4.3.4 Privatisations and demutualisations – easy money?
The 1980s and 1990s saw what came to be believed as sure-fire ways to make easy money from shares – privatisations and demutualisations.
Privatisations – the conversion of state-run utilities to private listed companies via a sale of shares to the public got underway in the UK in 1984 with the privatisation of British Telecom. This was followed by a succession of further privatisations in the following years including British Gas, British Airways, the regional water utilities (for example, Severn Trent) and the British Airports Authority. Additionally, the UK Government sold off its holdings in companies like BP and British Aerospace.
The rationale for the privatisations was a mixture of politics and economics. Getting more members of the public to become shareholders and to become actively engaged in a shareholding democracy fitted with the ethos of the Conservative Governments of the late 1970s and 1980s. Getting government out of business by selling off state utilities, which were simply businesses owned or part-owned by the state, also resonated with their economic philosophy.
The economics were compelling too. Privatisations raised huge amounts of money – some £50 billion between 1984 and 1996 – and hence reduced the need of the government to borrow.
For those who successfully received allocations of the new shares in the privatised utilities, the economics usually looked good too. In most cases, the share prices rose sharply immediately after flotation, with the result that instant profits could be made by a sale immediately after the launch date (a practice known as ‘stagging’). The reasons for this phenomenon are much debated. Suggestions include:
- the underestimation of demand from personal investors for the shares, with this demand being whipped up by extensive advertising campaigns
- the fact that institutional investors had to buy up large amounts of shares for funds that tracked the FTSE 100 – since in most cases the size of the privatised utilities meant that they joined the list of the 100 largest companies on the London Stock Exchange
- the desire of the investment banks (who arranged the privatisations) to see successful share issues. This meant that no risks were going to be taken by pitching the offer price of the shares at a level which left even a proportion unsold on the launch date.
The privatisation period came to an end with the arrival of the new Labour Government in 1997. In truth though, there was not much left at that point for the government to sell off!
How did shares in privatised companies perform?
The privatisation period created a new group of shareholders among the general public – although over time many sold their shares. Those who held onto them over the longer term had a mixed experience relative to investing in a FTSE 100 indexed fund – demonstrating what we learned earlier in the course about the specific risks associated with holding shares in individual companies. Those who did ‘stag’ the shares of the privatised utilities by selling soon after launch did, on the whole, make good profits thus underpinning the view that privatisations offered an easy way to make quick, risk-free money in the equity market.
Another way to make easy money in the late 1980s and 1990s came with the demutualisation of the larger building societies.
Building societies are mutual organisations owned by their members – their retail savers and their mortgagors. From the late 1980s though, most of the larger societies – starting with the Abbey National in 1989 and then, in quick succession in the mid-1990s, with the Halifax, the Alliance & Leicester, the Northern Rock, the Woolwich and the Bradford & Bingley – decided to convert to plc status (in effect to become banks rather than building societies). To do this, they floated on the London Stock Exchange and offered free shares to their personal customers – the savers and mortgagors. These shares could then be sold on or, after the demutualisations were completed, generated profits to these shareholding customers. Other societies became demutualised through agreeing to be acquired by banks (Birmingham Midshires, Bristol & West, Cheltenham & Gloucester, National & Provincial).
The recognition of this risk-free way to make money resulted in millions of members of the public opening savings accounts with any building society deemed a possibility for demutualisation. In some cases, these customers actively campaigned for their societies to demutualise by standing for board directorships and putting motions proposing demutualisation up for a vote at the societies’ AGMs.
This easy way to make money from shares came to a halt within a few years. The last to demutualise was the Bradford & Bingley in 2000. The remaining large building societies – the Nationwide, the Coventry and the Yorkshire – all made it clear that they supported mutuality and did not see the business case for demutualisation and conversion to banking status.
Subsequent events reinforced this viewpoint. Every one of the demutualised societies quickly lost their independent status either by being acquired by other banks (Santander acquired Abbey National and the Alliance and Leicester; Barclays bought the Woolwich), or by running into calamitous financial difficulties during the 2007/08 financial crisis (Northern Rock, Bradford & Bingley). Indeed, shareholders of the Northern Rock and the Bradford & Bingley found that their holdings became worthless.
The whole episode was a poor advertisement for the business strategy of demutualisation. For holders of shares in the Bradford & Bingley and the Northern Rock, it was an extreme and harsh lesson about the concept of specific risk when owning shares in individual companies.