Privatization

  

Categories: Econ

Taking private. Something that used to be public (in this case, the term usually refers to something that was run by the government), which is now bought out by investors and taken private. No more government knuckleheads running the show. No more arrogance about wasting tax payers' (or at least other people's) money. And as a private company, the entity can find a compensation system to attract the best and brightest talent to come work for it.

The system has happened in different methods over history in the U.S. and around the world. Airlines were privately run...then they did stupid things and went bankrupt. The U.S. government essentially bought many of them (or funded them back into existence). It regulated them, paid attention to the lousy service they were giving customers, and allowed unions to dominate in a very non-SouthWestian way. (Southwest is famously essentially owned, or was at least funded, by its own union, and the CEO was a union man from the womb...yet Southwest doesn't suffer the same typical "you can't fire me so I really don't care about the quality of service I'm giving you" vibe that most unions broadcast, especially at competitive airlines. The founder simply fired bad workers. What a concept, right? Yeah, we can't really do that anymore.)

Anyway, the government, with no culpability for costs, would allow the hiring of 17 workers to do the job of 7, and ran the airlines very inefficiently. It then suffered enough financial hemmoraging, sold them to private investors and, well, the airline industry today is a reflection of that structure. It is run just well enough to pay interest to bondholders on the debts the airlines carry as private companies. And their stocks look about like a dead man's pulse, albeit with defibrillators every now and then when the economy changes suddenly.

The process? Well, the gov calls out a shout for bids. Investment banks advise private equity shops on what they should spend for what. And then sales happen. New management is brought in. Massive firings usually happen. Big tech upgrades replace more people. And instead of 38,000 employees in a company losing $50 million a month, the company skinnies up to be 14,000 employees in a company making $20 million a month, with a lot more profits to come down the line.

Yeah, Darwin should be alive today to frame things for us.

Related or Semi-related Video

Finance: What is the Difference Between ...6 Views

00:00

finance a la shmoop - what's the difference between a private company and

00:06

a public company? one word- regulation. well private companies have virtually

00:12

none. that is they are only quote regulated unquote by the contracts that [chains fall off building]

00:18

are passed among the key parties. I agree to invest such and such amount of money

00:22

to buy this many shares- and outlining the contract here in runs what happens

00:27

to that money given various outcomes. well private companies are usually

00:30

funded and covered by the wealthy. and the government feels that the wealthy

00:34

can afford their own damn lawyers that they have enough education to know that

00:38

they need lawyers ,and while they're on their own. but in the case of public

00:42

companies things are different the government feels like it owes protection

00:46

to Jo Plummer sixpack who invests his hard-earned 3 grand a year in savings in

00:52

coca-cola stock. coke arguably the most public of public companies lives under [Coca Cola shares and price pictured on a website]

00:57

all kinds of rules. disclosures of operations disclosures of finances and

01:02

disclosures of governance and CEO compensation or bottling plant problems

01:07

in South Paulo or even that lawsuit over the carbonated swimming pool boondoggle

01:13

in Nairobi. why so much paperwork and disclosure bureaucracy? well the

01:17

government feels that if they require all these notices from coke then Joe

01:22

plumber 6-pack is somehow protected as if Joe ever read those coca-cola

01:28

document disclosure statements. yeah pretty much never. would Joe understand

01:33

them even if he did read them? well probably not so why bother with them? in [man sits behind tall stacks of paperwork]

01:37

theory it's just meant to be an added layer of protection for stockholders

01:40

just in case Joe decides to take a shmoop financial literacy course someday and

01:46

becomes a Rain Man level genius with you know the digits. of course on the other

01:50

hand there are a lot of government people who need employees and coke pays

01:54

lots and lots of fees for all of that disclosing, so as usual you know follow

01:59

the money. [man walks down yellow brick road littered with money] oh yeah.

Up Next

Finance: What is a Private Investment Company?
3 Views

A private investment company is an investment company that is not subject to the same regulations as public investment companies.

Find other enlightening terms in Shmoop Finance Genius Bar(f)