John Redwood
“I was the founding father,” says John Redwood, the former government minister who fought UK premier John Major in a Conservative leadership election last summer. “I was the pioneer who told them it could be done.”
It’s privatization the one-time Oxford university historian claims to have invented. Drinking a cup of coffee in a couple of quick gulps, he offers some evidence. “I wrote a series of articles in the 1970s setting out why we had to introduce private capital and I took the case to Margaret [Thatcher] who was then leader of the opposition.” He explained his ideas to her at a lunch in 1978: “She combined a gleam in her eye with profound caution,” he recalls.
After teaching at Oxford, Redwood had joined investment bank NM Rothschild where he wrote Public Enterprise in Crisis, published in 1980. Researching the book crystallized his thoughts and steered his course towards politics. He was appointed an adviser in Thatcher’s Number 10 Policy Unit after she came to power in 1979.
Redwood’s research on state-owned industries in the UK pinpointed trading performance, costs of external financing to the government, what bits could be privatized, and the attitude of the government. “I knew you had to start gently with a small successful business like Amersham International [a pharmaceuticals company], that had no business being in the public sector.” Then, he says: “I tackled British Telecom [BT]. I drew on the US and the AT&T monopoly having been broken.”
He returned to Rothschild in 1985 but told director of corporate finance Sir Michael Richardson that he couldn’t work on UK projects for ethical reasons, because he retained close high-level contacts with the UK government. So he was given carte blanche to set up an international business. “He let me set up an office. I asked for a secretary and then did three or four months’ marketing.”
It wasn’t easy at first – he recalls that he funded his travel expenses by going to speak at conferences that offered to pay them. One turned out to be very important: a US State Department conference in Washington where he met the Jamaicans, his first clients. The state department, he says, was very supportive of this “Brit going to impossible places” who “went round the world energizing” privatization. It helped that in February 1986 USAID had begun to link lending to privatization.
His fondest memories are of “pioneering” in Jamaica. “I said to the prime minister that we should begin with the National Bank of Jamaica – the old Barclays bank. The prime minister said OK, and I told him it would take a couple of months.” Redwood had to stimulate domestic institutional demand, because the government did not want an international placement.
“I wanted to see the stock exchange when I arrived on the Monday. I was told, ‘you can’t, it’s closed’. ‘I’ll go on Tuesday afternoon,’ I replied. But this wasn’t possible either. It was open only on Tuesday and Thursday mornings.” Once there he saw lots of “guys drinking orange juice” who were amazed by the size of the issue he was planning, and had a few pieces of structural advice. “They said you can’t distribute forms by post because they won’t arrive.” The issue was a success. Cement companies and hotels followed.
Jamaica was important as a marketing tool: “If you can privatize in Jamaica you can privatize anywhere,” was the pitch. Soon, however, the Americans started to compete – “six-foot blondes, very well turned out, making detailed presentations” – and some places, such as Israel, fell to them: “Rothschilds never win the business there because of the importance of the US economy.”
Big kicks
Redwood’s favourite privatization was the UK’s National Freight Corporation (NFC), which was bought by its 24,000 workers in 1982. One of the drivers told him: “When I was just an employee I used to kick my truck. Now I own part of it, I polish it every morning.” But perhaps truck-kicking is back in vogue – 83% of the shares were owned by employees and families when NFC was privatized, but it’s now nearer 40%. In the past two years the company has had three chief executives and two chairmen. What’s more, in the past three years it has underperformed the market by 60%.
Of the big UK privatizations Redwood says only BT has gone really well. “I remember shortly after privatization a guy came round to install my phone and did it like greased lightning. I said, that was quick and he replied, ‘I’m a shareholder now. I’m off to do the next one.'” British Gas was less of a success. “It should have been broken up instead of privatized whole. Creating competition is the most important thing.”
The interview over, the man who still has an outside chance of becoming Britain’s next prime minister takes a slim paperback off the shelf. “You might find this useful,” he says. The book’s called Popular Capitalism, published in 1988, and it’s by John Redwood.
Tamas Suchman
Sitting in his Budapest office overlooking the Danube, 41-year-old Tamas Suchman appears an unlikely champion of privatization. His blue suit hangs askew on his meaty frame. His hands are huge and callused, tangible evidence that his first job was shovelling coal.
Yet in 1995, this self-described left-winger was Europe’s most successful privatizer, selling $3.3 billion worth of state assets, including much of the country’s gas and electricity utilities. That figure nearly matches the total amount Hungary’s first post-communist government sold between 1990 and 1994.
“As a convinced left-wing politician, I would not have stepped on this road if I had not seen it as unavoidable,” says Suchman. Hungary began 1995 with both its trade deficit and government budget deficit shooting towards 10% of annual GDP. If there had been no privatizations, disaster would have loomed. “If we see it from a left-wing point of view that means the loss of hundreds of thousands of jobs,” says Suchman.
Country bumpkin
Last March, Suchman was greeted with sneers when he became minister without portfolio in charge of privatization. Hungary’s intelligentsia prides itself on its “European outlook”, its urbanity, its diplomas, and its fluency with languages. Suchman was a red flag to their elitist bull. In interviews, he unabashedly cracks his knuckles and alternately puffs working-class Symphonia cigarettes and upmarket Marlboros.
Suchman appeared immensely underqualified. He had spent most of his adult life working as a lawyer for a village council before becoming a member of parliament in 1990. He speaks no foreign languages. The Socialists’ junior coalition partner, a party of liberal intellectuals, threatened to withdraw over Suchman’s nomination. At best, they derided him as a country bumpkin, at worst as an obstructionist tool of the Socialist Party’s core constituencies: unions and an “industrial lobby” made up of ministry bureaucrats and utility executives.
At the time, Suchman said little to rebut his critics, hesitant to brag before his job was done. “I started my life as a physical labourer. I was hard as a rock. I had the biggest shovel. I never gave up at that time, and I didn’t give up now because the stakes are a million times higher. I think one of the biggest successes in a man’s life comes when he shows others that he is not what they say he is.”
Peter Mihalyi, chief economist at the APVRt (state privatization and holding company), offers a similar view. “Suchman took personal pride in [privatizing]. ‘God damn I will do it. I will show these idiots. I’m a peasant, speaking no languages, coming from the provinces – but I will push it through’.”
The deals could not have happened without Suchman’s drive, Mihalyi says. “There was tremendous opposition to privatization, opposition from all points – the industrial lobbies, the local governments, the trade unions, the public at large.” Suchman lobbied everyone, shoved through a regulatory framework for the gas and electricity utilities, then set and kept a breakneck schedule for selling them. Suchman “behaved like a steamroller, paying very little attention to legal and other objections or constraints”, says Mihalyi.
Suchman’s detractors, faced with $3.3 billion in deals done, say he privatized with such vigour because he hoped to spend excess proceeds on make-work projects that would inspire Socialist voters.
“These are crazy ideas,” Suchman retorts. “Now I assume that capitalism is the way to go. Now I’ve brought more than $3 billion into the country. Why do people presume that I want socialist solutions, if I see that the ideas don’t work?”
Of his critics, Suchman says, “These people haven’t sold an apple in their lives. And they haven’t ever created anything.” He holds up two gnarled hands. “I’ve created a lot of things with these two hands. And they should know that these are strong hands. There are many people with hands like this in Hungary, and together we’ll build up this country just as America and the west were built.”
-Henry Copeland
Xavier Blandin
Several British politicians and bankers have claims to being the architect of UK privatization. But in France one man stands out as privatization’s founding-father – Xavier Blandin. Not only was he Edouard Balladur’s key lieutenant when French privatization law was drawn up in 1986, he went on to head the privatization advisory group at Banque Paribas, which has arranged most of France’s important privatization issues.
The distinguished-looking 45-year-old has the background to fit the part. After attending the prestigious Ecole Nationale d’Administration, he joined the ministry of finance in 1978. After a spell as alternate executive director at the IMF and World Bank, he became a bank regulator. His life changed in early 1986 when the right-wing coalition won the parliamentary election. Jacques Chirac became prime minister and committed to reprivatizing the companies nationalized by the socialists. Chirac made Balladur his minister of state with a brief to sell 50 large companies over five years. And Balladur chose Blandin and Jean-Marie Messier (now chairman of Générale des Eaux) as his special advisers on privatization.
Blandin remembers it as an exciting period. The first sale was timetabled for the end of 1986, so the privatization law had to be drawn up in the space of only a few weeks in the spring. Blandin worked very closely with Balladur during this period. What was he like as a man? “He could be perceived as distant. But when you discussed things in private with him you got a very different perception. He was actually quite close to and even warm with his staff.”
One of the most controversial aspects of the privatization programme was the creation of noyaux durs – core shareholding groups designed to protect the company from takeover. Blandin is only lukewarm about the concept. “They were seen only as a transitory step,” he says. “The commitment was to keep shares for five years. I still think it was probably the only alternative.” To explain this, he points to the lack of developed pension funds in France. The use of a government “golden share” was largely ruled out because “we were worried the market would think that the government still ran the companies”.
Blandin now believes, though, that the days of noyaux durs are numbered. “Ten years on,” he says, “our capitalism is evolving and the system is changing. Cross-shareholdings have become something of a problem.” He points out that the sale of Pechiney in December last year did not include a noyau dur.
Immediately after France’s first privatization – of glass company Saint-Gobain in December 1986 – came the most successful privatization: that of Banque Paribas. A powerful advertising campaign featuring Paribas’ palatial doors slowly opening (“the idea was to give a prestigious but mysterious image”) attracted 3.8 million shareholders in February 1987.
Blandin’s work on the Paribas issue clearly impressed the bank. After the socialists returned to power in 1988, Blandin moved to less exciting jobs in the ministry of finance (including, ironically, heading the department in charge of public companies). In 1991 André Lévy-Lang, chairman of Paribas, approached Blandin to ask him to set up a privatization advisory group for the bank. The socialists looked about to lose power again and Paribas wanted to be ready for the expected next wave of privatizations.
Blandin has achieved some success in this role. Paribas has run most of the biggest French deals, including the Ffr14 billion ($3.9 billion) sale of Usinor last June – France’s biggest privatization to date. Indeed, such has been Paribas’s dominance that “at one stage there was a perception in France that Paribas got too many privatizations”, says Blandin. In the league table of world privatization bookrunners from 1980 to 1995, Paribas ranks third, behind only Goldman Sachs and SBC Warburg.
But this position derives mainly from its strength in the French market. Although it has won a good number of small privatization mandates outside France (particularly in Latin America and the former Soviet Union), Paribas is not yet in the first tier of global coordinators on large, headline-making deals. And the recent French deals have been considerably less well received than those in the early days of the programme. “Recent privatizations have shown disappointing results for shareholders,” admits Blandin. But, he says, “the problem is the stock market, not the individual companies”.
Blandin’s success in French privatization has been rewarded by Paribas. Last month, as part of a bank-wide restructuring, he was promoted to “senior banker” in charge of Paribas’ relationships with a number of large French companies. This, adds Blandin, “includes keeping an eye on all the companies that might be privatized in future.” –Garry Evans
Eric Dobkin
Eric Dobkin was six foot tall and good-looking before he started in the privatization business. At least, that’s what he tells everyone.
His physical sacrifice has not been in vain. “Dobkin is the first American who really made an impact,” says Steve Robson, director of finance industry and regulation at the UK treasury.
Dobkin first became involved in privatization in 1986 when Goldman Sachs was given the lead US role on British Gas. He was not instantly popular. John Guinness, the civil servant responsible for the transaction at the UK department of energy, recalls: “The first time I ever met Eric Dobkin he said it was the most uncomfortable interview of his life. Goldman had not originally put a good team together, so I drew up a list of where they had fallen down. He put an extremely good team on it from that point.” Relations quickly became less frosty. Guinness would gauge Dobkin’s mood by asking: “Did your dog have a good day today?” which derived from a threat Dobkin once made that “if he didn’t get more stock he would go home and kick his dog”.
In fact, Eric Dobkin’s dogs may have played a bigger role in world privatization than many members of the Goldman origination team. When Dobkin got a second dog, he threatened Guinness that he wouldn’t call it Electricity unless Goldman was appointed US lead on the UK electricity privatization. It was. But did his dogs die of natural causes or were they kicked once too often? “Let me tell you,” says Dobkin. “My dogs survived gas, and electricity.”
Dobkin believes British Gas is one of the most important transactions he has ever worked on, because it sealed Goldman Sachs’s reputation as a privatization specialist in the UK, Europe and worldwide He remembers the final pricing meeting. Goldman was the last to be interviewed about its price views: “I walked in and I said I am going to do something special for you. I will give you a list of the names of every buyer in the US, what they will pay, and what they will pay in the aftermarket. There were a lot of surprised faces, because that was breaking the paradigm. But I didn’t know any differently than to tell the client 101% of the truth.”
Dobkin began his career at Goldman as a sales manager in Philadelphia. After covering institutional sales in the Midwest he was charged with trying to breathe life into Goldman’s flagging primary-issuance business, which in 1984 totalled a mere $400 million in public offerings. “It was a mixed blessing,” he says: “having a great team and being fortunate to be promoted to the position and yet unfortunate to have to take on one of the toughest jobs in the business. But I love it and I thrive on the pressure.”
Selling is still a strong point. When he’s talking the book on the phone he has a sheet of paper and a ruler in front of him. He writes down the orders and tears off the strips. At the end of the day someone has to come along and put his strips into some sort of order.
But his main skill, says Robson, is marketing: “He watches out for mandates a long time in the future. He gets to know the main people, and talks to them about ideas. This helps him to understand the thinking of these people.”
His most difficult moments were on the second tranche of the British Telecom privatization in 1991. One of those involved recalls: “We used a computer to build the book, and the system worked perfectly for two-and-a-half weeks. However on the last night, a girl at Goldman in New York pressed all the wrong buttons and all the information came through garbled.
“We had to allocate a $20 billion book over the pricing weekend. But without Goldman’s information we couldn’t run the computers overnight which would mean we’d lose eight hours.” Dobkin had arrived by Concorde from New York at midnight. So an “energetic” Australian from SG Warburg solved the problem by phoning him at the Savoy at 4am. Dobkin jumped out of bed and, in his haste to get to Warburgs, arrived wearing not much more than a mackintosh, and started working the phones, eventually sorting out the problem.
German ambition
Other deals he considers important are Singapore Telecom – “it credentialized us in Asia” – and Conrail – “it credentialized us as the bank to the US government”. But all deals pale into insignificance beside Deutsche Telekom, which will be the biggest transaction of 1996. So much so that Dobkin considered getting German lessons but realized he didn’t have the time. They might have proved useful. On one occasion he was nearly evicted from a taxi because he shouted at the German driver that he was going the wrong way. The situation was only resolved when Dobkin called up a German colleague on his mobile phone and had him pacify the cabbie.
Dobkin stresses that there are 20 to 30 others in the Goldman team who are “as good if not better” than he is. And he loves what he does, which now includes being a member of Goldman Sachs’s operating committee: “They are going to carry me out of here in a pine box,” he says, “with my two wonderful dogs.”
David Mulford
David Mulford, head of CS First Boston Europe, spends a lot of time in the air. So it was appropriate that Euromoney caught up with him at London Heathrow airport on a two-hour stopover en route from Los Angeles to Rome, where he was to have dinner with Italian prime minister Lamberto Dini.
The former US undersecretary of the treasury for international affairs loves to talk about privatization. “It’s exciting to me. It’s where public policy and finance meet.”
He has won two important mandates: Argentine oil company YPF, floated in 1993, and Italian oil company ENI, the biggest IPO of 1995. Last year he also won the mandate to sell the remaining parts of Hungarian telephone company Matav to Deutsche Telekom and Ameritech. Perhaps more impressive was his success in persuading the Greek administration to retain CS First Boston as its adviser on the sale of telecoms company OTE after a change in government and doubts about whether it should be sold at all. “I believe I convinced them that we are professionals, who do our work for the elected government in power, and that we give the best advice we can to help a government meet its commercial objectives.”
Mulford graduated in the US and studied in Cape Town, before moving to Oxford to study psephology (the science of elections), and he wrote two books before deciding he wanted a life of action.
He met the president of the Carnegie Foundation who recommended him to apply for a White House fellowship, a programme offering posts in the US federal government to high-fliers. “I was one of the 15 selected from 4,000, and I served in the treasury, where I was a special assistant to treasury secretary Joe Fowler.”
Mulford then moved on to Wall Street, joining White, Weld & Co. His life changed when he went for a three-day meeting in Saudi Arabia in 1974, and the Saudis hired the firm on the basis that Mulford would stay for six months. He stayed nine years, heading the advisory team managing Saudi Arabia’s investment portfolio.
At the height of this period there was $10 billion of new money to be invested each month, and a team of eight managing a portfolio of $180 billion. He became used to tough negotiations, none tougher than when the IMF actually had to borrow money. “I negotiated the $10 billion private placement loan to the IMF, the largest private placement in the world. We were negotiating with an institution whose mentality was that of a lender. Their first experience as a borrower proved extremely difficult.”
When Merrill Lynch bought White Weld in 1978, Merrill chief Don Regan became Mulford’s new boss. But Regan became US treasury secretary shortly afterwards. In 1983 he told Mulford: “You know more about international money flows than anyone I have ever met. You have created this terrible debt problem [via Saudi money], so why don’t you help us sort it out.” Back in government, Mulford played a large part in creating the Brady plan – and gained a lot of grateful emerging market contacts.
In 1992 he returned to investment banking, secretly wondering if he still had the necessary commercial edge. “I was a little uncertain, but after a few weeks I was fine. I think commercial skills are simply part of one’s make-up. Besides I did a lot of negotiating in government.” So what does he bring with him? “I am a working investment banker, not simply a retired government official who goes around knocking on doors. People know I am experienced in financial markets and they trust me.”
“Come to me”
What makes Mulford so persuasive? “To me understanding the public-policy aspect of a transaction is essential. Too many investment banks are corporate-focused. They want to do a deal and move on to the next one.” When he’s asked by government officials who is responsible for any problems in a deal, his answer is, “You come to me. I am personally responsible for this operation.”
His powers of persuasion were used to full effect in the YPF deal. “All the banks were telling Argentina to sell 10%-15% of YPF stock. In early 1993, Argentina’s leaders were concerned about the country’s lack of credibility in international markets following years of poor policies. They believed that, if less than 50% of YPF was sold, investors would not really believe the company had been truly privatized. In the end we sold 45% of YPF for cash, with the balance of 13% sold in the form of exchange shares for pensioners bonds, making a total sale of 58% of the company.
“I went to every roadshow in the world with [Argentine economy minister] Domingo Cavallo],” he recalls. This was important: “A former undersecretary to the US treasury standing up and speaking of the success of the reforms counted for a lot with international investors.”
ENI was just as important. According to one of those present, his first words to the CS First Boston faithful after he won the ENI mandate were: “Look, I have my reputation at stake here and CS First Boston’s, so I don’t want to hear any complaints during execution that I am too senior to do this. I don’t have the time. This is a deal we have to make work.”
A vote of no-confidence in the Dini government fell on the same day as the pricing and sizing of ENI were to be determined. “Although Dini won,” says Mulford, “we had already committed ourselves in writing to going ahead because Italy’s privatization programme was separate from the political process at the time of the no-confidence crisis. We were ready to set the price range and to size the issue, irrespective. This was a courageous thing to do.” Who decided that then? Mulford looks back, steely-eyed: “I did.”
Maxim Boycko
Maxim Boycko, as principal adviser to former Russian deputy prime minister, Anatoly Chubais, stood at the centre of the largest and most controversial privatization programme ever undertaken. In the shadow of bitter parliamentary hostility, culminating in the storming of the parliament building, Boycko and a small group of economists, most not yet 30, privatized two-thirds of Russian industry, turning 40 million Russians into shareholders. Most of that action was crammed into 15 incredibly busy months between late 1992 and spring 1994.
These were the young reformers whom Afghan war veteran and former vice-president Alexander Rutskoi sneeringly described as the “boys in pink pants”. The boys got a lot done. Over 80% of the country’s labour force is now in the private sector. The state’s participation in the Russian economy is less now than Italy’s. Despite Chubais’s recent sacking, it seems highly unlikely that privatization can be reversed, though its pace may slow.
From 1992 to 1994, Boycko’s office was first stopping-off point for countless western bankers and consultants keen to participate in this capitalist revolution. “There were about a dozen of them working flat out around the clock in what looked like a dungeon,” recalls one banker. At one point Boycko’s own health almost gave out.
The character these western bankers encountered must have seemed reassuringly familiar. He was drawn into the Chubais camp from an economic research institute, IMEMO. Although at times gregarious and high-spirited, Boycko more often comes across as a serious young economist who might have just walked out of the Massachusetts Institute of Technology or the University of Chicago. He describes privatization techniques that don’t work as “sub-optimal solutions”. His book on the mass privatization, Privatizing Russia, co-authored with colleagues Andrei Shleifer and Robert Vishny, is a dry account of an astonishing episode. Though lucid, it is long on theory, short on drama.
Now, as chief executive of the Russian Privatization Centre, a non-profit body channelling foreign assistance funds to restructuring privatized companies, Boycko has graduated to more modern and pleasant offices than most foreign investment bankers in Moscow enjoy. He talks optimistically about the way some Russian companies are now finding their feet in a new world. He mentions a furniture factory in a small town outside Moscow. It used to turn out very poor quality goods. Tough competition from abroad has forced it to improve. It has now found its niche, using the advantage of low labour costs to produce average quality furniture. He offers a list of 20 similar success stories. “My strong sense is that it is the core of medium-sized companies that will determine the future of Russian industry.”
Competitive markets
Perhaps Boycko seeks in such stories an escape from the constant criticism of Russian privatization from abroad and at home. He tries to be hopeful.
“It is a fact of life that, if you start with no corporate governance, it takes time for the situation to improve. It comes down to restructuring. Even in the west, it can take a couple of years for a large company to restructure. So to say that Russian privatization doesn’t work, just because companies have not changed within six months, is a little premature.”
But it is quickly clear that corporate governance is not something in which Boycko places great faith. These companies will not become more efficient nor restructure on their own, just because it is a good thing to do. Nor will much telling pressure come from outside shareholders. He says, simply: “The most important thing is to make sure that the markets for companies’ products are competitive and that the government taxes them properly.”
For the moment, banks are the richest group of new owners in Russia. Boycko expects this will change, as the country slowly develops more conventional pools of managed capital. “During the transformation from a socialist to a market economy, certain things can be done in a big bang – mass privatization, price liberalization. Others have to grow. Russia needs insurance companies, pension funds, mutual funds.”
Following the controversy over loans-for-shares deals, popular anger that a greedy few are benefiting from privatization and the recent sacking of Chubais, the prospect for privatization looks dark. But it always did.
For all the criticism and treacherous political currents, Boycko and his reformist colleagues have plenty of incentives to press on with their work. There are still a significant number of companies only partially privatized or just entering privatization. And there are areas where it has not yet started, such as privatizing land, buildings and apartments. Boycko says: “The job isn’t done yet.”
Peter Lee
Mario Draghi
Mario Draghi is dry. In every sense from economics to personal life. “You do your duty,” he says, “and that is to serve the state.” He doesn’t like to speak to the press and tries to keep a low public profile that is so low he is almost supine. “Given his delicate task,” says a friend, “it’s not surprising that he’s always very careful.” In Italy where magistrates will take every opportunity to launch a judicial investigation, his reticence about his work as director general of the national treasury may be forgiven. But it’s less surprising that he has also been very successful.
“He has good relations with everybody,” says one banker, “without getting too close to anybody.” This approach has served him well in the topsy-turvy world of Italian government where he has held his post for five years His style is gentle, intellectual and persistent. “In Italy you do not bang your fist on the table, but keep pushing. You must exercise unrelenting pressure on events,” he says.
A voracious reader of Greek and Latin classics, and of the novels of Henry James – “I recommend the short stories of 1916” – it is said of him: if the challenge isn’t impossible, it doesn’t interest him. And privatization is among the most impossible in Italy.
It is also among the most thankless. Privatization had been on the agenda in Italy since the 1980s when Romano Prodi, then chairman of IRI, the giant state holding company, took the first steps down the road. But Prodi, now leader of a centre-left grouping, lacked the political support he needed to accomplish the job. An entrenched political class, known as the CAF (Craxi-Andreotti-Forlani – a particularly unholy alliance of Socialist and Christian Democrats), was reluctant to give up the patronage which state control of the commanding heights of the economy gave them: including IRI, a curious conglomerate of three of the country’s biggest banks, most of the telecommunications industry, the steel industry as well as highway cafés and anything else irrelevant it had acquired.
It was Draghi’s job to try to push back the frontiers of the state. His academic pedigree was impeccable: an outstanding undergraduate career in Rome was followed by a doctorate at Massachusetts Institute of Technology. “He has no idea of politics,” says one observer, “I think he’s more centre-right than centre-left but others may put it differently.” Besides his academic record, he had experience of the (almost) real world of the IADB and the World Bank in Washington as an executive director before moving back to Italy in 1990.
He became Italy’s anointed privatizer from 1992, and beneath him has 20 relatively young zealots who believe they are working at a historic moment in the life of the treasury. Draghi, who works till 10pm six days a week, laughs at the suggestion they are akin to an order of monks. “A mission is overstating it,” he says.
But in spite of all the political resistance the list of completed privatizations is growing: banks IMI and Credito Italiano, insurance group INA and oil company ENI, 1995’s largest deal. Which was his favourite? “You want to know the real answer?” he says. “The next one – I never look back.” The “next one” looks to be electricity generator ENEL. James Ball
Francis Maude
“A privatization is a five-day test match. This isn’t limited-overs cricket. You have to build the innings methodically. You don’t succeed by a couple of sixes over the bowler’s head,” is the verdict of cricket-mad Francis Maude, Morgan Stanley’s head of global privatization.
The 42-year-old former Conservative politician and financial secretary to the treasury lost his seat at the last UK election, and has spent the past four years as an investment banker. “Yes, it’s been an incredibly useful experience,” he says. “It’s been most interesting to be on the other side of the table.” He was the government vendor when the second tranche of British Telecom was sold in 1991. So he knows what it’s like to be pitched to.
Nevertheless it was a surprise when Maude joined Salomon Brothers in 1992. Previously a barrister, it was assumed he would return to the law. But former UK secretary of state for trade and industry Lord Young, who was a member of Salomon’s board, said that there might be a global privatization role available. He decided to leverage his experience at the treasury and become an investment banker.
A big gun?
On his first day, he recalls, he pitched to the Hungarian government for the mandate to advise on the privatization of Matav, the telecoms company. He was successful. A year later he moved to Morgan Stanley.
Maude says Salomon was “cheerful” but didn’t get taken seriously enough in this kind of work. “Morgan Stanley is a fully rounded investment bank. I wanted to be with a firm that could both be an effective adviser on pre-privatization issues but at the same time has a full-scale equity capability.” His earnings are a secret – the press’s largest guess is £500,000 a year.
Opinion is divided as to whether Maude is anything more than a big gun to be wheeled out to pitch for a mandate. “I bring to this business the knowledge that governments as clients don’t just have financial objectives,” he says. “People feel one is talking the same language – because the guy on the other side of the table feels you have been in the same position.”
Asked what his pitching style is, he replies “no idea” but adds: “My experience is that aggressive pitching does not work.” His pitching can’t have been too bad – Morgan Stanley has won some high-profile advisory roles: Nuclear Electric in the UK, Belgian telecom company Belgacom, and the quest for a strategic partner for Ireland’s telecoms company.
A banker recalls his first meeting with Maude: “I went in to see this young, unstuffy-looking minister, fiddling with these bright yellow worry beads. It was more the sort of thing one would expect more from a minister in Athens than a member of Her Majesty’s government.” He never uses them on a pitch, others note. But, when he was in government, a Whitehall source remembers, “he forever had to have something in his fingers. He has a love affair with paperclips: he’ll twiddle them around and put them together. And at parties he’ll play with cocktail sticks.”
Morgan Stanley knows its head of global privatization is heading back into politics, to fight the next general election in a safe seat. “Horsham should be safe enough even for me,” Maude says – it has a 25,000 Conservative majority.
Per Tegnér
Per Tegnér has not always found it easy to be Sweden’s Mr Privatization at the ministry of industry and commerce. What with swings from left to right and back again in the Swedish political spectrum, bankers detect there is a certain hostility to selling off state-owned property. “Swedes have concerns over privatization. It might inhibit their right to roam through the forest,” jokes one observer. This is no joking matter, says another, there are lots of forests in Sweden. Fortunately Tegnér has a very good sense of humour.
Privatization began in 1987 when the government allowed its 100% ownership of conglomerate Procordia to be diluted. Late in 1989 this company merged with healthcare leader Pharmacia, bringing the government stake down to 40%. This was a “typical Swedish way of doing it,” says Tegnér, “making bigger, more efficient companies.” The treasury earned nothing from either transaction.
But this mentality led to conflict – in January 1992, for example, when Volvo launched a hostile takeover for Procordia to create an even “bigger” company. Tegnér says this was an “enormous adventure” – because the right-wing government did not approve. In 1993 the company was split: the government took Pharmacia and successfully floated it. Volvo got Procordia’s other businesses.
Rough treatment
The Pharmacia float was the culmination of several IPOs for Tegnér. “I have certainly improved,” he says. “If you believe in learning by mistakes then I’ve learnt a lot.” His reference is to Celsius, an engineering company, which was his debut IPO, and was heavily underpriced. By the time Pharmacia was done, international methods of bookbuilding were used. Bankers speak admiringly of Tegnér “roughing up” the Swedish institutions – abolishing their traditional right to cosy preferential allocations.
According to Tegnér, Sweden has Europe’s largest concentration of small shareholders. There are 2.5 million – 30% of the population. There is also a difference of style: “We don’t privatize monopolies, but good efficient companies.” Examples include a forestry products company (AssiDoman), and a bank (Nordbanken). Total revenues from privatization are Skr30 billion.
Bankers universally like this opera-loving Swede whose career at the ministry of industry has spanned 20 years. Bob Boas, SBC Warburg’s managing director of corporate finance, worked closely with him during the merger and acquisitions-style privatization of Procordia. When not discussing hostile bids they debated the merits of opera sung in the vernacular and in the original Italian. “I prefer it in the original, with subtitles” is Tegnér’s verdict. Boas, a director of English National Opera, was of the other persuasion.
Has Sweden reached the end of the privatization road? “That is a highly political issue,” he says. The right-wingers would like to sell telecoms company Telia. But this would be an unusual sale by telecoms standards, since the Swedish market is already deregulated. “We haven’t got a proper valuation yet,” says Tegnér. “But it’s obviously a lot of money. Several billion.”
David Clementi
“Privatization veterans like me go back to 1979,” says David Clementi, chief executive of Kleinwort Benson. He even remembers how the term got into circulation. “We won the first mandate in 1979 for British Aerospace. The government announced it had appointed Kleinwort Benson to do its first ‘privatization’. We retorted, you don’t mean this, you mean ‘to take it public’, in reference to the investment banking term ‘going public’. But despite our difficulty with the term, the government would always refer to it as privatization. After three or four months we just rolled over and have called it that ever since.”
After the success of the first BT flotation, the big one for Kleinwort, Clementi’s advice was in demand. “I could have spent the whole of 1985 talking to the delegations that came from abroad to find out how the thing was done.” Between May 1982 and December 1984 he lived BT – “I think I got close to being a civil servant,” he says. Kleinwort suggested floating 30% might be wiser than unloading £4 billion of stock at the one time. “I was told, ‘David, in our world, it’s not a privatization unless majority control passes’.”
It was a period of continuous innovation. Clementi says: “I was in minister Kenneth Baker’s office in 1984. I said, ‘We’ll need a new concept here. We need to send out a prospectus ahead of time to have an informed debate with institutions about price’. I said, ‘In America this is called a red herring’. Baker said, ‘That’s a very odd term. No what you mean is someone who lights the way like a pathfinder [sent out to check for mines] in the second world war’. We said, ‘Yes minister, that’s what we mean’. So the term pathfinder prospectus was born.”
Dream background
Clementi remains active, especially in electricity, a sector where Kleinwort Benson and he are acknowledged specialists. He led the National Power/PowerGen secondary offering last year, and Kleinwort is advising the Italian government on the IPO for state electricity company ENEL.
A keen sailor, Clementi has a “dream background” according to a former colleague: Oxford followed by an MBA at Harvard and accountancy qualifications while at Arthur Andersen – he joined Kleinwort in 1975.
Steve Robson, former privatization head at the UK treasury, says: “David just seems to have been part of the scene so long that I can’t remember when I first met him.” Robson is impressed by Clementi’s skills. “In the early part of 1990 we’d just finished the RECs [regional electricity companies] which sold at a large premium. We were looking at ways to improve – David came up with the idea of a back-end tender [the opposite of a green shoe]. This showed there was a UK house prepared to innovate.”
James Sassoon
“I don’t really have a patch,” says SBC Warburg’s director of privatization, James Sassoon, who these days roams the world. China is a favourite. “There are particular problems,” he says. “For example, Yizheng Chemical, which we did. The company owns the town and all the public services. But how do you tell the management that institutional investors probably do not want the fire service or the hospital?”
Described by a former colleague as meticulous, his first experience of pitching for a mandate in China was unconventional. The company was Harbin Power Equipment, one of two leading power station builders, located in what used to be Manchuria, an hour’s flight north of Beijing. “No investment banker knew anything about it, but it was on a list of 22 companies to be privatized in the second wave.
“It had no accounts and we had no idea of the quality of the management. The meeting was on Saturday, but as the company was rebuilding its headquarters we met in an East German-funded training centre nearby. There was no central heating and everyone was smoking so a window was opened. It was sub-zero and there was snow on the ground. A colleague made a presentation wearing a fur hat. I wore a mac and a pair of gloves. The dialogue went on for three hours.”
In the end the Warburg team were invited for dinner – what really impressed the Chinese management team was the Warburgers’ declining the polite suggestion to eat in the Beijing-style restaurant, opting to go native and eat local Manchurian food. “The chairman even served the food out to us, and three weeks later we formally won the mandate.”
Sassoon, whose background is in corporate finance, spent four years leading Warburg’s equity corporate finance team, which meant he was sitting alongside capital markets. He was one of those involved in introducing bookbuilding to the UK in the 1991 British Telecom second tranche.
He remembers an ice-hockey match at Broadgate, London, the night the issue was priced and started trading. “I captained a Warburg team that played the treasury and its other advisers. I forgot I was supposed to do an interview with Capital Radio so I had to dash round and do it in my hockey gear. I remember I was panting furiously as a Bee Gees record was finishing and I was being cued to speak. I announced to the listeners their shares had gone up before another record came on. I haven’t appeared on Capital since.”
Little details
Privatizations are different from other investment banking activities, he believes. “On privatizations there are more teams of people and the deals last over a more extended period,” says Sassoon. “This gives you more time to worry about little details. There was a time when a certain US joint global coordinator and us were having an argument over ink on a prospectus. We wanted dark blue used in the regions of the world we ran, and they wanted it all black.” Neither side trusted the other so both had junior executives standing by at the printers till 3am to check the prospectuses through the presses.
Steve Robson
Steve Robson, director of the finance industry and regulation at the UK treasury – motto: “There is no such thing as a successful privatization. Privatization is a political process” – came into privatization in the mid-1980s. He is to privatization what the Godfather is to organized crime.
But unlike the Godfather he has never refused to see an investment banker: “You both always get something out of such meetings. They are good value for both sides.”
He is well liked in spite of the fact that he has repeatedly ditched old practices – such as dispensing with underwriting – in favour of making the process cheaper for the issuer. And he has almost single-handedly made bookbuilding the chosen technique for international privatization. Bankers say he knows the book better than they do. On the second tranche of British Telecom (BT) in 1991, he didn’t go to sleep each night until the bookbuilding data was delivered to his home, where he would sit in bed reading it.
In the process he has added his own innovations. BT3, for example, was the first occasion when a global syndicate sold everywhere in the world. A level playing-field produced an interesting result. “We saw that the banks that brought in the orders were from the UK. NatWest Securities outsold Merrill Lynch and Morgan Stanley combined.”
But he does not shrink from “banging on tables” when the investment banking community stonewalls innovative new methods. In such instances “I get them in a conference room and say ‘Look, we, the UK treasury, have looked very hard at this measure and we think it will work. If you don’t want it, you’re not part of the transaction. And remember we’re a repeat vendor.'”
The ultimate accolade for a bank is to have one of its presentations preserved in the large grey cabinet in the corner of his tombstone-filled room. Just below a pair of white gym shoes – for squash and cycling to and from work – he keeps a small selection of the best he has received – there are fewer than 20. One was written by Mark Evans, now chairman of Goldman Sachs Asia. “It was the first one he wrote,” says Robson. “But he was an Olympic gold medallist for Canada so he knew how to go the extra mile.” Something Robson admires.
Today he is no longer simply responsible for privatization. His patch has expanded to comprise regulating the City of London. But he estimates 20% of his time is still spent on his first love.
Anthony Carlisle
Some say Dewe Rogerson’s Anthony Carlisle invented the retail market for privatizations on a Friday afternoon in September 1984 by calling the Sunday newspapers.
Carlisle, the communications agency’s executive chairman, smiles: “I know where that story comes from. We organized a lunch with John Bell, then city editor of the Sunday Express and Kleinwort Benson. I explained the structure of the British Telecom offer: the bonus shares, the part payment, the money off telephone bills, and he produced an article entitled ‘British Telecom to go on super 17% yield’. That article was incredibly important.”
Carlisle and Dewe Rogerson have worked on almost every important privatization since, with a brief to create the impression of success, and so fuel demand. This means dealing with the press, organizing media campaigns and keeping the general public informed via mailings.
“It’s not complicated,” says Carlisle. But Dewe Rogerson’s admirers say he does the simple things thoroughly and puts the best people on the job. A rival agency, Brunswick, was initially chosen for the third tranche of the British Telecom (BT) privatization in 1994, but it was dismissed in the follow-up campaign six months later and Dewe Rogerson came back. A banker from Rothschilds says: “Carlisle simply gives good advice and that’s why he gets hired again, and again, and again.”
Carte blanche
Carlisle’s experience of privatization began in 1981, when Cable & Wireless was floated – a relatively straightforward operation. BT was much more complex. For a start it was eight times bigger than any deal that had gone before. In marketing terms Carlisle was given virtual carte blanche. The UK government’s brief was so slender Carlisle can quote it from memory: “You may be aware of the government’s intention to offer for sale all or part of its holding in British Telecommunications. The objectives are success and wide ownership. Would you be interested in putting forward your ideas of how to achieve these objectives?” Carlisle sought amplification: “‘Would you like to define success?’ and they said no. ‘Would you like to define wide ownership?’ and they said no. I said ‘There’s not much point asking any more questions then’, to which they agreed.”
BT was hard, and editorial comment was negative. In the event there were 2.4 million retail applications. Carlisle is proudest of one sentence written when he pitched for the mandate: “The marketing objective is the creation of a perception of scarcity.”
Carlisle is credited with inventing the mini-prospectus, coming up with the idea of a share information office and the mailing of friendly letters to the public with their BT bills, as well as setting out the overall retail marketing approach. But, says Carlisle, “I’m reluctant to claim any of these ideas as mine alone.”
His job wasn’t made easier by a government which initially considered TV advertising unsuitable. “This isn’t toothpaste, Tony,” he was told “These are risky financial assets.” Getting his £13 million budget was no foregone conclusion either. “Things like that always end up in big meetings,” he recalls. “I had three or four minutes to present the marketing strategy and the budget. The minister, Kenneth Baker, said ‘Tony, as I understand it, you’re asking us to spend more in three months than any marketer has spent in a year. I cannot believe this is necessary’. To which I replied, ‘Minister if you will change your objectives I will change my advice’.” He got his money.
Dewe Rogerson is still as persuasive. In Europe last year the firm ran all the major deals, from Repsol to ENI. Coming up? Railtrack in the UK and what is billed as the BT of the 1990s, Deutsche Telekom.
Giles Henderson
Giles Henderson of law firm Slaughter & May first became involved with privatization in 1977 with the sale of British Petroleum (BP), but made his mark with the British Gas flotation in 1986, pioneering key developments in global underwriting. He helped the UK government persuade the foreign underwriters to forgo their normal procedures and instead adopt those applying to the UK underwriting – achieving the first-ever fully synchronized international share flotation.
“When we first put out the proposition to foreigners,” Henderson says, “the US and Japanese houses thought we weren’t serious. Then we sent them a detailed memorandum explaining the importance to the government of the changes we wanted. The US bankers continued to be astonished at the revolutionary changes to the US underwriting practices they were being asked to make. Ministers, however, said that ‘You either make these changes or we will drop the US tranche’. The changes were agreed.
Once the US houses capitulated, the Japanese and the Canadians followed suit. This approach was essential with the secondary offering of BP in 1987. The changes were agreed. “If they hadn’t been, all the UK underwriters could have been liable without any of the US also being liable and the government would only have achieved a partial sale,” says Henderson.
The fortnight following Black Monday in which the Americans pushed for that BP issue to be pulled proved to be the most exciting of Henderson’s career. But there were lighter moments amidst the long hours and tension, including culinary revelations for the treasury mandarins. “The permanent secretary to the treasury was Sir Peter Middleton [now chairman of BZW]. I remember a large group of us were in his office, which was rather grand. It was getting late, and Peter complained that the treasury could sometimes provide drinks after hours, but no food. My assistant replied, ‘If you’re really desperate we can get a pizza’. He replied in amazement, ‘What? How can you do that?’ We phoned out for a delivery and elaborate arrangements were made so the security guards would let the delivery-men through. Then a guard came up, opened a large box and asked whose was the pepperoni. This delighted Middleton, who called it the pizza trick.”
At the height of the electricity privatization, Slaughters had 100 of their 500 lawyers working on what was perhaps the most complicated privatization ever completed. Henderson was the only lawyer invited to a weekend brainstorming session with civil servants and government ministers to discuss how it should be done.
“He’s not your typical lawyer,” says Keith Palmer, director of the natural resources and utility group at Rothschilds. “He thinks of the questions before you ask him.”
The Rothschild mafia
Housed in a rather drab 1960s building in St Swithin’s Lane in the City of London, NM Rothschild is the spiritual home of the privatization club. Those who have worked there have perhaps done more to further the selling of state enterprises than any others.
Sir Michael Richardson, who is now 70 and at financial boutique Hambro Magan, was the director of corporate finance who made Rothschild the leaders in government advisory. “I gave a lunch for Margaret Thatcher in the City when she was leader of the opposition [before 1979],” he says. “She said ‘I’ll privatize’. Everyone’s mouths were wide open, but no-one really knew what she was talking about.”
Rothschild got its first advisory role when it won the beauty contest for the flotation of British Gas in 1986. This was no foregone conclusion. John Guinness, the civil servant chairing the selection, says the feelings towards Rothschild were not “in the least bit warm”. This was because 18 months earlier Richardson, who was advising RTZ, had bought 49% of the newly privatized Enterprise Oil for RTZ just as the government announced its commitment to wider share ownership via privatization. The government made RTZ scale back its holding. But the quality of the team Richardson took to the beauty contest persuaded the department of energy to award Rothschild the mandate.
The fees were low, but there were greater things at stake. “Richardson was dead right to take low fees on Gas,” says Guinness. “Some of his Young Turks thought Rothschild had been conned by the government. But it made Rothschild probably the predominant privatization adviser worldwide.”
Simon Linnett and Tony Alt were the most promising of the young men at Rothschild. Linnett is described as a “one-man merchant bank”, an extremely creative mind with a mathematics degree. UK treasury civil servant Steve Robson says you can discuss an idea with Linnett in the evening, and find a crisp five-page brief on your desk the next morning at 8am.
Tony Alt, who is cricket-mad, is the dealmaker. A “75-cigarettes-a-minute man”, he never dallies – “Come on…I’ve got 30 seconds…I’ve got to play squash”, is one impersonation of him Euromoney heard.
Richardson was the leader and elder statesman. He was good at finding first-class talent like Linnett and Alt, ensuring they were treated well, sharing the credit for successes, and fusing the different styles. A typical meeting might involve Richardson leading off, Alt saying “Michael, that’s rubbish” and Linnett kicking Alt under the table.
Rothschild now has advisory roles worldwide. It offers specialized sectoral cover. Keith Palmer, director of the natural resources and utilities unit, focuses on oil and gas projects. He has been with the firm for 11 years, having previously worked in Papua New Guinea, at the World Bank and at the IMF, never staying in a job for more than two and a half years.
Another Rothschild star is Oliver Letwin an expert on telecoms privatizations. He was brought into the firm with John Redwood (see main article) from Margaret Thatcher’s Number 10 Policy Unit. The idea was that both he and Redwood would get elected to parliament as Conservative MPs, but Letwin fought a near-impossible seat in 1987, and was then beaten in Hampstead by actress Glenda Jackson. At the next election he is standing for West Dorset.
Rothschild privatizers have to grapple with unexpected challenges. For example, during the three years it took to privatize the Hungarian gas industry, Rothschild faced a change of government, seven changes of sponsoring ministry, and six chief executives. The trick was to persuade people to do something before they lost their jobs
Letwin remembers a gas project in an emerging market. Rothschild asked the minister/regulator about the 50% discrepancy between gas going into the pipeline and the amount delivered. “We were pretty certain it wasn’t our modelling,” Letwin says. “It’s a matter of men and machinery,” the minister explained. At dead of night, villagers would emerge from their houses with blow-torches, make a hole in the pipe and construct their own pipeline to their homes. “This,” he concluded, “had led to a large rural outflow of gas.” – SI
