What is a government to do when a company faces a near-death
situation? In almost all cases, the right answer is to let the
company go under: It is not the job of a government to prevent
companies from dying. Indeed, creative destruction is central to the
proper functioning of capitalism. Capitalism without failure is
socialism for the rich.
But sometimes, the cost-benefit ratios can look
startling. Sometimes, the disruption to the economy that comes from
the death of a company can be rather large. Let's look at three
stories.
Three examples
- GM
- In July 2009, the US government chose to put $50 billion into the
auto maker General Motors (GM) as part
of complex
rescue, which included wiping out the existing shareholders and
embarking on a complex restructuring of the firm. The old GM died
there.
GM got back to profitability this year. Seventeen months later, in
17 November, GM got back on its feet with an IPO which raised $23.1
billion. How impressive! See this
story by Michael J. de la Merced and Bill Vlasic in
the New York Times. This IPO was at $33. With this IPO, the
US Treasury got down from 61% ownership to 26% ownership, so this
IPO was the re-privatisation of GM. From here, if the US Treasury is
able to sell its remaining 0.5 billion shares at $53 a share in the
future, it will fully recoup the $50 billion that went into the
rescue (ignoring time value of money). - Satyam
- On 7 January 2009, Satyam announced that a lot of money was missing
from their balance sheet. In the aftermath of this crisis, the
government put Deepak Parekh, Kiran Karnik, Tarun Das, and three
others in charge. Read this
of Deepak Parekh with Tamal Bandyopadhyay in Mint, and this
post by John Elliott.
The new board put the firm up for sale. It was bought by Tech
Mahindra. A collapse of the firm was averted; the employees and
customers largely stayed in place. - UTI
- When UTI got into trouble, I was opposed to
government intervention. But by and large, I think the intervention
worked well. US-64 unitholders did suffer losses: half of the
gap between the NAV and market value was paid by the unitholders and
half by the government. And the follow-through was excellent. The
staff quality that MoF was able to muster on the problem was
outstanding. The UTI Act was repealed, and UTI was turned into an
ordinary company. `Bad UTI' was separated out by `Good UTI'. The
ownership was modified including the recent work of bringing in
T. Rowe Price as a shareholder. All in all, the exchequer did well
when selling off the shares in SUUTI. Privatisation hasn't yet come
about, but where we are is progress.
When is it right for a government to go in?
Should the US government have gone into GM? There was a fair
amount of criticism of the Obama administration for the
decision. There was concern that they were doing this owing to
pressure from trade unions. But the outcomes have been quite nice,
so (at least ex post) it looks like a good call.
In the
case of Satyam, the existing shareholders were not
expropriated. It can be argued that the failure of the firm was
not their fault. But by that argument, many firm failures in India
in the future will justify government intervention since most
public shareholders are fairly powerless when the inside
shareholders have over 50% shares. In his interview, Deepak Parekh
says Had it happened to a consumer finance company or a small,
or even big, manufacturing company, the government would not have
come out and superseded the board. The normal procedures for
bankruptcy and liquidation would have taken place.. I am not
sure how the future will work out.
The problem of execution capability
Satyam, GM and UTI are success stories in that the government
packed a mean punch in the execution. In particular, in Satyam's
case, I had simply not expected that such a nice outcome could be
achieved by the government. We should really admire the teams that
worked on these problems.
But can we count on such high quality execution on such problems in
the future? Our success in the Satyam or UTI stories should not be
generalised to the view that in the future such high quality
execution will always come about.
The exit strategy
The really amazing feature of the GM story is the clarity and
commitment of the government in getting out of `Government Motors'
by doing a privatisation just 17 months after going in. All too
often, government interventions turn into nationalisation and then
you're stuck with a public sector company for a long time, with all
the usual politics of the privatisation.
In the deep past, numerous weak companies have been nationalised
in the decades of Indian socialism (e.g. National Textile Company)
and generally the outcomes have been bad.
A particularly attractive feature of the Satyam story is that no
government money was involved. The presence of government money
makes things much harder. In India, all too often, it's easy to ask
for government money and it's easy to get it. And if the government
had got shares in Satyam, it's not easy to see how they would have
got out of it.
Similarly, a nice feature of the UTI story is that in the end, the
UTI Act was repealed, and UTI is on course for turning into a
normal financial firm. Government intervention in the rescue did not
yield an ossified PSU.
At the same time, while Satyam and UTI are good stories in terms of
the exit path, we cannot generalise too much from this given the fact
that GOI is at a
standstill on privatisation. In general, we have to assume that
what is purchased is never sold, which puts a crimp on a vast array of
situations where government intervention might be evaluated.
To summarise
When most firms approach death, the decent thing to do is to let
the firm die. We must rejoice in the extent to which Indian capitalism
is able to bring about a steady pace of firm death. Building a good
quality bankruptcy mechanism will increase the class of firms where
resolution is handled in a routine and humdrum way, without the
possibility of a special intervention. (Note that going through the
bankruptcy process was an integral part of the GM story).
When a potential
intervention situation arises, six questions need to be asked:
- Are the negative externalities of firm death really that
onerous?
- Can government intervention be envisaged without requiring
money?
- Are the Union ministers involved in the problem known for being
smart and clean?
- Can a top quality team be put together which will work on a
time-bound project starting from intervention until exit? Does this
team combine competence with cleanness?
- Do we see an exit strategy through which, within a short time,
the firm will be fully out of government hands?
- Are we very sure that in the end, we will endup imposing no
costs upon the government?
Ex post, these questions worked out well for GM, UTI and
Satyam.
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