Question 1: Major factors that influ...
Financial Accounting of Companies
Question 1: Major factors that influence the privatization
of Telstra.. 2
(a) To reduce
Government Debts and Interest Payments. 2
(b) To Fund
Environmental & Wildlife Projects. 2
(c) To Reduce
Monopoly in Telecommunication Industry. 2
(d) To Promote
Technology Advancement 2
(e) To Increase
Question 2: Reason for choosing Installment-Payment and
Book-Building Method along with its drawbacks. 2
Reason for choosing Installment-Payment and Book-Building
Drawbacks of Installment-Payment and Book-Building Approach.. 3
Question 3: Differentiation of Telstra 1 and Telstra 2
share issue strategy. 4
The Australian Government was under financial pressure due
to the economic crises in the region and the government believes that the
potential privatization will generate substantial funds which would help them
to pay-off their debts and ease the financial burden of the country. Further,
the government also believes that privatization will improve the quality of
decision because of the lack of political interference in decision making
process (Quiggin, 1996).
The Coalition Government was much more concerned about the environmental
influences and wildlife projects which increased their interest to privatize
the company. The privatization of Telstra generated A$8 billion, out of which
A$1 billion were used to fund environmental and wildlife projects. It will
improve the living standard of the country and motivates their peoples that
they are living in a healthy environment (Quiggin, 1996).
One of the fundamental aspects of the privatization of
Telstra was to reduce the monopoly in telecommunication industry and to promote
a perfect competition. It will not only
reduce the prices of the offered product but will also enhance the quality of
service as well. Further, the government also believes that it will bring
foreign investments which will boost economy and generate employment
opportunities (Whitfield & Dexter, 1992).
The subscribers believed that the new entrants will bring
new technology and expertise which will enhance customer service and helps
company to compete across the globe. The government believes that new
technology will save time, promote convenience and encourage corporate &
normal consumers to operate in an efficient manner (Whitfield & Dexter,
The government believes that the operations of Telstra were
not conducted in an efficient manner due to excessive political involvement and
privatization would resolve this issue and enable the company to operate in an
efficient manner. Further, they also believe that the potential privatization
will convert the inefficient monopolies to competitive market through reduction
of substantial expenses and investment in profit making projects (Whitfield
& Dexter, 1992).
The basic objective of Commonwealth Government behind using
installment-payment and book-building approach for the issue of shares are to
attract potential investors and to determine the exact price of the share. Some
of the reasons for using the respective approach are given below.
(a) Cost-Effective Approach
Installment-payment is a cost effective approach where
investors are initially entitled to pay only small portion of current share
price and the remaining portion will be paid at later date (Schmidt, 1996). Telstra selected an initial installment of
A$1.95 per share followed by final payment of A$1.35 per share. This will ease
the buying capacity of the subscriber.
(b) High Dividend-Yield
Installment-payment enables shareholders to receive full
dividend at the cost of partial investment which attracts potential investors
and encourages them to invest in the company (Schmidt, 1996).
(c) No Underlying Obligation
Investors in Installment-payment approach are not entitled
to make final payment at the expiry which limits their losses to the initial
payment. Further, the shares are liquidate in nature and traded in stock
exchange where investors can sale before its maturity.
(a) Transparency in Pricing
In a book-building approach, the issuer sets a range of
prices within which the potential investors are requested to bid. Such range is
based on the value of company and trading pattern of comparable entities which
will help potential investors to appropriately determine the exact price of the
enterprise (Schmidt, 1996).
(b) Investor’s Participation in Price
In a public offering, it is very difficult to analyze the
appropriate price of the enterprise but book-building approach helps to get an
exact price of the enterprise (Schmidt, 1996). It involves the analysis of
different potential investors which have exerted different assumptions to
determine the actual price of enterprise.
(c) Low Cost and Less Time Taking Strategy
Book-building is a relatively less costly and low time
taking strategy which would tend the Australian Government to easily access the
funds at low cost (Chong and Galdo, 2002).
(a) Artificial Demand
Installment- Payment method artificially increases the
demand of the shares when the company is about to announce dividend and reduces
the share price when the final installment is due. It restricts shareholders to
analyses the exact value of the enterprise (Chong and Galdo, 2002).
(b) The Price may be over valued
The installment payment method is used to attract the
potential investors to pay in installments. The accumulated price of the share
may be overvalued but it may seem reasonable due to first installment and
dilute the decision of potential shareholder (Ferner and Colling, 1991).
(a) Limits Control towards Small Number of
Book-Building method targets limited audience which restricts
the control towards limited number of shareholders. In order to avoid this, the
Australian government exerts excessive restrictions on the allocation of shares
to ensure that control is diverted among excessive shareholders. It limits the
maximum allocation to single shareholder to 2% of total issued shares and
limits the foreign investment to 11.67% of available shares.
(b) Restricted Analysis in Determining
The Book-Building process requests small number of
institutional investors to bid within limited range set by the company. It
restricts the pricing analysis towards limited number of shareholders and
raises difficulty in determining the actual price of enterprise.
Telstra 1 share issue strategy achieves a tremendous success
which helped both the general public and Commonwealth Government. Funds raised
from the share issue strategy were used to pay-off government debts and to fund
the environment and wild life projects. Telstra privatization removes the
regulatory measures on telecom industry which attracted foreign investments and
tends them to implement them a radical structure change which improves the
efficiency of telecom industry (Quiggin, 1996).
Telstra 2 share issue strategy did not obtained that success
as it had been achieved in Telstra 1 share issue because the company was facing
increased competition from new entrants which significantly affected the share
price of the company. Further, the company had also invested in some poorly
performing projects which threatened the desired results from the investment
The pattern of outcome was not consistent in the share issue
process. Telstra was previously a single dominating telecom company in
Australia which attracted the potential buyers in Telstra 1 share issue
strategy but as long as new entrants entered into market, it eliminates the dominancy
of the company and attract potential buyers towards other companies in the