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Reason Foundation

A Guide For Divesting Government-Owned Enterprises

Henry Gibbons
July 1, 1996

EXECUTIVE SUMMARY

Governments at all levels in the United States own commercializable enterprises in such fields as electricity, water and wastewater services, parking facilities, insurance, hotels and convention centers, mail delivery, etc. Interest by public officials in privatizing such enterprises is growing, fed in part by knowledge of the large volume of such transactions overseas. Yet because actual sales of government enterprises in the United States have been very few, most public officials have little idea how to actually carry out such a sale.

The mechanics of privatization are complex, and each case raises its own problems. The main options are:

  1. a trade sale, where a company is sold to a single firm or a consortium;
  2. a public offering on the stock exchange, either by a fixed price offering or by a tender offering with a minimum price;
  3. a management/employee buyout; or
  4. placement with a group of investors. A range of important issues need to be addressed in preparing a business for privatization. This guide focuses on some of the principal issues which arise and explains some of the techniques and solutions developed over the past decade in thousands of transactions around the world.

Privatization exercises are as individual as they are complex, but fundamentals generally include consideration of industry structures, commercial and regulatory regimes, capital structures, sales arrangements, and the nature of the continuing relationship between the government and the divested enterprise. Decisions must be made on methods of sale, special arrangements for employees and customers, marketing, logistics, timing, and the structuring and management of overseas syndicates.

For most small and medium-size enterprises (especially those owned by municipalities), a trade sale is relatively quick to execute and works well if the company to be sold is perceived to need the benefit of an alliance that brings with it skills and know-how. However, public offerings make more sense for larger enterprises and when the company to be sold has a reasonably strong skill base, and capital markets are liquid. For national-scale privatizations, combining large retail and institutional offerings and ensuring competition between banks and regions of the world within the international offer are now conventional features of privatizations by public share offering all over the world.


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