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Using IPOs as a Strategy for
Bank Privatization
Bank Privatization in emerging
economies: at early stage
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to date 156 SOBs privatized
$ 38 billion transaction value
9% of transactions and 11% of volume
only 41% non-OECD countries compared to
86% of OECD countries to have privatized
banks
• 30% of banking assets SOB versus 10% in
OECD
Impact of bank privatization
• Positive efficiency effects on banking sector
• in turn is of great importance in stimulating
economic development
• however, bank privatization faces obstacles
such as entrenched interests of stakeholders
including government
IPOs and bank privatization
• 44% of emerging economy bank
privatizations occurs by way of IPO
• book building method most frequently
applied
• use underpricing and preferential allocation
to reward certain groups of investors (e.g.
SOB employees)
Objectives of privatization
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Increasing efficiency
developing a market-oriented industry
ensuring stakeholder support
developing the local stock market
building confidence in the program
importing capital and know-how
eliminating soft lending
maximizing proceeds
stimulating wider share ownership
Increasing efficiency
• Politicians use SOBs to pursue noneconomic goals such as subsidize favored
constituents
• weak corporate governance due to free rider
problem of atomistic share ownership
• no market for corporate control since
chance of bankruptcy is remote
Developing a market-oriented
sector
• Government intervention lower welfare
levels: Otchere (2003) underperformance of
SOB explained by size of government stake
• stock market listing facilitates adoption of
market-oriented management compensation
• also pressure from market for corporate
control
Importing capital and know-how
• Allowing foreign (strategic) investors to
participate in IPO important
• foreigners tend to upgrade technology,
develop new business lines and pursue more
fee-for-services
Ensuring stakeholder support
• Stakeholders such as employees and
favored constituents have something to lose
• IPOs provide means to ensure stakeholder
support
• underpricing and preferential allocation
Developing the local stock
market
• State bank IPOs stimulate stock market
capitalization and trading
• lowers cost of equity
• attracts further investment
• triggers gains in economic growth and
efficiency
Building confidence in the
privatization program
• To distinguish from populist (opportunist)
government retain sizeable stakes and offer
highly underpriced shares at IPO
• recover lost proceeds with subsequent share
offerings
• to signal that government is committed to
market reform and will not resort to
populism by changing regulations for
privatized companies
Eliminating soft lending
• Government retain stake even after
subsequent share offerings
• median 57% in non-OECD countries versus
5% in OECD countries
• tendency to sustain soft lending to stateowned enterprises as government interferes
to soften the blow of market reforms
Maximizing proceeds
• Government more likely to list companies
during periods of high stock market
valuation
• book building allows government to extract
highest possible price since this process
encourages investors to truthfully reveal
their demand curve
Stimulating wider share
ownership
• Insurance policy against later renationalization
• underpricing is used to entice the voters to
participate in the IPO
• empirical studies find an underpricing
differential
• but avoid incumbent management to retain
control
Polish bank privatization
• First IPO was WBK in March 1993
• EBRD 28% as strategic investor of default
• employees 15%; small investors 20%;
institutional investors 7%; state 30%
• threefold increase from issue price on first
day of trading June 22 invites criticism
Bank Slaski
• Responds to criticism by increasing
valuation from 75% to 100% of book value
• failed tender of 45% stake offered to
strategic investors
• IPO in November 1993
• ING buys 25.9% stake through private
negotiations in December 1993
• 12 fold increase from issue price cause
outrage
Mexican bank privatization
• Announced program in October 1991
• auction instead of IPOs as privatization
strategy
• exclusive focus on proceeds maximization:
• select winners purely on bid level
• protect oligopoly structure: no new licenses
• no guidance as to valuation of SOB
Disastrous results
• Inexperienced investors overpay as they
assume oligopolistic profits are secure
• government opportunistically starts granting
new licenses
• lending increases indiscriminately: 19911994 growth 24% p.a. versus GNP growth
of 3% p.a.
• bailout cost $ 100 billion = 16% GDP
IPOs would have avoided most
flaws of bank privatization
• Institutional investors demand reporting
according to international standards
• avoids overstated profits and valuation
• IPO offer opportunity to attract experienced
foreign strategic investor to take the lead
• IPOs penalize governments behaving in a
populist manner by changing the rules in
mid-game
Lessons from the Polish bank
privatization program
• Avoided collapse of banking system
• delay and sub-optimal results as government shifts among
conflicting goals
• initially foreigners restricted to 25% stake
• government holds on to long to too high a stake: slows
pace of restructuring
• fact that IPO went through despite no strategic investor
could be found is indication that wider share ownership,
stock market development at least as important as
increasing efficiency of banking sector