine, using all of the traits for which he is known. There was hyperbole. “This is insanity,” he wrote of competitors’ high prices. There was humour. “What is the difference between marketing cat food and software? Nothing.” And, finally, a pitch. “If you’re a software developer, don’t waste your time trying to start another software publishing company. License your product.”

By that time, O’Leary was aggressively pushing SoftKey’s products in the U.S., and met with a distributor named Tony Bordon in New York. “He was intoxicating with his story of his line of software and how it warranted more time and attention than anything else,” Bordon recalls. O’Leary proved just as aggressive recruiting Bordon for SoftKey. When Bordon stopped taking his calls, O’Leary phoned him at home one Saturday morning. Bordon relented, and took the job.

The company grew by swallowing up dozens of competitors. O’Leary was ruthless in killing products that didn’t sell. “He went through our portfolio and threw out about half the products, referring to them as dogs,” says David Patrick, whose company SoftKey purchased in 1993. The firm relocated to Boston and in 1995 assumed the name of one of its acquisitions, the Learning Co. (TLC). O’Leary had abandoned business applications by then for children’s software, and he was fanatical about market share. “Every Monday morning he came in and read the market share data, and if we slipped a share point in one category, there was hell to pay,” says Patrick, the company’s president of worldwide sales and operations. Though O’Leary could be brutally blunt and demanding (former colleagues say his persona on Dragons’ Den is straight from the boardoom), his drive was inspiring. “He believed he could do anything, and that gave you more confidence in yourself,” Bordon says.

TLC cleared more than US$800 million in revenue by 1998, but software sales were expected to move online. Adjusting would have been hugely expensive for TLC to do alone. Luckily, Mattel was seeking an acquisition to bring itself into the digital age. In December 1998, Mattel announced it was buying TLC in an all-stock transaction valuing the company at US$3.8 billion.

O’Leary’s take is unclear. He owned 1.2% of the company and held 1.7 million stock options. Mattel’s share price closed at nearly US$28 when the sale was finalized, putting the value of his shares at US$35.4 million. The options are more difficult to price, and O’Leary says he doesn’t remember when he exercised them. He didn’t sell anything when the sale closed, though he may have wished he did. Mattel’s stock soon plummeted.

Ten years later, O’Leary can rattle off arcane statistics about TLC. He’s sitting in the atrium of CBC headquarters, waiting to film another episode of The Lang & O’Leary Exchange, but his mind is cast back to TLC. “Our R&D costs went from 22.5% to 12%,” he tells me of a long-ago reorganization.

While TLC grossed US$839 million in 1998, it lost $105 million. It recorded losses the two previous years as well. Some analysts questioned why Mattel would pay billions for a money-losing company. “Well, that’s not true,” O’Leary says, eyes narrowing. “The company was profitable when we sold to Mattel. Who said it wasn’t profitable?” I read him the earnings taken from the company’s annual reports, and he asks to see my notes. “You know, I gotta check. This doesn’t look right to me,” he says. After another moment of scrutiny, he tosses the notes back on the table. “Those were public numbers, so whatever they were, they were,” he concludes. “But I don’t think Mattel was worried about that. They were looking at the growth in market share and what our top line was.”

The problems started almost immediately. In the third quarter of 1999, Mattel’s dismal results were exacerbated by a shocking US$105-million loss in the TLC division. (Management had projected a US$50-million profit.) Mattel’s stock crashed, wiping out US$3 billion of shareholder value in one day. Though O’Leary had signed a contract to stay with Mattel for three years, six months after the deal closed, he was fired. He left with more than US$5 million in severance.

Soon after, Mattel brought in a long-time software executive, Bernard Stolar, to turn around the division. “It was in horrible condition,” Stolar recalls. TLC had too many employees, too much overhead and aging brands. Stolar believes its acquisition spree was solely to add revenue. “They didn’t even care if they were losing money or not,” he says.

Shareholders filed a class-action lawsuit accusing Mattel execs, O’Leary and former TLC CEO Michael Perik of misleading investors about the health of TLC and the benefits of the acquisition to Mattel. The lawsuit alleged TLC used accounting tricks to hide losses and inflate quarterly revenue. The defendants disputed all of the charges, and none of the allegations were proven in court. Mattel paid US$122 million to settle in 2003.

The company grew restless waiting for Stolar to turn around TLC. Three months after his arrival, Mattel announced it was looking for a buyer for the division. No one was interested. Finally, in September 2000, Mattel struck a deal with Gores Technology Group to take the division off its hands for a share of future profits.

O’Leary blames the meltdown primarily on the culture clash between the two companies. “We had a fantastic company,” he says. His former colleagues also blame cultural problems. Bordon likens it to the “Marines meet the New York ballet,” but Stolar isn’t convinced. “The company was in the process of being destroyed,” he says.

The bravado drains from O’Leary when he recounts the outcome. He feels most badly for the employees. “I feel like I let them down,” he says. “They’d worked so hard.” The sentimental tone doesn’t last long. “But that’s the thing about business. It’s very Darwinian.” He goes on to spin the tale into a lesson on perseverance.

Stolar, for one, isn’t surprised O’Leary moved on. “Promoters never die,” he says. “They just go to the next act.”

O’Leary lacked direction after he was fired, but eventually found a new calling. He recalls he was an occasional guest on ROBTv until offered his own program by general manager Jack Fleischmann. “Jack approached me and said, ‘Look, why don’t you try out on television? Because you’ve guested a few times, and we’re interested in seeing what happens.'”

Fleischmann remembers it differently. “He called me out of the blue one day,” Fleischmann says. The caller explained he was a Boston investor and thought he could be on television. Fleischmann hadn’t heard of him, and explained he encountered many TV hopefuls. What made him different? O’Leary offered to show him. “He hopped on a jet the next day and showed up in my office,” Fleischmann says. “It was quite clear, like instantly, that this guy had that magic thing that you need to be successful as a presenter on TV.”

O’Leary raises his eyebrows at this. “I cold-called him? I don’t think so,” he says. “You know what, I’d go with his version of the facts, because I don’t remember.”

Whether television was a happy accident or a conscious pursuit, O’Leary was a natural. He co-hosted SqueezePlay with Amanda Lang for six years, and was almost cartoonish with his right-wing bluster. The pair jumped to the much larger CBC last fall, and O’Leary seems to have shifted farther right now with the public broadcaster. “I expect to see torches on the street tonight,” he said on-air last fall, after an intervention by the CRTC into private industry. “Burn down Parliament!” Such tirades often lead people to ask Lang if he’s acting. “He really believes what he’s saying,” she says. “It’s why he can be repetitive.”

Viewers love or hate him, but they watch. Dragons’ Den provided an even bigger platform for O’Leary when it debuted in 2006. The latest finale pulled in nearly two million viewers. He knew the show was a success after the first season when a man recognized him in an airport bathroom. He called O’Leary an asshole.

All this time, he never left business. In 2003, he became a founding director in a self-storage company called StorageNow started by another entrepreneur in Toronto. A rival company called InStorage REIT attempted to buy them out in 2006, but they weren’t interested. Former InStorage CEO Jim Tadeson relishes imitating the grilling he received from O’Leary. “‘You should be so happy to sit in the same room with me,'” he parrots. “All that kind of crap. Complete posturing.” InStorage was a public company, unlike StorageNow, and could expand more easily. A year later, InStorage purchased StorageNow for $109.6 million. “It was very satisfying that they thought we were nobody and couldn’t hold their briefcase, and now we’re buying their company out,” Tadeson says. O’Leary has no problem with that. He owned roughly 20% and grossed $21.9 million.

He also joined the board of an environmental remediation company, since renamed EnGlobe Corp., in 2004. The board fired the founder and CEO, alleging he misappropriated company money, and EnGlobe was mired in litigation for years. The share price peaked at nearly $4 a share in 2004 and trades for pennies today. “For me, it was a failure,” O’Leary says. He quit the board in 2008 but retains his shares.

His fund company has been more successful. He had been looking for a money manager to match his investing style for years – conservative, with a focus on cash preservation and yield. Everything he owns needs to pay a dividend. Or, in O’Leary parlance, it needs to be “dripping cash like chicken on a spit,” pointing out he has a wife and two kids to support. A mutual friend connected him with Connor O’Brien, a Wall Street veteran who had moved to Montreal to manage money for private clients at his own firm, Stanton Asset Management. O’Leary had more in mind than finding a money manager. He saw a huge opportunity providing high-yielding investments to retirees and baby boomers who formerly relied on income trusts. O’Brien was intrigued, and together they launched O’Leary Funds in 2008.

The prospectus for the first product, a closed-end fund, disclosed no investing performance history for O’Leary (or Stanton, for that matter) since he is not a professional money manager. Name recognition was the primary incentive to buy. This didn’t prove to be a problem, however. The O’Leary Global Equity Income Fund (OGE) launched in June 2008 with $40 million of assets under management. O’Leary meets regularly with financial advisers across the country to pitch his funds. Some have even arranged events for him to give talks to their clients. “We went to Kitchener, Ont., and the adviser in that case rented the Galaxy movie theatre,” he says of a recent event. “We had 300 seats. They were all full.”

The team at Stanton conducts the actual trading and investment research, while O’Leary handles promotion. But he also helps devise new products and contributes broad investment ideas. Most of these he picks up from guests on The Lang & O’Leary Exchange. He says he has access to CEOs, politicians and fund managers and chats with them before each show in the green room. “The unwritten rule is whatever’s discussed in there, it’s never discussed again,” he says. “That is where I get my best investment ideas.”

The notion that some of the world’s top financial minds are spilling secrets to O’Leary in the dressing room is one that has garnered skepticism, notably from Mark McQueen, who operates venture debt company Wellington Financial in Toronto. He is a prolific blogger, and O’Leary is one of his favourite targets. “Kevin O’Leary is a fantastic television personality,” he says. “I’m not sure what that has to do with picking stocks.” McQueen created a mock portfolio on his blog of 15 dividend-paying stocks to compete with the first fund, OGE, when it launched. As of early April, McQueen’s basket of stocks was up 16.7%. OGE units were down 11.4%.

O’Leary dismisses McQueen. “He could be in his basement writing this stuff,” he says. A more accurate way to judge portfolio managers, he points out, is by the net asset value (NAV) of the fund. Since inception, the NAV of OGE has grown 1.3% on an annualized basis, beating by far its MSCI World Index benchmark. In July 2008, O’Leary trumpeted OGE on BNN for 10 minutes, and viewers were intrigued. The unit price, relatively stagnant up until then, jumped by more than a dollar the next day. But despite the NAV performance, units are still down 9.5% as of the end of April, including distributions, since OGE debuted on the TSX at $12.

OGE had the misfortune of launching a few months before the market meltdown, of course, and its NAV didn’t crater to the same degree as its market value. Most of O’Leary’s other funds debuted in 2009 and benefited from the recovery. The company now operates seven closed-end funds and four mutual funds, which are outperforming their benchmarks. O’Leary, naturally, is thrilled. “I love to see cash come into my account,” he says. The firm is rolling out its eighth closed-end fund, and there are more to come.

That will keep O’Leary busy for a while. In fact, he has never been busier. If he is not on television or promoting his funds, he’s likely giving a speech somewhere. This past March, he delivered a presentation at an event organized by Deloitte & Touche in Toronto. He peppered the crowd of 300 or so with O’Leary catchphrases – attendees applauded when he urged businesses to pour boiling oil on competitors – and showed off a picture with his arm around Apple co-founder Steve Wozniak on the set of Dancing with the Stars. “Nobody gets to him,” he said. The next slide showed O’Leary posing with Gonzo from the Muppets.

After the presentation, a trio of businessmen bounded out of the hall. “That guy is frickin’ awesome,” said one. His colleague shot him a sideways glance. “He’s a nutbar!” But the third had O’Leary nailed: “My kids love his show.”