Saudi Aramco: IPO and Saudi Arabia’s Move Away From Oil
Saudi Aramco is the world’s largest oil company with the second largest proven crude oil reserves. It is a state owned entity based in Dhahran, Saudi Arabia and boasts ownership of the largest off and onshore oil field deposits. The company is expected to complete the largest ever initial public offering next year and the Saudi Government has estimated it to raise 100 billion USD, four times the value of Alibaba’s flotation.
What is an Initial Public Offering and why would a company do it?
An Initial Public Offering (IPO) is when a company floats its shares on a public exchange for the first time. This process can be a teething one especially when the potential capital raising is monumental. For example, the Saudi Aramco IPO is only expected to come to fruition in May of 2018. The process involves obtaining permission from the stock exchange, paying underwriting and advisory fees and rounding up pre-IPO investors. This is all an administrative conundrum but is it worth it?
For a start, IPOs open a company to wider financial benefits in the form of share capital and issuance of corporate debentures. This would allow the company to raise capital in various ways which would not be explored otherwise if it was still privately owned. IPOs serve as a platform for a company to expand its market value and improve its public profile through annual general meetings and analyst briefings. They also allow a more dynamic and malleable work environment as takeovers and chief executive change overs become commonplace. This change is done on a unanimous voting basis by major shareholders and board members. The IPO process allows for employees to be appraised through share option schemes, which in turn, boost productivity and ambition within the workforce to increase sales and profits. Share option schemes also attract talented employees if the prices quoted are at healthy discounts. .
However, there are certain disadvantages attached to carrying out IPOs. As mentioned earlier, they can extremely time consuming and costly depending on the magnitude. It requires a thorough legal and administrative framework to be in place before its inception. An IPO also minimizes the power or control of the chief executive officer due to take-over threats and presence of shareholder activists, for example, Carl Icahn. Being in the eye of the public is not always a good thing. For instance, financial reports must be published quarterly in most countries. Negative financial reports exert downward pressure on the share price which subsequently taints the public image of the company. Becoming a public company also requires a company to pay dividends to its shareholders on a regular basis which can prove to be costly. At times, the company may simply want to reinvest retained earnings back into the business in order to carry out projects, research or plant, property and equipment purchases.
Is the IPO a good move for Saudi Aramco?
Undergoing an IPO is only a good idea if it fits in with the vision of the company that is executing it. In this case, the Saudi government has a 2030 vision which entails a shift away from reliance on oil as a sole stream of export revenue and diversify its economic production to other sectors. The capital raising expected from this IPO is set to make that vision a plausible reality given the investment opportunities that shall arise from it. This move is also an excellent statement from the government to make the Middle-Eastern nation a voice in global affairs. It has already caused a battle between the London, New York and Hong Kong stock exchanges to win over Saudi hearts by proposing lighter listing regulations. The interesting part of this whole scenario is that Aramco is only listing 5 percent of its business which would still double Alibaba’s record according to the Wall Street Journal. The oil giant may simply list on the domestic bourse then list on a major stock exchange at later date, which would make more sense.
However, listing on other global exchanges would allow the world a rare look at the financial statements of the most powerful oil nation in the world. This is counterfactual to the secrecy that the Saudis are well known for. They should hope that the sacrifice is a necessary one.