Wednesday, March 22, 2006

Corporate Finance for Dummies


I'll come clean at the outset. I'm no corporate finance whizz kid. I wouldn't know a leveraged buyout from a mezzanine-funded IPO. The height of my financial management track record was recognising that the Eircom floatation was a pup and that McCreevy's SSIA offer was a 4-for-1 gift horse too good to miss. Those of you with property investments in Bratislava, a section 23 pad in Drumshambo and a 7-series on hire purchase, can choose to ignore the rest of this blog. The rest of you pay attention.

Aer Lingus is a state asset. Assets have value which rises and falls. Like any asset, you need to maintain it, use it or you are better off losing it. Aer Lingus needs an injection of cash to purchase new aircraft. Otherwise it will soon be a worthless asset. Our agents, the Government, have a choice. They can either invest in new stock themselves or they sell the asset off to someone who will sweat it properly (i.e. sell it's Heathrow landing slots and close down the provincal airline). Holding assets that you don't use is a cost to the owners. Assets can only be sold once. So if you sell an asset, you should use the funds raised for capital investment not to fund recurrent expenditure.

Choosing to hold or to sell is a strategic decision which has to be made on the balance of the options. (I can offer advice here although you might have to beg for it!) (By the way, I don't buy either the 'strategic importance' of the National Carrier or the 'market will decide' philosophies of either side.

The one option that makes no sense (and hence the most likely outcome) is to sell a bit of Aer Lingus. (This satisfies the Unions who see it as a way to protect their comfortable jobs. Look at the US Airline industry to see the long term consequences of such myopia.) No-one will pay for a part of an airline that they can't control. And the amount of money raised will hardly buy a tailfin let alone a new fleet. This is a stupid option.

Paige,
Financial Consultant to the Stars


Image : www.bbc.co.uk

9 Comments:

Blogger Omaniblog said...

A fabulous piece of writing. I'm not setting myself up as a judge but this is one of the clearest explanations of business options I have ever read. It is a model for any financial journalist to follow.
I don't agree with every point, just all bar one. You say that you shouldn't spend the money you get from selling an asset on anything except another asset. Whyever not? I remember spending some of the money I got from selling a house on food and drink. There are times when it is wise to spend money on current survival in order to be able to enjoy the futurn return on assets. But I am nitpicking. Your post, and the image you use to illustrate it, makes me jealous.

2:31 p.m., March 23, 2006  
Blogger Paige A Harrison said...

Omaniblog,
Of course you are correct. I was too casual in that sentence. But even you wouldn't sell your clubs to pay for membership of the golf club unless you'd other money to buy new set of clubs. But I didn't want to introduce the concept transfer pricing in lesson one!

3:41 p.m., March 23, 2006  
Anonymous copernicus said...

I'm with Garret FitzGerald, it's a strategic asset. It doesn't help that the Govt. have been lying through their teeth about EU state-aid rules.

3:25 a.m., March 24, 2006  
Blogger Omaniblog said...

So you really are an economist! I better watch my words because I struggle with the household budget.

You are spot on: I would not sell my golf clubs to pay for membership of a club in Cork - unless the price was right.

I used to think you were a trainee journalist. Now I think you are a financial analyst working for one of the big 5. (Just in case of misunderstanding: I don't want to know what you do for a living. It's a lot of fun imagining.)

9:44 a.m., March 24, 2006  
Blogger Omaniblog said...

I've been thinking about what you've said about the sale all week. Today, I gave in and wrote a blog about it.

10:32 a.m., March 25, 2006  
Blogger Mark Dowling said...

Hi - have put a long response to yourself and omaniblog here:
http://cork2toronto.blogspot.com/2006/03/why-aer-lingus-share-offering-must-go.html

4:31 p.m., March 25, 2006  
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