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Eleventh Plenary Session of the OECD Advisory Group on Privatisation (AGP)

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Eleventh Plenary Session of the OECD Advisory Group on Privatisation (AGP) Organisation for Economic Co-operation and Development Organisation de Coopération et de Développement Économiques in co-operation with the Italian Treasury Eleventh Plenary Session of the OECD Advisory Group on Privatisation (AGP) on Banks and Privatisation Framework conditions, methods and processes of privatisation: Lessons from the trade sale of an Austrian bank by Karl Aiginger and Peter Mooslechner Rome, 18 and 19 September 1997 Banks and Privatisation Rome, 18 and 19 September 1997 FRAMEWORK CONDITIONS, METHODS AND PROCESSES OF PRIVATISATION: LESSONS FROM THE TRADE SALE OF AN AUSTRIAN BANK* by Karl Aiginger and Peter Mooslechner** 1. Introduction: How not to privatise a bank? On January 12, 1997 the Austrian government decided to sell its controlling 48.6 per cent stake (which represents 70 per cent of the bank’s voting rights) in Creditanstalt, Austria’s second-largest bank, to Bank Austria, the largest Austrian bank. This decision ended a more than six-year attempt to privatise Creditanstalt, characterised as “possibly the longest privatisation saga in history”1 The privatisation process of Creditanstalt has received widespread attention in the international financial community and was heavily criticised in the financial press. Despite Austria having done a lot in privatising large parts of its state-owned economy, it raised serious questions about Austria’s willingness to privatise. The government’s attempt to sell Creditanstalt has been derided as a lesson in how not to privatise.2 Unfortunately the discussion of the problems in the process of privatising Creditanstalt focused nearly exclusively on political factors and arguments. Of course, political considerations and political views on how to privatise the *. Paper presented at the OECD Symposium on "Banks and Privatisation", Rome, 18-19 September 1997. **. Karl Aiginger, Austrian Institute of Economic Research (WIFO); and Peter Mooslechner, Oesterreichische Nationalbank Economic Analysis Division 1 “Death of a bank”, Euromoney, March 1997. 2 “Creditanstalt: How Not to Privatize a Bank”, The Wall Street Journal Europe, September 21, 1995. 2 Copyright © OECD. All rights reserved Banks and Privatisation Rome, 18 and 19 September 1997 second-largest Austrian bank played an important role, because Austria’s coalition politicians couldn’t agree on how to dispose of the government’s shareholding in the bank. But it has also to be emphasised that - from an economic point of view - several structural factors and specific framework conditions contributed seriously to the problem. In particular, it should be noted that the issue of public ownership and privatisation is part of the much wider economic discussion on corporate governance, although it is now a widely held view that the government should generally not be the owner of companies in competitive sectors, such as in the banking industry. On the other hand, privatisation may not be seen an end in itself. It is part of a larger trend towards rebalancing the relationship between public and private sectors and is seen to contribute to the overall efficiency of an economy within this framework. In this paper we shall argue that there are a number of economic reasons why the privatisation of Creditanstalt turned out to be much more complicated than expected. One main point in this respect is that the process of privatisation - and in particular the privatisation of a major bank - is closely related to the corporate governance structure of a country, to the ownership structure, the mechanism of control and the particular role of banks in this mechanism. A second important aspect is the problem of conflicting goals. As it is well known privatisation always has many aims - ranging from maximising budget revenue to promote share ownership and improve corporate governance - and it is always a very difficult task for the government to decide on the trade-offs when the objectives announced come into conflict with one another. To solve these conflicts in a sustainable way is not only important from an economic point of view but also for the political and social acceptability of privatisations. Against this background the following two sections of the paper focus on the historical dimension. Section 2 summarises the attempts to privatise Creditanstalt, Section 3 illustrates the history of public ownership in the Austrian economy in general, section 4 describes the successful experience of privatising large industrial firms in Austria. Section 5 discusses the fundamental differences between the main two types of financial systems and, in particular, their consequences for the privatisation framework and relates this to the structure of ownership and corporate governance in Austrian banking. In sections 6 to 8 we try to evaluate some of the specific elements creating additional major difficulties in the case of Creditanstalt: These elements are the role of strategic and large shareholdership as well as the development of capital markets (section 6), the problem of foreign ownership 3 Copyright © OECD. All rights reserved Banks and Privatisation Rome, 18 and 19 September 1997 (section 7) and - last but not least - the particular importance of using a privatisation agent given these specific framework conditions (section 8). Finally, section 9 tries to draw some tentative conclusions based on this analysis. 2. The Creditanstalt privatisation story - A brief chronology of the attempts to sell Creditanstalt-Bankverein In April 1991 the Austrian parliament passed a law empowering the Minister of Finance to sell the state owned stakes in two big commercial banks - Creditanstalt-Bankverein and Österreichische Länderbank - on the best terms possible. The law encouraged the use of capital markets for the placement of Creditanstalt shares, but the proposals to make secondary offerings of shares on the international markets turned out to be rather unsuccessful. Österreichische Länderbank was taken over by Zentralsparkasse und Kommerzialbank Wien (Z) to form Bank Austria, the largest Austrian bank. General Electric Capital Corporation turns out to be the first serious foreigner interested in Creditanstalt in 1992 but the Creditanstalt board was hostile because it thought that GECC would only be interested in consumer finance. At the same time some interest in entering the Austrian banking market was also shown by Bayerische Vereinsbank, one of the largest German banks. Later on Creditanstalt sold its stakes in two foreign banks to Vereinsbank and its wholly owned subsidiary Mercurbank to GECC. Therefore both bidders showed no further interest in Creditanstalt. The first concrete Austrian offer came in from Raiffeisen Zentralbank (RZB) for the Austrian co-operative banking group in 1993 with further backing from an unnamed foreign partner. Creditanstalt’s board opposed the plan because they saw a diminution of capital in the planned reverse take-over. The government rejected the RZB proposal as well since RZB was not willing to reveal its foreign partner. Early in 1994 Credit Suisse emerged as a potential buyer. At the same time EA-Generali, a close partner of Creditanstalt, began to construct a defensive, largely domestic consortium, bringing together some of Creditanstalt’s best clients and partners. This - so called - “Austrian consortium” was joined later on by Erste Österreichische, a leading savings bank. The consortium received open support from Creditanstalt’s management board. It offered 7.2 bln. ATS for 37 per cent of voting shares, Credit Suisse said it wanted to buy 20 to 30 per cent at once and take full control later on. But after open resistance from CA’s 4 Copyright © OECD. All rights reserved Banks and Privatisation Rome, 18 and 19 September 1997 management board, from the employees of Creditanstalt and negative public reactions Credit Suisse withdrew its bid in September. The Minister of finance said he was very much in favour of the Credit Suisse offer, but - given the resistance of CA’s management and employees - it would almost have been a hostile take-over. He hired Booz-Allen & Hamilton as adviser. During the first month of 1995 Germany’s Allianz Holding and Bayerische Hypotheken- and Wechselbank AG submitted an offer for Creditanstalt and the Austrian consortium raised its bid. With Allianz and Bayernhypo the last foreign bidders withdrew their interest due to problems of getting enough information from Creditanstalt on the economic situation of the bank. The new Minister of Finance hired J.P. Morgan as the government’s adviser. J.P. Morgan valued the stake in Creditanstalt owned by the public sector at 18 bln. ATS, including a control premium of about 6 bln. ATS. On September 7 an invitation to tender was published in the Financial Times. The government invited new bids by October 9. It was clearly stated - based on the preconditions agreed upon by the Austrian parliament - that Creditanstalt will be sold to the highest bidder, but that the deal must safeguard national interests and contribute to a restructuring of the banking sector. In other words, the government had to reconcile three possibly conflicting criteria in the privatisation process. In October the coalition government resigned and a new election was called. This put the sale of Creditanstalt on ice well into 1996. By mid 1996 Erste Österreichische proposed a holding company to control the majority of Erste and Creditanstalt. Creditanstalt’s executives rejected the plan by asking for a “proper valuation” of both banks. The new Minister of Finance gives the consortium a deadline to submit a final bid by the end of August. But Erste leaves the consortium and the rest of the consortium submitted its own bid which was rejected. The bidding was re-opened with an updated valuation by J.P. Morgan and a November 15 deadline. Just before that date Erste rejoined the consortium and together they made a new offer. The consortium and two other bidders started due diligence at Creditanstalt and the Minister of Finance fixed December 16 as final bid deadline. By December 16 three bids came in, one by the consortium, one by entrepreneur Karl Wlaschek, who just sold his foodstore group, and - surprisingly - one by Bank Austria, Austria’s largest bank.
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