Discuss about The Privatization of Telstra Corporation Limited.
Privatization encompasses the transfer of an enterprise from the public sector to the private sector. The Common Wealth Government of Australia embarked on a partial privatization of its telecommunication assets with the aim of using the proceeds to reduce the government debt and as well as lower the interest rate payment burden. Moreover, it is aimed at opening the market to competition. The focus of this paper is to respond to prompts regarding the privatization strategy employed.
Major Decision Making Factors
According to Dinc and Gupta (2011), sales are a measure of size, and the ratio of profits to sales is a measure of a company’s profitability. A government may have a preference in the privatization of a more profitable firm during its periods of profitability with the aim of having increased proceeds from its privatization. In addition, a government may prefer privatization during this period of high-profit rates as it builds public support because of successful primary sales. Privatization of a firm also leads to greater efficiency. Thus, the decision is placed on the emphasis of greater efficiency of Telstra or anticipated proceeds (Dinc and Gupta, 2011).
Bortolotti and Faccio (2009), state that politicians may choose to target public funds that may be used in pivotal areas of the economy with the aim of gaining political mileage to win an election. The government may choose areas that tend to receive a lot of public interest, criticisms and advocacy for change through lobby groups (Bortolotti and Faccio, 2009).
For this case, decision to make the partial sale of Telstra would have been made to quell critics and substantial public interests that had been placed on the country’s foreseeable unsustainable public debt. In addition, the government may have hoped to gain political mileage through its efforts in environment and wildlife conservation efforts.
According to Pettinger (2011), deregulation is often accompanied with the privatization of public corporations where policies are made to allow other players into the industry to increase competition (Pettinger, 2011). Doing away with a monopoly in the industry may have been a way in which the government aimed at lowering the cost of telecommunication products through the introduction of monopoly into the sector. The move would also have opened up rural areas to access communication services.
Issue Process used by Common wealth Government in both of Telstra Share Offers.
Rationale for the use of Installment-Payment and Book-Build instruments in the Sale of Shares
Brooks (2010), states that corporations may prefer to use installment payment in the sale of shares for it allows the seller to defer certain taxes that are derived from the income of the sale (Brooks, 2010). According to Bernfield (2015), capital gain tax can be deferred during the full or partial sale of business. Providing a discount of $0.10 per share was also a tool of attracting investors. The use of book-build instruments was also essential for it enables a company to determine the price of a share using the highest bid price (Bernfield, 2015).
Advantages of Using Installment-Payment and Book-Build instruments in the Sale of Shares
Brooks (2010) states that the sale of shares using installment payment is not only attractive and but also beneficial to potential investors. The technique enables a buyer who may not have the entire required amount necessary to purchase a required number of shares at the time to own shares of the company through a partial payment system. It, therefore, attracts an increased number of investors. Furthermore, the purchaser of shares is able to fully purchase the shares and pay the installment using dividends derived from the company’s profits. The company will typically be financing the investor (Brooks, 2010).
Drawbacks of Using Installment-Payment and Book-Build instruments in the Sale of Shares
An example of a drawback of selling shares using installment payment is that the seller does not get expected proceeds upfront. The occurrence is particularly detrimental is the seller intends on using proceeds on urgent and pending matters (Keck, 2009). Neilson (2014) states that the use of a book-building instrument to determine the worth of a stock may lead to overvaluing a company’s stock if a company chooses to determine a price issue using the highest bid price. The use of the instrument may lead to fall in demand and consequently, fall in price (Neilson, 2014).
Comparison of Relative Success Levels Associated with Telstra 1 and Telstra 2
The Commonwealth Government was the main beneficiary of Telstra 1 as it received many proceeds from the issue of shares to the public due to the increased value of the shares. At the final installment payment, the share price was at $ 9.15 within the two years of the initial listing date. On the other hand, the public was at a loss because of the devaluing of the company’s share. The occurrence meant that if an individual aimed at selling shares purchased during Telstra 1, the sale would be made at a loss.
During the Telstra 2 share offer, the Common Wealth government had a low level of success denoted from a low amount of proceeds that was attributed to the falling of the share price. The new shareholders who were members of the public were the beneficiaries in this case for they purchased shares at $5.20 and later sell them at $5.50 per share.
The pattern of outcome is consistent with what is suggested by anecdotal evidence. According to Gerardi and Shapiro (2009), increased competition in a sector that a company had a monopoly over makes the company lose some of its market share. Assuming that the population of the market share remains constant, the company eventually reduces its sales and consequently its profitability ratios. The end result will be a decrease in the value of the corporation’s shares (Gerardi and Shapiro, 2009).
The paper details major factors that influence the decision whether or not to privatize a corporation. It also details the instruments that can be applied during privatization. The discussion gives insights and predictability in the purchase and sale of shares. It is important to consider company’s external environment prior to deciding whether to purchase shares.
Bernfield, W. (2015). Maximizing Tax Benefits of Installment Sales | Certified Public Accountants | Weltman Bernfield. Retrieved September 10, 2016, from https://weltmanbernfield.com/maximizing-tax-benefits-of-installment-sales/
Bortolotti, B., & Faccio, M. (2009). Government control of privatized firms. Review of Financial Studies, 22(8), 2907-2939.
Brooks, G. (2010). Selling Your Business Using Installment Sales | Exit Plan Pros. Retrieved September 10, 2016, from https://www.exitplanpros.com/2010/02/selling-your-business-using-installment-sales/
Butterworths Journal of International Banking and Financial Law, 485.
Dinc, I. S., & Gupta, N. (2011). The decision to privatize: Finance and politics. The Journal of Finance, 66(1), 241-269.
Gerardi, K. S., & Shapiro, A. H. (2009). Does competition reduce price dispersion? New evidence from the airline industry. Journal of Political Economy, 117(1), 1-37.
Keck, R. (2009). Installment payments in spectrum auctions and telecom privatizations.
Nielson, S. (2014). Why did Facebook’s shares fall after its initial public offering? Retrieved September 10, 2016, from https://marketrealist.com/2014/01/facebook-ipo/
Pettinger, T. (2011). Advantages and problems of privatization. Retrieved September 10, 2016, from https://www.economicshelp.org/blog/501/economics/advantages-of-privatisation/