IT goes without saying that, with the benefit of hindsight, the government sold the shares in Royal Mail too cheaply. A decent discount would have been fine; they are routine with flotations and privatisations as the buyers are taking a risk and nobody knows the value of a firm before it starts trading.
A deliberate degree of undervaluation is thus necessary to make sure that all of the shares can be shifted. The psychological and financial cost of failing to get enough buyers for a new issue can be catastrophic, and success from the buyers’ perspective is defined as making immediate gains.
In this case, however, the instant profit was too high. It is right that the pricing decision will now be scrutinized – but those now pretending that it was obvious all along that the price was far too low need to show a little more humility. A couple of firms did argue that the pricing implied large gains – to their great credit – but most investors failed at first to appreciate the full extent of the exuberance that was to come. Grey markets set up by spreadbetters suggested a much lower price than eventually materialised.
The simple truth is that nobody has any idea what a share will be worth – other than in very rough terms – until a market for it actually exists. That’s the job of markets: they help discover new information, aggregate the supply and the demand and come up with a price. There were also plenty of discussions prior to the privatization of the political risk; it seemed, for example, that Labour might advocate renationalising the firm. If anything, that sort of talk from left-wingers will have influenced the low pricing. Subsequently, the opposition’s loud insistence in the run-up to the offer that the shares were far too cheap quite clearly helped fuel a rush of demand and arguably became a selffulfilling prophecy.
The government could have hiked the price at the last minute – but this would have triggered panic, even greater outrage and potentially even accusations of misselling. Instead of endless discussions about whether the coalition sold the shares too low, we would now be debating whether it conned small retail investors.
There needs to be a parliamentary investigation into all of this. But it should not be limited merely to grilling the banking advisers and Vince Cable’s department. The Labour party’s role also deserves close scrutiny. It is also important to get to the bottom of the unacceptable, chaotic scenes that have seen investors who purchased shares through the government website unable to sell them, apparently because they haven’t yet been given the right paperwork. This is madness – though so far, investors have benefited from the delay.
The absurd decision to ban individuals who ordered more than £10,000 worth of shares from getting anything at all also needs to be investigated. This meant that 35,000 people – or five per cent of the private investors who applied – got nothing. Yet a tiny reduction in the allocation to institutional investors would have allowed the government to extend the flat £750 share allocation to all wannabe investors, not just the bottom 95 per cent.
Many stockbrokers were trying in good faith to get their clients to invest their entire £11,520 individual savings account (Isa) allowance; some were seeking to invest their entire pension pot of £50,000. The fact that these people got nothing at all has infuriated many brokers as well as investors. It bodes ill for the next privatisation: nobody in their right minds will bid for more than a few thousand pounds, and most will probably stick with the minimum amount. This will drastically reduce the demand for shares from the public and make the next sell-off much harder to pull off. It was a shockingly misguided decision. Most important of all, we now need a proper, realistic investigation into everything that went wrong, not a show trial.