If you aim to create a dynamic, successful business, a state-owned utility is not the place to start.
It is 25 years since the public offering of a 50.2 per cent stake in British Telecommunications. Never before had a major state-owned utility been transformed into a public company with dispersed share ownership. The flotation, five times larger than any previous offering on the London Stock Exchange, was not the product of a carefully worked out Thatcherite scheme to roll back the frontiers of the state. It came about almost by accident.
Britain’s telecoms infrastructure had fallen far behind. The problem was reconciling the need for large investment in digital switching with rigorous macroeconomic targets for public borrowing. Various wheezes to escape this dilemma were thought impractical (a later generation of accountants would be more relaxed about off-balance sheet financing). The only solution seemed to be the sale of a majority stake.
The offering initially went badly. Investment institutions thought a public utility a dull investment. But small investors took to the idea. A vigorous advertising campaign succeeded beyond anyone’s dreams. Huge public demand meant that allocations to institutions were scaled back. The shares, offered at 130p but with only 50p payable upfront, immediately gained a 40p premium in the secondary market.
The easy immediate profit made privatisation popular. Bribing voters with their own money is a well-tested political strategy. The novelty here was that the strategy was used, not to gain votes, but to build support for a specific policy. Governments around the world followed the British example.
Few industries have changed as much in 25 years as telecoms. Prices have fallen dramatically and the telephone line in your home has become the gateway to a previously unimagined range of services. But these changes are the result of competition and new technology rather than privatisation.
BT has not performed well as a public company. Its shares, which ended their first day of trading above 170p, stand at 150p 25 years later. (Along the way, shareholders have received dividends, subscribed £6bn in a rights issue, and benefited by about the same amount from the demerger of the company’s wireless businesses).
Such outcomes are familiar for investors in privatised businesses. They make an immediate profit from underpricing of the issue, but then experience dull business performance. BT has repeatedly sought global diversification and repeatedly failed in that aspiration. Most recently, the company has been trying to contain losses in its global network division and is again focusing on its core natural monopoly functions. As with other privatisations, this is where most of the profits come.
Many of BT’s senior managers had joined the company when it was a government department. Such positions did not represent attractive careers either for high-flying civil servants (who would rather be in a policy department) or for those with aspirations in business (who would prefer a private-sector organisation). Those who had worked their way up the hierarchy at first resisted privatisation but soon came to see its benefits. Increased management autonomy went along with free shares, bonuses and options. It was like winning the lottery.
But like lottery winners, many found this good fortune difficult to manage. Top management was preoccupied with distracting strategic fantasies. The business environment was changing rapidly and the organisational culture was a nightmare. The workforce was ruled by powerful unions, and the battle to reduce numbers and gain control of working practice was protracted.
If you aim to create a dynamic, successful business, a state-owned utility is not the place to start. Vodafone, today Britain’s largest telecoms company, was established a year after BT was floated. The verdict on BT plc must be that privatisation provided a route for the managed decline of a business whose historic purpose was disappearing. Perhaps there are lessons for Royal Mail, the other component of what was once the General Post Office.