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Northern Rock Nationalisation? My off-the-wall solution :-)

Posted by Mark Harrison on January 8, 2008

Of all the reports about Northern Rock over the last six months, the one that has consistently impressed me most is Robert Peston, of the BBC.

In the latest twist, Robert reports that SRM, a Hedge Fund who currently own about 10% of Northern Rock have written to the Government, making it clear that if the Government try to Nationalise NR at less than a “fair price”, they will sue for damages.

The story then goes on to report how SRM have arrived at a “fair price”, and how difficult it is to value failing businesses.

I have a solution. I’ve no idea whether it would hold water legally, but it has a certain “business logic” and “natural justice to it.”

I wonder whether it could apply to all “companies on the verge of nationalisation”, not just NR…

Run an auction with a twist

  • Buyers would have to demonstrate (before entering the auction) that they had the funds in place
  • The government would have the RIGHT, but not the OBLIGATION (ie an option), for 24 hours after the auction closed, to buy, at a 10% premium over the “hammer price”
  • Of this 10%, half (5% of the highest bid) would be an uplift to the price the sellers of the business received
  • The other half (5% of the highest bid) would go to the highest bidder

Why have I suggested this?

  • The purpose of the first 5% is to demonstrate, clearly, that the government is paying “fair price”.
  • The purpose of the second 5% is to make sure that potential bidders are encouraged to bid up to their highest price – because for just making the offer, and putting down no cash, they MIGHT end up with a 5% profit straight away.
  • The purpose of making it an OPTION is to  make sure that no-one over-bids in the hope of that 5% profit – there would be a good chance that the Government would leave them swinging with their over-priced asset 🙂 And, of course, to make sure that the Government only bought if they REALLY felt it was in the national interest.

Would bidders play? Asia is awash with rich financial institutions at the moment!


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