Does anyone know how they valued Royal Mail shares given that they closed up 38% at the first day of trading? Any Actuaries involved? What would the dividend discount model have stated as the price?
The valuation method is secondary to the process followed in this case, I think, in that the method of flotation was decided on before all the issues around long term liabilities (ie the DB scheme) were sorted out. With shares being placed with investors directly, it was fairly easy for investors to talk down the price with unsophisticated types in Govt on the receiving end. Lots of uncertainty in this kind of business but given that Royal Mail is best placed to handle small package delivery in the immediate future it should have been obvious prospects for the busness were very strong.
Sorry but my question is whether the Govt should have (assuming they hadn't already?!) gone to Actuaries with our discounted dividend models to establish the price?
Not really. Valuing equities is not exactly our core competency compared with investment analysts who do nothing but. Now, if you were interested in projecting the customer base forward in time together with propensity to use Royal Mail services...some interesting work could be done there.
I don't know whether actuaries were used in the process or not (to be honest I doubt it), but the government will always err on the "undervaluing" side of the spectrum in instances like this. That's because, politically, failing to sell all the shares would be a disaster, so they will take their best estimate and sell them cheaper than this to ensure that all of them are sold. Also, the dividend discount model isn't really "ours", I think it was invented by an economist if I remember my university lectures correctly. I would say there are probably other experts who are more qualified than actuaries to value the shares, for example the CFA guys.
I don't accept that spin that's being put out on the media. You don't sell 38% below true value. Taxpayers lost out on £400m apparently. It's a scandal. Even your actuary exams specify different ways to sell shares in an offering. What's wrong with a highest bidders get them system? Let me explain: the political elites wouldn't get to cash in that way. So actuaries can't value a firm like the Royal Mail? Useless aren't we?
I agree, selling so far below the true value is bad for taxpayers, but I don't know whether they intended to sell so far below "true value". How did the political elites manage to cash in? I thought everyone was limited to only buying £10k in shares or something, and that people who wanted less were given priority, so that no one person or group could get their hands on lots of shares to take all the profit. I'm not saying we can't, actuaries are perfectly capable of doing it. But there are other professions whose entire role is to value companies, so they are better placed than we are to do it. Just like we are better placed than anyone else to price a life insurance contract.
Because then you assume the pricing risk. When you place shares at an agreed price you remove that risk. Each method of placement has advantages and disadvantages, and it's easy to criticise with hindsight. Most flotations are badly mispriced (remember Facebook?); the only question is in which direction. This is especially so when there is a large emotional component to the issue, as is the case with "national treasures" like the post office. Who exactly has benefited in this way? You wouldn't go to a dentist and complain about your foot. I've never been asked to value a share in my working life and I'd decline to do it if I was. Equally, I wouldn't go to an investment analyst and ask them to price an insurance contract.
Valuing properly is extremely difficult, people place different values on companies all the time. You're probably right, the shares should've went to the highest bidder to give taxpayers the most money, but I still don't see why the elite benefited because they didn't.
Oh all just a coincidence is it that the taxpayer lost out on £400m here? You think people don't talk and share tip-offs?
I'm not saying it's a coincidence, I'm saying I'd need more proof that it was politicians who were the main benificiaries of the underpricing. My guess is that banks and hedge funds probably benefited the most, but also the hundreds of thousands of individuals who bought shares will have benefited too.
Have a read of this: http://www.adamsmith.org/blog/regul...damsmithinstitute+(Adam+Smith+Institute+blog) It makes a lot of sense to me, but you may not agree.
The more you look into this the weirder it gets. JP Morgan had valued Royal Mail at close to £10bn but it was sold for £3.3bn.
Yes, but on the other hand £10bn fails to pass the smell test. Consider: £10bn as the price of a perpetuity at 5%, suggests a free cash flow of £500m per year after all taxes and expenses. That's utterly ridiculous. The Royal Mail has what, five years left as a monopoly? The future of the market is in handling packages and there are lots of companies competing in this space, many occupying niche segments. In the same way that I can read up on case law and give legal opinions. You can do it, but if you rely on it you've a fool for a client.
Valuation isn't an exact science and is far more complicated than some comments suggest. If it was we're all in the wrong profession. The Royal Mail flotation is no different to any other floatation that occurs each year. The biggest 'risk' to an IPO is from insufficient demand which is borne by the company itself or the underwriter if they guarantee the price (for a fee of course). It is well-known for the initial IPO price to be at a discount to the 'true' price to attract demand. It is also well-known for the underwriters to approach the large institutions with the financial resources to test their appetite for the shares. They will therefore have negotiation strength in their attempt to get the best deal for themselves. The more risk averse the prospective issuer the lower the price and vice-versa. Hindsight is ALWAYS 20/20. Had the IPO failed to deliver sufficient demand and not gone ahead everyone would be complaining about how useless the Government is etc etc and they would be criticised for different reasons.
That's the spin put out on the media. I wouldn't mind at all. I would want the highest price possible for the taxpayer. After all the public finances are in a mess so no excuses for selling this on the cheap.
I suspect you're missing the most important/'obvious' point. Nobody knew what that magical price was. Furthermore, given the fluctuations in ALL share prices publicly traded, what is deemed the 'correct' price changes every second; literally. It's also worth noting the Government still own 30% of the stock so are still participating in the upside.
