How the BT-led revolution fizzled out
Financial Times
By Jonathan Guthrie
Published: December 4 2004
The City, whose raison d'être is to make judgments about the future, can be correspondingly uninterested in its past.
Yesterday's celebrations to mark the 20th anniversary of British Telecom's first share offering were distinctly half-hearted.
Yet the flotation in 1984 was a defining moment in post-war British capitalism. The £3.9bn sale was four times oversubscribed and the Bank of England offered £1.5bn in extra liquidity to support an overstretched banking system.
When dealings began on December 3, the shares, part-paid at 50p each, rose to an immediate premium of 45p, capitalising the business at just under £8bn (£16.2bn at today's rates).
Yet yesterday, when Sir Christopher Bland, BT's chairman, appeared on the BBC's Today programme, his interview was devoted to current strategy. He kicked off the day's share trading as a guest of the London Stock Exchange, then hurried off to a series of meetings. It made the excitement surrounding the float - at the time the largest offering of equity attempted anywhere - look distinctly overdone.
British Telecom, still in its bones a state utility, wound up with 2.3m shareholders because Margaret Thatcher, prime minister, was determined her privatisation programme would deliver an ideological dividend.
Many of the privatisations launched between 1981 and 1987 and raising over £16bn were giveaways. The aim was to expand share ownership, and, with it, economic individualism and support for the Conservatives.
John Moore, a Treasury minister, trumpeted that the BT sale had created "a new army of capitalists" and had brought closer the time when "share shops" would dot British high streets.
Share shops never took off and the army of capitalists is on leave. There have been flurries of activity by stags, selling shares in privatisations and in building societies converting to banks.
Dotcom speculators had a brief run in the late 1990s. Otherwise, most small investors have sat on their shares, showing minimal interest in trading or even following the fortunes of the businesses they own in any detail.
Numbers rose from 4m people in 1983 to 15m in 1997 and have now fallen to around 11m according to ProShare, which promotes individual share ownership.
Brian Winterflood, chairman of Winterflood Securities and a veteran observer of the City, says: "Mrs Thatcher created a massively wide pool of share ownership but the financial services industry failed to deepen it."
Mr Winterflood believes flotations such as BT gave "a nation of gamblers" a taste for equity risk.
But this was best exploited by fund managers, who lured Britons away from direct share ownership and into collective investments such as unit trusts.
Gavin Oldham, chief executive of The Share Centre, a brokerage, says the privatisations that began in earnest in 1984 with BT were "one of the biggest lost opportunities ever". He believes each new shareholder should have been matched with a broker able to provide advice and dealing services.
But what of companies that were privatised? They were left with huge shareholder bases that were expensive to service. Even today, BT has 1.6m shareholders. Over 650,000 of them hold fewer than 400 shares each, accounting for just 1.6 per cent of the shares in issue. That compares with the 229 shareholders who hold more than 5m shares each and control 70 per cent of the share capital between them.
Asked how the company feels about small investors, a BT official made this revealingly lukewarm comment: "It is something we have inherited from 20 years ago. We are proud of our heritage but it does have cost implications."
In October, BT set up a low-cost dealing service, which the company says small investors can use to increase their stakes as well as reduce them. However, Guy Barker, a director of Georgeson Shareholder, a shareholder relations consultancy, says: "When you introduce a dealing facility for a privatised company, there will generally be a lot of sellers."
Mr Barker estimates the cost of servicing an investor with corporate information at £12 a year. He adds that total will be reduced by economies of scale, the substitution of summary financial statements for full annual reports and by the minimal demands imposed by nominees.
For example, Rolls-Royce, the subject of a £1.36bn privatisation in 1987, says cost "is no longer an issue" thanks to cheap electronic channels for distributing investor information.
Richard Davies, an investor relations consultant, says that, although some companies see small investors as "a pain in the butt", they are increasingly regarded as an asset. "A lot of research shows you can turn a shareholder into someone who buys your product too."
That is certainly the view of George Stinnes, head of investor relations at British Airways, which was also privatised in 1987. He says small investors "are a necessity rather than a luxury" because they "have a sense of belonging and are happy to support their company as customers".
A wider benefit for the UK is that holding shares - as opposed to trading them - has ceased to be seen as suspiciously aristocratic behaviour, becoming even more commonplace following the demutualisations of the 1990s. And, as Martin Graham, director of market services at the London Stock Exchange, puts it: "It is hard to deny that [Thatcherite privatisations] were a resounding success in raising awareness of equity as an asset class." For that, at least, the City should raise a ragged cheer for the events of two decades ago.