Harvard Business School
Rev. December 31, 1986
British Telecommunications, PLC
Just after the market's close on December 3, 1984, Kathy Ellis, a vice president of Morgan
Stanley, was awaiting a call from Richard Merley of Kleinwort, Benson, Limited, a British merchant bank. Since May, Kathy had been working with Richard on a multi-market initial public offering of equity for British Telecommunications, the United Kingdom's government-owned telephone monopoly. The U.K. government had decided to denationalize British Telecommunications (BT) in a public offering of 3,012,000,000 common shares, representing 50.2% of BT's total equity. The BT offering had been brought to market earlier on December 3, and trading in BT shares had commenced at the opening of the New York Stock Exchange that morning.
Because the British Telecommunications issue represented the largest initial public offering ever undertaken, a number of unusual measures had been taken to ensure adequate demand for BT shares. In order to provide credit to investors in BT, the offering had been structured as an installment sale. Payment for the shares was to be made in a series of three installments over a period extending 17 months beyond the initial offering date. In addition, the British government had sponsored a £10 million publicity campaign to promote the offering in the U.K. and had designed special incentives to encourage British individuals to participate in the stock sale, including the payment of bonus shares to purchasers of small blocks of BT stock. Finally, BT had decided to tap international demand for its shares by conducting the initial public offering simultaneously in four markets: London, New York, Tokyo, and Toronto. Kleinwort, Benson had represented the U.K. government in the transaction, and Morgan Stanley had served as lead manager of the U.S. offering.
The purpose of Kathy's phone call on the afternoon of December 3 was to discuss the extraordinary results of the first day of trading in BT shares. The price of partly paid BT shares had risen to an 85% premium over the offering price in extremely active trading, and there was evidence that many of the 180 million shares placed in the U.S. had already flowed back to the U.K. Kathy knew that these results would raise questions about the viability of multi-market offerings, and was anxious to hear Kleinwort, Benson's reaction to the day's events.
The Internationalization of Equity Markets
Although the British Telecommunications initial public offering was unique in terms of its size and complexity, cross-border equity offerings by large corporate issuers were not uncommon in the early 1980s. Corporations tapped foreign equity markets to achieve a variety of financial and
This case was prepared by Associates Fellow Sally E. Durdan, under the supervision of Associate Professor Scott P. Mason, as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
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British Telecommunications, PLC
strategic goals, including reducing capital costs, broadening their base of investors, increasing corporate exposure in foreign product markets, and facilitating the