Coffee House

Blame it on the bankers’ boogie

12 April 2014

11:30 AM

12 April 2014

11:30 AM

Vince Cable and Michael Fallon, ministers responsible for the Royal Mail sell-off, have been summoned for another select committee grilling after Easter. Meanwhile, Labour’s irritatingly smug business spokesman Chuka Umunna continues to score points by claiming that last October’s flotation was ‘botched’, costing taxpayers a notional £750 million as the shares leapt from the issue price of 330 pence to 455 pence on the first day, and much more since as they rocketed on upwards.

The truth is that the ministerial duo were right to be super-cautious about pricing a privatisation that had been thwarted for so long by union subversion, for which public enthusiasm was uncertain, and in which taxpayers would continue to hold a 30 per cent stake. Right also to rely on advisers — chiefly Lazards, relying in turn on consultation with the rest of the City — to recommend a level at which the issue could be safely got away, rather than pitched at higher risk to extract the last pound. The fact that it took off like the hottest dotcom in town was predicted by no one, even analysts whose early valuations were well above 330 pence.


So the outcome was a prize example of the capriciousness of markets: if at a late stage Cable had sniffed the air and told Lazards to whack the price up to £4, demand would have shrivelled and subsequent performance would have been completely different. On the other hand, the business secretary was clearly misguided when he referred to 16 ‘priority’ institutions as ‘a core of high-quality investors who would be there in good times and bad’. They were not contractually or morally committed to that role, and they behaved rationally by taking profits when the price surge took them by surprise like everyone else.

Neither ministers nor select committee members really understand this stuff, I’m afraid, so another televised show trial will achieve little. Better to aim a barb at Lazards, plus Goldman Sachs, UBS, Merrill Lynch and Barclays in the ‘book-building’ role: for all your smooth talk, boys, if new issues like this one are such a maddeningly inexact science, remind us why you deserved £14 million of fees?

This is an extract from Martin Vander Weyer’s ‘Any Other Business’ column in this week’s Spectator. Click here to subscribe to the Spectator.

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Show comments
  • Stereotomy

    This line about the pricing being wise, deliberate “caution” rather than a huge screw-up has been repeated quite a few times. So if this was a deliberate decision, could you point me to when Cable or anyone else publicly stated “And by the way, we’re planning to sell it for hundreds of millions- maybe even more than a billion- less than it’s worth” before it happened?

  • starfish

    Nonsense. The govt got rid of a famously inefficient heavily unionised excuse for a business and have probably saved millions in potential costs. All this hindsight is pointless esp from a labour party that signally failed to resolve the issue in 13 years

    • Mynydd

      If this is so why does the last accounts for the Royal Mail show a profit of £400m.

      • starfish

        Slippery accounting. Especially now the pension debt has been shifted onto the long suffering taxpayer

        • Des Demona

          Gracious – do you mean to say we kept the £12 billion pension deficit and yet STILL got stiffed on the sale price?
          This gets worse!

  • 2trueblue

    Cable was way out of his depth.

  • Hugh1

    Sorry for my ignorance but is there a reason why there isn’t a pre-privatisation market? Why doesn’t the government say that they will sell X number of shares at price Y today but will only handover the shares at the rate the buyers purchased them at in 14 days time?

  • Tony_E

    A spirited defence but I think Cable seriously didn’t understand the market, and the advice he recieved was designed purely to get the shares away. The minister is ultimately responsible for the price and should have been more savvy

    Part of the problem is that share prices have currently a lot to do with the effects of monetary expansion. Companies over the last few years have seen massive share price rises both here and in the USA. Driven by an endless stream of money to invest, the large institutions are not looking to hoard cash or loan it to startups , they want to sink it hard into stocks. There are quick profits to be made, much in excess of the interest rates, which make it profitable to borrow simply to speculate.

    With this economic backdrop, there was always likely to be an initial spike. Whether it will last in a more competitive mail market is yet to be seen.

  • dado_trunking

    I don’t blame the bankers for anything. I verbally flame them, literally.

  • kyalami

    It was clear some time before the privatisation that demand would substantially exceed supply. In those circumstances, you put up the price. It’s really not difficult: IIRC, Google did it very successfully. And if you end up selling fewer shares (unlikely) then you hold on to the balance. As it is, large numbers of people found it impossible to get as many shares as they wanted, and many got none.

    No dodging facts: this was a botched launch.

    • Jambo25

      It verged on theft from the general public.