Sunday 4 July 2010

I'll be back

   Like the famous quote, Telefonica is announcing "I'll be back..." to take VIVO from Portugal Telecom - the fight for the Brazilian joint-venture of the two firms was to be expected, sooner or later.
   Although most of the discussion has been about the recent use (and abuse?) of golden share rights by the Portuguese Government, there is a renewed lesson from all this.
   And that lesson is plain simple, and comes over and over again - the notion of "core national shareholders" in so-called "national champions" is quite elusive and it meltdowns every time
it faces a sufficiently high price. No wonder, and actually I would not expect any company or bank to let go profits just for "national pride". After all, they can always claim they will put the money to good use (and they hope better use) than keeping the current shares.
   Let's take some basic economics (and get corrected if I do something wrong...). First, current shareholders of Portugal Telecom (PT) are not forced to vote in favor of selling Vivo to Telefonica. The single argument to sell is the price.
   Second, if they are selling either the price is higher than what they expect to earn by keeping Vivo in PT's portfolio or they are incompetent in assessing the proposal.
   Third, in their assessment I expect that shareholders included in their decision the value of alternative investments PT can make with the cash inflow from selling Vivo. Unless that cash can be geared toward some shareholders at the expense of others, it may be a reasonable decision for PT to sell.
   Fourth, Government intervened with its special voting rights. Since they exist, and other shareholders know such special rights exist, why should anyone presume that such voting rights would never be used? The relevant question is why are they used, what is the source of value of PT that is not paid for by the Telefonica's bid for Vivo? Unless that becomes clear, it is hard to judge whether the bid should have been blocked or not. Anyway, it maybe a rational decision as well (but a bit unclear on the value given).
   I understand that such special rights were and will be challenged as barriers to free capital flows within the European Union, that without Vivo PT becomes a much smaller company, that if the reverse situation occurred most likely the Spanish Government would exert its influence somehow, that the Government clearly stated its objection to the sale, etc...
   All those arguments have some truth in it, but should they really weight so heavily in a business decision? Anyway, from now on, it is clear that either a) PT sells Vivo to Telefonica; b) PT buys Vivo from Telefonica; c) Vivo starts to underperform due to the internal fight between Telefonica and PT. The two first options are clearly better, but the third looks the more likely, unfortunately.


  1. "Second, if they are selling either the price is higher than what they expect to earn by keeping Vivo in PT's portfolio or they are incompetent in assessing the proposal."

    Is it possible to happen a third option were shareholders correctly assess that the sell price is lower than what they would get if they kept Vivo, but sell anyway to get liquidity in the short-term? What kind of decision would this be?

  2. From a public policy standpoint, the crucial question here is whether the government's decision was good or not. Put in another way, was this use of a regulatory tool, stocks with special rights, justified?

    A benevolent government maximizes the well being of the population it represents (thus including in its decision every imaginable benefit and cost associated with its decision). In this situation, I can identify three distinct agents: the shareholders of PT, its managers and "the others".

    The shareholders revealed their preference: they would rather have Vivo sold by PT. As Pedro Pita Barros says, this may have happened either because the price offered by Telefonica is higher than the expected value of keeping Vivo (this does not rule out liquidity constraints as the source of the decision) or because the shareholders are incompetent. The latter explanation alone could justify government intervention (holding, for now, constant, the well being of the other 2 sets of agents). How likely is the scenario though? I, for one, would expect BES, Ongoing and other large shareholders to have significant resources employed in the art of analyzing the value of Vivo to them. Socrates' actions, however, seem to point that the value of Vivo to the shareholders was irrelevant to the decision. On the other hand, even if the government wanted to consider the impact of its decision on the shareholders, how likely is it that its resources are better at evaluating the value of Vivo than those of the private shareholders? I'm tempted to say not likely at all.

    The managers of PT probably prefer Vivo not be sold. I believe that it is a long standing business theory that managers like to run as big of a company as possible. Even if we are willing to accept this, or any other manager-related motivations as legitimate, it is highly disputable that manager preference satisfaction should trump shareholder satisfaction.

    This leaves "the others", where I would include the portuguese population at large, as the only possible source of legitimacy for the government's decision. Indeed, it seems that this is the government's defense: the so called "strategic interest", an expression worn out by politicians in the last few days. And this is where I can't detect any valid reasons. Why would any portuguese citizen care that PT sold a stake in a foreign company to another foreign company? What does such citizen loose?

    If, as I suspect, he looses close to nothing, then I'm left with the belief that, as usual, there's nothing benevolent about our government.

  3. Dear DFG - What is the impact of loosing Vivo on the qualified employment offered by PT (namely PT Inovation) in Portugal? Close to nothing?

  4. Daniel.R, is PT Inovation only capable of working with Vivo? I mean, qualifiend employment usually don't hame much trouble finding more opportunities. And by the way, wouldn´t an amount of about 4% of the Portuguese GDP be able to create a few jobs?