GETTING VALUE FOR MONEY IN PRIVATISATIONS
PART 1: KEY LESSONS
| 9.Flotations
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| Management of the Flotation |
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| - What can help departments manage flotations effectively?
| - Departments should study lessons learned in previous sales and give careful consideration to recommendations we and our predecessors have made in the light of the conduct of these sales.
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| - With the benefit of this experience, departments are more likely to be able to introduce innovations which secure better value for money.
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| Selling Shares in Stages |
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| - Why should Departments consider selling shares in stages?
| - Departments should always consider selling shares in stages, with the presumption that unless they can be confident about pricing the initial share offering they should not sell all the shares at once.
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| - In spite of recommendations to the contrary from our predecessors, in a succession of flotations, culminating in the sale of the Regional Electricity Companies in 1990, departments sold all the shares on privatisation, only to see the price of shares increase rapidly, often as soon as trading commenced. The Committee welcomed the fact that in the subsequent sale of National Power and PowerGen only 60 per cent of the shares were sold. When the remaining shareholding was sold in 1995 the taxpayer benefited from additional proceeds of £2.3 billion.
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| - We are therefore very concerned that, in more recent flotations, departments have reverted to 100 per cent sales, with the taxpayer suffering serious loss of value.
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| Retail Incentives |
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| - What consideration should departments give to the use of incentives to persuade individuals to buy shares on privatisation?
| - Experience shows creating competitive tension between individual and institutional investors can help to get a better price. Stimulating the interest of individuals, in many cases by offering incentives to them to apply for shares, can put pressure on institutions to bid more strongly.
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| - In seeking to reduce costs wherever it is prudent to do so, departments should continue, however, to ensure that the nature and net value of any incentives that might be offered to investors are appraised carefully.
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| Pricing the Shares |
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| - What steps should departments consider taking to fix the price at which the shares can be sold?
| - In recent years departments have adopted a process called bookbuilding, in which shares are priced on the basis of competitive bidding by investors who are required to indicate how many shares they would be willing to purchase at different prices. Particularly in cases where the shares were already traded and there was therefore a price in the market, this has helped departments set the price at a level at which proceeds were likely to have been maximised.
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| - In some recent flotations where there was no existing price for the shares, oversubscription at the top of the price range set by the departments has made it difficult to judge whether the best price was achieved. Where there is uncertainty over the market value of the business, departments should make sure that the top of the range does not constrain pricing.
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| Allocating the Shares |
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| - What steps should departments take when deciding how to allocate shares between investors?
| - Departments should maintain control over the allocation of shares in accordance with a well-defined set of criteria that have been made known to potential investors.
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| - To maximise competitive tension between bidders to help get the best price and to achieve a stable aftermarket, departments seek to ensure that there is over-subscription.
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| - Some investors will not therefore get the number of shares they bid for. Departments should ensure that investors understand the allocation policy ahead of the sale so that the subsequent allocation of shares is seen as being fair. Otherwise there is a risk that the government's credibility will be damaged, with adverse consequences for future sales.
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| - A policy of favouring in the allocation likely long-term investors can have significant benefits but this policy needs to be made clear to potential investors.
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| Market Stabilisation |
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| - How can departments get a better price for the shares by reducing the likelihood of the share price falling following a flotation?
| - Departments should consider carefully giving the co-ordinator of a flotation an option to stabilize the share price in the period after a flotation, by entering the market and buying and selling shares so as to reassure potential investors and secure a better price for the shares. Such arrangements must, of course, comply with stock market and other legal requirements.
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