The board of AIB finds itself on the horns of dilemma that is playing out in various guises in boardrooms across the globe. They pretty much have until Thursday to decide whether to proceed with buying back a significant chunk of the Government’s remaining shareholding in the bank.
Their problem? US president Donald Trump.
The immediate issue is that the bank’s shares are trading below the price at which it agreed to buy them from the Government. The shares are trading at just under €6.06, a not insignificant discount on the €6.26 per share price agreed in late March.
Given the amount of money involved – AIB shareholders have approved the bank spending €1.2 billion – the potential “overpayment” is considerable. Something in the region of €40 million.
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On the plus side, the transaction will mean the Government stake in AIB falls from about 12 per cent to close to 3 per cent, bringing the bank closer to the Holy Grail of full private ownership. The shareholders – who approved the buy back at the bank’s annual general meeting last week – would seem to think almost €40 million is a price worth paying for freedom, as they overwhelmingly approved the purchase.
Their approval, however, lapses on Wednesday and after that, it is back to the drawing board in terms of agreeing to a new price with the Government and seeking shareholder approval. “The bank would face having to call an extraordinary general meeting, at a minimum of 21 days’ notice, to get any new agreement over the line with shareholders.”
If the board proceeds with the purchase at above the market price, they can expect some political heat because the Government’s stake in the bank – which dates back to the banking collapse of 2011 – is indirectly linked to a €500,000 cap on the salaries of senior executives and a €20,000 cap on bonuses after which a super tax of 89 per cent kicks in.
When Bank of Ireland exited State ownership, the cap on salaries was lifted but the bonus restrictions remained. AIB can expect the same treatment and the case for bonus restrictions will be hard to sustain with both banks effectively out of the hands of the State.
It is not a good look for AIB to spend €40 million of shareholders’ money so that it can pay its senior bankers more. It may be an unfair and simplistic characterisation of the proposed transaction but that will not stop the Opposition parties – Sinn Féin in particular – making political capital out of it. The fact that the taxpayer is the beneficiary of the overpayment will no doubt get lost in the mix.
Leaving this aside, from the perspective of the board of AIB, the decision really comes down to one question: where does the share price go from here and when it will reach €6.26.
This is where the US president comes in. Global stock markets have been on a roller-coaster ride since Trump took office in January as they reacted to a barrage of policies announced during his first 100 days in office, the most significant of which has been sweeping tariffs on imports from the US’s main trading partners.
His big set-piece policy announcement – Liberation Day on April 2nd – marked baseline “reciprocal tariffs” of 10 per cent imposed on pretty much everywhere except Canada and Mexico. They climbed to 50 per cent depending on a somewhat whimsical formula.
The impact on global financial markets was little short of catastrophic and after several days of horrendous loses that threatened to bleed across into the market for US debt with serious consequences for the US’s ability to finance itself, Trump relented and announced a 90-day pause for all countries except China to allow for negotiations.
AIB’s share price hit €5.29 in the immediate aftermath before recovering. Markets have now regained their poise somewhat on the assumption that these negotiations will lead to some sort of compromise, or a series of compromises.
We are now 30 days into the 90 days pause and it’s doubtful that anyone can point to a clear landing zone, within the next 60 days, that will avoid another bout of financial discombobulation.
If anything, Trump appears as erratic and unstructured as ever and his administration compliant in equal measure. This weekend marked the announcement – it was a surprise but that is not surprising – of a call for 100 per cent tariffs on imported movies.
The idea is inherently unworkable and counter to the desire of Hollywood for Federal financial support to bring down the cost of making films in the US. It may not even come to pass. Trump’s proposal – according to the Wall Street Journal – came to him while he read through news clippings on Air Force One.
Trump’s supporters are once again reaching for the caged madman theory to explain the president’s behaviour; this is the notion that his impulsive and combative approach is a deliberate strategy to wrong-foot his opponents and secure a beneficial outcome.
What is clear is there is no guarantee that come July 8th – if not sooner – that all hell will not break loose in financial markets because of Trump, which could leave the board of AIB looking very foolish indeed if they proceed with the buyback.
The idea that the AIB board must factor the unpredictability of the US president into a strategic decision about a share buyback is disconcerting. When you consider the same dynamic paralysing boardrooms across the world, it becomes terrifying.
