Do you remember the yellow pages?

Believe it or not, exactly 10 years ago today, on May 29, 2009, marked the death of the yellow page directories with the bankruptcy of R.H. Donnelley, one of the largest yellow pages publishers in the U.S. with 80+ million directories circulated across the country.

For years, R.H. Donnelley was one of the main clients I worked on as an investment banking analyst at Lehman Brothers (yes, which is also now bankrupt).

Just before it collapsed, R.H. Donnelley was worth billions of dollars. But, I knew it was only a short matter of time for R.H. Donnelley to go south. With both R.H. Donnelley and Lehman Brothers now gone, let me share you my story and the details of the exact moment I knew something was wrong.

But first, why were yellow page directories like R.H. Donnelley worth billions of dollars?

From the time of the invention of the telephone, over a century ago, yellow page directories were virtually a monopoly. As the telephone served as the only technology that can be used to contact anyone in the world in real-time, the telephone number listing and organization of all the services in the world were only accessible through the yellow pages. They were the company’s online website, Google.com, Craigslist.com, HomeAdvisor.com, Relator.com, Cars.com, and every other [Service].com directory search engine, combined.

If you had a business, you just had to list yourself in the yellow pages, it was the single and most basic and important way to advertise yourself. If you missed out in being printed in the annual yellow page directory, it was as if you didn’t exist for the entire year. For those loyal advertisers who continued to feature themselves year after year, they would get added benefits like being listed above their competitors or even have larger sections in the directory. If the advertiser ever stopped paying, it could mean that they lose these benefits to their competitor.

For the consumer, when they received their free yellow page directory, they kept it in their home in a safe place, as the yellow pages served as a valuable reference for every possible service that someone may need. Even though the book was very large and heavy, they never would throw it away as it served as an important resource.

What happened to R.H. Donnelley?

Since the company had historically stable revenue with large profit margins (all you had to do a print a large book with the names of all the people that paid you each year and mail it out to everyone which also served to reinforce the marketing of the yellow pages), the company was able to take on billions of dollars of debt to purchase other yellow pages companies and increase its physical footprint as each yellow page directory served a specific, localized market (i.e. the yellow pages in Cincinnati, OH were different than the yellow pages in Washington, D.C., and each had their own print production, market distribution, advertising clients, and sales staff).

In the years before its collapse, R.H. Donnelley continued to double down on buying more and more yellow page directories, increasing its physical footprint, but not spending any money investing in its digital footprint or offering new products and services (at the time of its collapse, R.H. Donnelley had over 600 different directories across the U.S and a massive sales staff of 2,000 people). As a result, from 2002 through 2007, R.H. Donnelley’s debt grew from $2 billion in 2002 to a whopping $10 billion by 2007 (yes, that’s a ton of advertisements that would need to be sold just to cover debt).

As an investment banking analyst at Lehman Brothers, in 2005, I worked on R.H. Donnelley’s biggest deals like R.H. Donnelley acquiring one of its main competitors, Dex Media, in a $9 billion dollar deal, and the year thereafter, in 2006, I then worked on a $1.1 billion secondary equity offering of R.H. Donnelley’s stock of two of its largest shareholders, Carlyle Group and Welsh, Carson, Anderson, & Stowe. Here is my Lehman Brothers lucite (i.e. deal trophy) from the successful closing of this deal.

Looking back at it today, it would seem rather crazy for a yellow pages company to spend all their time and money buying other yellow pages directories and not investing in their own technology, continue to operate its legacy business model, and do nothing meaningful in regards to digital innovation.

In the his last quote as Chairman & CEO, David Swanson stated that the company’s “growth-through-acquisition strategy never anticipated the cataclysmic collapse of the U.S. economy and the local advertising market.” It seems that Mr. Swanson’s final statement and legacy was to put the blame on all of us (the entire U.S. economy), and his clients (the local advertisers), and not on R.H. Donnelley’s strategic direction or business model.

Simply put, the death of R.H. Donnelley and all the other yellow page directories is due to one simple thing: the internet, and not adequately adapting to it quick enough. The company may have a little more time to figure out its internet strategy, but remember, the company took on 5x more debt over the course of 5 years so it really didn’t have any added time or cash to focus on anything but paying down debt given its existing business model.

When did I know that R.H. Donnelley would be in trouble?

As I mentioned, I was part of the deal that helped sell $1.1 billion of stock of R.H. Donnelley which was held by two of the company’s largest shareholders that took place in New York City in the Fall of 2006. With all the investors that are physically located in New York City, this served as an important opportunity for the $1.1 billion secondary stock offering.

To make this happen, I helped put together the roadshow. A roadshow is a term used to describe the process in which the executive team travels across the country to meet with investors and pitch to them the terms and benefits of the offering (“road” as they are traveling around to meet investors and “show” as the company needs to put on a great show to then get those investors to invest in the company).

It was also a relatively fun experience for me because many times I had to work on the presentation but never got to see how the presentation would actually be presented live at the roadshow. In regards to this roadshow, this would be the opposite, as the roadshow presentation was already completed and I was just there to help organize the actual event.

On the day of the roadshow, my boss invited me to sit next to him in the audience. I was very excited and honored, and for a moment it did not seem like I actually was working, as now I got to experience the roadshow for myself as a member of the audience, just like all the other investors who were seated around me. I was also excited to listen to a seasoned CFO who ran a billion dollar company performing on stage, trying to rally investors in raising money for the company.

The CFO did a great job walking through lots and lots of slides highlighting how great the yellow page business model was, especially how it was very stable and consistent like a utility company. These companies had strong valuation multiples because of their consistent earnings so that was a key highlight for investors.

But, there was only one slide dedicated towards R.H. Donnelley’s internet strategy.

I found it puzzling to focus so much attention to a yellow pages directory and not talk about the future in digital and online listings. During the presentation, the CFO showed us one page and talked about how they would have an add-on for each advertiser (remember, R.H. Donnelley had over 600,000+ advertisers at the time) that would charge an annual fee of $50-$100 to maintain their website listing on the R.H. Donnelley website.

Believe it or not, the average advertiser of R.H. Donnelley spent $3,500 per year in the physical yellow pages directory (yes. that’s 600,000+ total clients paying on average $3,500 per year, which equated to about $2.1 billion in annual revenue in that physical yellow pages directory each year).

How can you justify this price? Well according to Ben Braun, a friend who read this article, states “many successful small businesses that have been around for decades, built their business almost exclusively on Yellow Page directories.”

The CFO argued that the physical yellow page directory would continue to be the company’s most important asset, and the digital online listing was just a small add-on.

I found this was odd for a number of reasons.

First, it was 2006, and any business at the time could create a free website listing on their own website, on a search page like Google or Yahoo, or even on social media like Facebook (and not have to spend a whopping $3,500!). I found it strange that they would also want to charge their advertisers an extra fee for this essentially free service.

Second, I found it odd that even if the advertiser didn’t pay the additional fee of $50-$100, then R.H. Donnelley’s online website would be weaken as it would essentially contain less content (I also could not imagine anyone paying $50-$100, let alone any price for this service). It seemed like they actually needed to list as many advertisers as possible on their website to actually make it useful (even for free). But, at the same time, R.H. Donnelley would struggle to get paid for this, because the advertiser could do it free online and with all the other new website competitors. It seemed like the value proposition of simply posting that your business existing, which is all what the yellow pages really did, would be exterminated by the internet, and R.H. Donnelley had not articulated a solid strategy of how they were going to tackle this during the presentation. It seemed to me that their internet strategy might just be dead on arrival.

As I was listening to the presentation in the audience, I made some quick calculations. Even if all 600,000 advertisers paid $100 per year, it would equate to $60 million, which is nothing as compared to the total debt of $10 billion, it would take them 167 years just to use all that revenue to pay down their debt every year. They really needed to figure out a strong business model to maintain a customer base of 600,000 advertisers paying $3,500 per year or things would not be very good for them.

At that moment, I felt like I was back at The Kelley School of Business at Indiana University, listening to an interesting case study. I had graduated only a couple years prior and I was now seated in the audience. So, I raised my hand and to ask him a question about their proposed internet strategy.

Even though everyone else was asking questions about the other things he highlighted in the presentation, my question was focused on the one quick slide I felt most important, the internet.

I raised my hand and got excited when he, the CFO of a multi-billion dollar company, actually called on me.

I asked him about the validity of their internet strategy and the incremental value R.H. Donnelley would have to give vs. other free sites on the internet to make people want to actually pay for the service, and when everything goes online, what would then happen to the future of the print directory they relied on so much.

I could see he was taken aback, as he answered in a fumbled way.

I said to myself, wow, I actually asked a smart question in a sea of other, older, more experienced Wall Street investors. I took a risk and it paid off, as asking a question could have been embarrassing to me if it sounded stupid.

But, as he was answering, it didn’t seem like he had a strong strategy or even knew how to articulate a good answer. After addressing my question, I had some follow-up, as his answer did not seem complete, so I raised my hand again as he was finishing his response to ask a follow-up question.

When I was in school, I was encouraged to ask smart questions. I was also taught there was no such thing as a stupid question.

But, it was at that same exact moment when my senior banker, my boss, and a person I very much admired and actually had invited me to attend the presentation and sit right next to him, forcibly grabbed my arm and pulled it down.

He was one of the most happy and exciting bosses I have ever had. He was a very carefree and fun guy. But as he looked at me, there was anger and rage in his face.

As I locked eyes with him he categorically says to me: “STOP EMBARRASSING THE CLIENT!”

I was taken aback.

I thought to myself, what did I do to embarrass the client? I do not want to harm anyone here, and I certainly did not come here to embarrass anyone.

I was shocked and puzzled, what did I do wrong?

The entire rest of the presentation I could not focus my attention on anything other than to understand what had happened and I was constantly reliving the moment, tracing my steps back and forth wondering what I did to embarrass the client.

It was at that moment that it suddenly clicked.

R.H. Donnelley is our client and we are their banker. The goal of this roadshow is for our client to raise as much money from the investors in the room. My question and his response could harm that, as it was not in our position to challenge the client. It was the role of the investors, not the bankers, to ask questions and figure out what stocks they want to buy or sell.

I looked around. I saw a sea of people much older than I was.

These investors were probably not as sophisticated with the internet. They probably had no idea what an internet strategy was and how to even compare what he was saying with the realities of an online offering.

It was at that moment I realized that asking a smart question was actually stupid.

Further, I also realized maybe it was smart to be stupid.

We did not want to lose a client, and we ultimately wanted our client to succeed. Banks like Lehman Brothers could also make at least a 1%+ broker fee from the total offering, which at $1.1 billion was $10+ million in fees. Yes, get paid $10+ million to make the client look good while keeping your mouth shut.

I always was taught the phrase that there were “no stupid questions”. At this point, yes, I did realize there is a carve out for stupid questions when raising those questions actually go against your interests.

As a 24 year old, it seemed like the realities of business were now more complicated. Now I have to think about the ramifications of the questions I ask, as if I would have to build a decision tree to understand what questions I may ask and to whom I can ask them. I was naturally curious about my question to the CFO, but now I realized I could not ask the questions I wanted to.

In 2007, R.H. Donnelley’s top executives got paid millions in total compensation. The two owners who sold their 26% stake in that secondary equity offering I worked on in November 2006, Carlyle Group and Welsh, Carson, Anderson & Stowe sold their stake for $60 per share, and got paid $1.1 billion. As the executives made millions and these owners made billions, for that next year, my question did in fact seam stupid, as R.H. Donnelley’s stock hit a high of $67 in July 2007.

But then in 2008, R.H. Donnelley started cutting costs by firing 10% of its employees, then in September 2008, Lehman Brothers went bankrupt, and in November 2008, R.H. Donnelley started to freeze pension plans, and then a month later, on the last day of 2008 on December 31st, the New York Stock Exchange suspended the trading of the company’s stock, rendering it worthless. The CEO made millions and these owners made billions just a year prior to the employees and long-term shareholders getting nothing.

In June 2008, I left Lehman Brothers 80 days before it went bankrupt, my apartment burned down in a fire, and I joined a hedge fund, Aurelius Capital Management, that solely focused on specializing in investing in bankrupt companies (all these events happened in that single month in June 2008). I found my calling as no more a banker, but now as an investor. When asked why I wanted to leave Lehman Brothers, the hedge fund loved my R.H. Donnelley story in my interview, and very much valued people asking critical questions to make smart, analytical decisions.

Did I want R.H. Donnelley or Lehman Brothers to go bankrupt, of course not, no one did. Too many people lost too much, and both companies had been in operation for over a century.

But, smart questions always need to be asked, and in life, things always change. Both R.H. Donnelley and Lehman Brothers are now bankrupt, and I do think there is a correlation. At the end of the day, being silenced is stupid, and asking smart questions is the key to success.