Research Magazine > ARCHIVE > Fall
93 > Article
You Can Buy Anything...
If the Price
by David Dodson
Welcome to the sale of the century!
Can we interest you in a piece of Air France? Perhaps a stake in STET, Italy's
telecom giant? Maybe Latin America is more to your liking? Well, Argentina's
largest oil company may have just the stock offer you're looking for.
There's no shortage of companies to choose from. More than 100 blockbuster
deals are anticipated in Europe alone. And we accept dollars, francs, pounds
-- just about any hard currency will do.
Privatization is all the rage now. From Venezuela to Malaysia, governments
are priming their best industrial candidates for a run at the financial markets.
For a price, they'll put state-owned companies into stockholders' hands. And
judging by new research from University of Georgia finance professor William
L. Megginson, privatization is looking like a better deal than ever for the
companies, their new shareholders and the governments that cut them loose.
Megginson and two of his former graduate students will soon publish in the
Journal of Finance the most comprehensive evidence to date that state-owned
enterprises perform better after privatization -- and in some unexpected ways.
"What we were expecting to find were improvements in efficiency and profitability.
And we did on both counts," Megginson said. "But we were also expecting
to find large-scale job losses. We were quite surprised to find that did not
Political angst over layoffs and shrinking payrolls is the most often cited
stumbling block for privatization. Megginson called it "the great fear
of all governments contemplating privatization programs."
But Megginson's research team discovered that employment actually increased
for nearly two-thirds of the 61 privatized firms they analyzed. And the number
of workers hired by companies in the sample more than offset the employees
laid off. On average, these companies increased their work force by more than
Still, the finding puzzled Megginson. How could these corporate wards of state,
with a history of bloated payrolls, become more profitable and add new hires?
He concluded that while productivity (measured as output per employee) increased
significantly, total sales grew even faster, allowing employment to be driven
up by greater demand in the marketplace. When given the freedom to manage,
the companies were apparently able to fulfill the dichotomous goals of efficiency
and job security at the same time.
Similarly, the companies Megginson studied also achieved high marks for several
other measures of performance. After privatization, most companies:
increased real sales
- became more profitable
- expanded their capital investment spending
- improved operating efficiency
- reduced their debt significantly
- and raised their cash dividends, once they started paying them.
All of this, and in most cases more jobs, too. "That was the real surprise
of the study," Megginson said. "And we checked it every which way
just to make sure."
In fact, the results were largely unchanged when the companies were compared
across categories: competitive verus protected industries, industrialized versus
developing countries and full versus partial government divestment.
"The most successful privatized companies were sold off entirely by the
government, usually in one or two stock issues," Megginson said. "And
where companies were sold off entirely, there was a clear political commitment
to privatization -- for example during the Thatcher era in Britain."
But a political platform to shrink the state's role in the economy isn't the
only reason governments privatize state-run enterprises, Megginson said. Socialist
and developing countries remain equally interested in raising cash to counter
their many debts. And the obvious goal of every de-nationalized company is
getting more bang for the buck, a lesson usually learned quickly in the private
Perhaps more fascinating than why the companies went private is that they were
allowed to at all. Throughout the 1980s, the political will to privatize state-owned
banks, telecoms and heavy industries was backed by a financial leap of faith.
Concerned governments had precious little guidance on the best way to divest
their assets, Megginson said.
Only now are international finance experts like Megginson able to analyze the
financial performance of newly privatized firms and reach some conclusions
based on several years of data.
For their forthcoming journal article, Megginson and Matthias van Randenborgh,
a German graduate student working on his master's thesis, undertook the arduous
process of soliciting financial reports from 150 companies that had privatized
through public share offerings.
"We knew the ones that were most successful would be the most enthusiastic
about cooperating with the study. So, we bent over backwards to try to get data
from those that might not have been as successful," Megginson said. "Sometimes
we were able to include a company just from secondary reporting data. We're confident
we don't have a selection bias."
Van Randenborgh, who made most of the international phone calls because
of his fluency in five languages, said collecting the data was "exhausting,
"I worked through a couple of nights trying to get people (during business
hours) in Singapore and Japan. A few hours later, I could try Jamaica."
For seven months in 1991-92, Megginson, van Randenborgh and doctoral student
Rob Nash analyzed the data from 61 companies, representing 18 countries and
32 industries. The sample reflected "the largest and most important recent
privatizations in the world," with a combined market value of $166 billion,
"The difficulty was obtaining financial statements," said van Randenborgh,
who extended his work on the project through a UGA Research Foundation grant. "Once
we had the data we started looking for commonalities because some of the companies
followed completely different accounting rules."
The researchers studied privatizations from as far back as 1961, when the
West German government sold a majority stake in Volkswagen. "But it was the
British Telecom stock issue in November 1984 which launched privatization programs
on the world," Megginson said. "BT proved that size was not an impediment
to successful privatization."
That opened the floodgates for ever larger share offerings, capped by Nippon
Telegraph & Telephone's $40-billion stock issue in 1987. By comparison,
the largest stock issue in U.S. history was valued at $2.1 billion. After 1989,
a global recession and political fluctuations slowed the most aggressive privatization
programs in Britain, France and Japan.
"The mid- to late 1980s were the peak period to date," Megginson said. "But
we seem to be entering another peak period now. For example, the conservative
government in France is about to have an even bigger privatization drive than
they had in the late '80s."
If a French campaign to privatize 20 companies reaches $50 billion as predicted,
other socialist governments may take a harder look at what assets they can
send to the auction block.
Megginson said he believes his study's findings, particularly on employment
security, carry potent policy implications for all governments debating or
embracing a program of privatization.
"Privatization has been a historical experiment. And it has been a historical
success," he said. "By implication, government control of the economy
-- or the nationalization of business -- has been a historical failure. There's
a clear warning in this study."
Governments are apparently heeding that warning. Latin American nations have
privatized more companies in the past five years than even the Old World. Chile
moved first in the early 1980s, with Mexico and Argentina claiming some of
the largest public share offerings since 1990.
Now, as countries of the former Soviet bloc jump on the capitalist bandwagon
rumbling across Europe, the sell-off of state-owned enterprises could reach
up to $40 billion a year through the end of the century.
"But the true test will be Eastern Europe and Russia," Megginson said. "Here
you have some of the largest economies in the world, and they have just started
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