Therefore no one made a profit out of privatisation

The CBI really needs to learn double entry accounting and something about business valuation before it talks about the costs of nationalisation

Hmm.

But, second, it gets worse. This payment is apparently a ‘cost’ to government. It’s as if the CBI thinks that in every takeover in British history value was destroyed and the acquiring company wrote off the asset bought through the profit and loss account as an expense straight after the purchase. That, of course, is not what happens. And there is good reason for that: valuable property have been acquired, as would also be the case here. In other words, this is not a cost. It is an investment. And the investment goes on the country’s balance sheet in that case. Which means it is not a cost.

Third, the CBI then claim that the interest cost of the acquisition, which would be just £2bn a year, is a burden to be suffered. But that, of course, ignores the fact that these assets acquired have earned a return to date, which is precisely why they attribute such high value to them. In that case they are more than capable of covering a £2bn cost of interest. But the CBI forgets this.

So is any part of the CBI claim as to value, asset accounting or income cost true? No: not a single part is. The CBI apparently does not know how to value assets and account for takeovers, and nor does it realise that costs might have income compared to them.

To describe their claims as a shoddy piece of work worthy of a fail in sixth form business studies is to be too kind to them. It’s just incompetent.

If the CBI does not like nationalisation it will have to do a lot better than that. And understand some basic, but essential accounting as well.

Therefore privatisation was just double entry bookeeping as well, wasn’t it? Govt got what the assets were worth.

Shrug.

14 comments on “Therefore no one made a profit out of privatisation

  1. Ah yes, but he wants a world where government controls everything, so therefore nationalisation is good, privatisation bad. That’s all that matters.

    And on one level he’s right – the govt spending £10m on acquiring companies will then give them an asset worth £10m at that point in time. Except that the asset value is based on estimated future revenues, and the govt is crap at managing things, so the value would be lower simply because the govt has acquired it. And if they buy a lot of competing businesses (e.g. all gas providers) then they will have a lot of redundant equipment/people and no competition to keep them efficient, driving the value lower still. I’d be impressed if what they end up with is worth half what the market values it all at in private hands.

  2. Isn’t this about cash flow?

    Many a company buyout or merger has failed because the acquiring company borrowed too much to pay for the acquisition and then so badly managed the acquired company that cost savings and increased profits never materialised to pay the off the cost of borrowing.

  3. Rational anarchist

    You’re spot on the money – and the moron’s interpretation of the CBI’s comments on Market value is this:

    ‘First, they have assumed that Labour will pay a 30% premium over the market value of these companies at present. That is because they say this is ‘normal’ in a takeover. But this is not a takeover. It’s a nationalisation. And the market has already determined the price of the asset each shareholder owns’

    Hence why his nemesis Mcdonnell is talking about paying a ‘Fair Price’ rather than the Market Price. I am guessing as this doesn’t fit the narrative its ignored.

    ‘Third, the CBI then claim that the interest cost of the acquisition, which would be just £2bn a year, is a burden to be suffered. But that, of course, ignores the fact that these assets acquired have earned a return to date, which is precisely why they attribute such high value to them. In that case they are more than capable of covering a £2bn cost of interest. But the CBI forgets this.’

    I mean I know his knowledge of accountancy is subject to serious criticism in these quarters but the fact that someone this stupid is viewed as being capable of employment in the higher education system, even in a more modest institution is really testament to the damage wrought by university expansion – this is schoolboy stuff, and based on an analysis written where – on the back of one of the new fag packets

    I mean I understand his anger – my reaction to the CBI estimate was that given the likely impact on pensions and investment they were lowballing it. Look at the three countries which have adopted these policies, Zimbabwe, Venezuela and Equatorial Guinea and they are all utter basket cases. However, that’s not quite the same. So it’s a dilemma – do I trust a lobbying organisation for British business with many decades of experience and understanding of balance sheets, or a commentator widely acknowledged to be the most ignorant extant in cyberspace in this or indeed any known country in the world? It’s a tough one….

  4. Also, has he missed that in the great majority of cases the share price of the acquiring company trends to fall quite a lot as investors are rightly sceptical of the benefits of acquisition in most cases?

    I can’t remember the figures from my corporate finance module, but I seen to remember that most acquisitions destroy value in the short term.

  5. There is something humorous – in a morbid sort of way – about Richard Murphy lecturing others about their incompetence in matters of accounting.

  6. But the point is nationalisation will destroy value, for which we will all pay, several times over. Government don’t run businesses to make a profit, and we have seen that where they try, they are bad at it. The old nationalised industries were terrible. No concept of customer service. No concept of innovation. Run by central diktat at the whim of politicians. Commercial accounting principles just don’t apply!

  7. AndyH; Vodafone and Mannesmann was supposedly the big example, for a bit.

    And if those price movements didn’t happen, then merger arb strategies wouldn’t work.

  8. Dennis

    Some would see an element of the surreal in being lectured on any topic by a man whose output reveals him to be arguably the least knowledgeable person extant in cyberspace – an intellectual cromagnon whose self- confidence is in direct proportion to his utter lack of knowledge.

  9. I know a few ex-miners that used to point out the biggest problem with efficient and profitable coal production was the National Coal Board (NCB), and that having the NCB and it’s policies was part of what gave the unions so much leverage.

  10. If govt is making a profit from a nationalised industry it’s just a hidden tax or a temptation for hidden taxes if they can use monopoly power to generate profit

  11. Labour wants to use the profits from nationalised firms to pay back the borrowing involved in acquiring them. Yet it has also promised to ramp up investment; reward the unions; slash bills for consumers; and transform ownership structures to focus less on profit. So there will be no or little profit, and the value of the firms will fall. And Spud naturally misses this point entirely.

  12. John77

    It’s a calculated risk… hoping no one does an Elizabeth Warren and claims to be 1/48 CroMagnon…

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