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Monday, 12 October 2009

How governments screw shareholders

The biggest argument against government ownership of companies is that governments bring baggage with them and they do things that don't necessarily fit with the best economic choices. Take for example the sale by Citigroup to Occidental of Phibro, announced last Friday. The sale was agreed at around net book value.

That meant essentially that despite that pre-tax profits at Phibro have averaged $371 million for each of the last 5 years, and $200 million over the last 12 years, the fact that the company has been profitable in every year in the last 12 and in 80% of all quarterly periods in that time - good going for a trading company - all of that was disregarded in the price and the company was sold for the net value of its assets consist of cash, marketable securities and readily saleable commodity positions less borrowings or around $250 million.

Why such a giveaway? Because the company had a contract with Andrew Hall, CEO, that would pay him up to $100 million a year. Remember that the profit record was after CEO pay and bonuses. But that doesn't matter to a government that owns a large part of Citigroup, which is why the directors were happy to sell for such a low price without a risk of shareholder suits.

Of course the one person who could have paid a higher price would have been Andrew Hall, but if having a $100m a year employee on the government payroll was bad, the only thing that could have been worse would have been a $350m a year director/shareholder in a government MBO.

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