pounds 23bn tidal wave of free shares threatens to engulf market
Some 19 million investors in societies and insurers pose an unprecedent ed challenge, reports Chris Hughes
Friday 11 April 1997
If only a fraction of the new shareholders decide to sell, the pressure on dealing systems could be immense. Salomon Brothers predicts that 20 per cent of the windfall shares will be sold in the next year, rising to up to 50 per cent of the shares if their prices rise sharply. The American bank conducted a survey with Mori in which one in eight respondents said they planned to sell their shares immediately. That could mean 2.4 million people trying to deal on a stock market that averages a daily turnover of around 40,000 transactions. A further one in eight intended to sell some shares in the first year.
When the Alliance & Leicester floats on 21 April, many shareholders will be tempted to sell their entire holding via A&L's offer of a dealing service free to those deciding to sell all their shares in the first three days' dealing.
Barclays Stockbrokers is expecting a selling spree and has set up a telephone dealing service for the A&L flotation. But director Justin Urquhart Stewart is urging shareholders to exercise restraint.
"I would be desperately keen to encourage people not to sell their shares," he said. He may be right. Over a half of the shareholders created by the Abbey National's conversion into a bank held on to their shares and have seen the value of their investment rise by 500 per cent. True, Abbey National hit the market at a time of high inflation and it may not be the best indicator of the prospects for the likes of the Halifax and Woolwich, but history suggests the shares could perform well initially.
One reasons the shares are expected to rise is the anticipated desperation of so-called tracker funds to get a slice of the action. Tracker funds are duty-bound to buy into all the shares in which ever index (usually the FTSE 100) they follow. Because all the shares will be issued to ordinary account- and mortgage-holders, those big institutional funds will have no exposure at all when the shares start trading.
No one knows how they will act to build up their positions, which are already dangerously low in the banking sector. According to one analyst, the damage started in 1989, with the Abbey National flotation. "Although 20 per cent of the stock was sold in the first six months, the flow from private to institutional investors was very slow after that, at about 5 per cent a year," he said.
The summer's proposed flotations mean the situation can only get worse. The exposure of funds to the sector is already only about 69 per cent of where it should be. The Alliance & Leicester flotation will probably shift the underweighting down to 67 per cent, with Halifax taking it down to 56 per cent.
What this does not necessarily mean, however, is that new shareholders can be certain of entering a seller's market from day one. One possibility is that tracker funds will buy into other high street banks to keep their stakes in line with the sector's weighting in the index. Their shares have been rising over the last year in anticipation.
The Exchange has decided the earliest date the A&L and Halifax could be included on the index is 23 June, but shares start trading on 21 April and early June respectively. This should help prevent an artificial boost to prices but it is unclear how successful the device will prove.
"There could be a rush on the first day's trading, or things could be quiet until 22 June," one observer said. "When Orange floated, the shares were forced up to pounds 2.50 and the highest price was reached on the eve of the shares entering the index. What we will probably see is orderly buying throughout the period prior to index entry."
The tracker funds will not want to create a rush on the shares and could hold back in early days to depress the price. This would hit private shareholders hoping to cash in early. When Abbey National floated in 1989, its share price fell 8p from 153p in the first days of trading.
What is certain is that as soon as the issues make the index, the trackers will be forced to buy, almost regardless of price. If people rush to sell, Barclays' telephone dealing facility, a partnership with BT, aims to offer a service to people who are unfamiliar with stockbrokers. Callers will be greeted by a computerised voice, offering them the choice of buying or selling shares, or putting them into a PEP. Transactions will be handled by an operator and the proceeds paid into the caller's bank account.
Richard Hunter, NatWest's assistant director of share-dealing services, says NatWest aims to spread excess demand over a variety of dealing channels, including personal computers. "We will have extra staff on hand, but by offering a selection of dealing methods, we hope to avoid any problems."
If the Exchange is unable to process the sales, though, the brokers' preparations to court the shareholders could be in vain. A large number of small-value sales presents the Exchange with a challenge, since it is accustomed to larger deals.
Crest, the Exchange's computer system, was introduced last year and is already coming under strain. In January it was upgraded to cope with the transfer of FTSE 100 companies from the existing Talisman system.
To prevent Crest cracking under the strain, brokers will accumulate their clients' sale orders and sell in one go, either every hour, or when they have gathered a significant quantity of shares.
This will spare brokers the impractical task of in-putting the price of each transaction and sending a note to the registrar of the client's details. Instead, they will in-put a single large sale and send a covering note detailing the various clients' involved in it.
Fears are growing, however, that the new shareholders may actually want to increase their stake rather than cash in on it - one of the most frequently asked questions on A&L's flotation hotline.
Michael Saunders, UK economist at Salomon Brothers, says it is impossible to be certain whether the windfalls will be cashed in at all. Salomon's survey found the largest payouts would be to people who are middle-aged, richer and more financially sophisticated, and therefore more likely to hold on to shares.
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