April 11, 2005

MG Rover's downfall

Slightly behind on the MG Rover issue, but here we go. Below is an official statement released on the issue –

Tonight MG Rover has announced that their board has decided to call in the receivers.

This is a devastating blow to all those involved - the workers and their families, the company's suppliers and the wider community. Tonight our thoughts are with them.

Everyone recognised that a partnership with SAIC was critical to MGR's future. That is why MGR, the government and the trade unions have been working tirelessly round the clock to secure this deal.

In the end, SAIC made it clear that they were not confident about the future solvency of MG Rover, and therefore there was no reasonable prospect of a deal.

The government stood ready to issue bridging finance of over £100m to help, but without a deal there was no possibility of a bridging loan. SAIC, for their part, indicated that bridging loan finance would not have solved their concerns.

Full article here

The government has the right idea in not providing a financial rescue plan. The loss of jobs is a sad thing, but worse would be sustaining jobs artificially.

Some people, point to Rover’s size with its many employees and suppliers as reason to intervene. Size however, is irrelevant. What’s important is the future yield from the company’s continued operation relative to the funds required to keep it going.

If a £1m investment could revive Rover, preventing loss of jobs whilst bringing in revenue greater than £1m, few people would tell the government to hold back. However, the same reasoning could be applied to thousands of businesses nationwide. Cash flow problems often lead to the downfall of start-ups and small businesses even if their ideas seem profitable in the long run. Wouldn’t it then make sense to help any firm facing a 51% chance of liquidation without external aid? After all, limiting the privilege to companies the size of Rover could be sheer political opportunism. Why then is there no ‘Business Bailout Organisation’?

The obvious answer is, the future is unpredictable and we can’t know for certain how a company will faire later on. To get even a rough idea requires bringing in strategists, lawyers and accountants all of whom are eager to bill by the hour. It’s hassle the government could do without. Additionally, companies whose profitability is more certain and are better able to keep a lid on expenses even in slow periods wouldn’t be eligible at all. The fact that a company requires assistance implies poor financial management and/or insufficient demand. Providing financial aid may simply prolong its inevitable demise. It may thus be better to leave companies with marginal probability of survival to fend for themselves, or suffer the consequences. After all, there is no end of people willing to step into the fray if there’s money to be made.

- One comment Not publicly viewable

  1. I agree with your reasoning. Furthermore, the money that has to be used to save MG has to come from somewhere, governments do not have (and I know some people have a hard time understanding this) infinite credit. That money is better spent elsewhere!

    12 Apr 2005, 23:27

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