Aramco IPO: Four factors to consider before the company makes its public debut
Cass finance expert Professor Meziane Lasfer comments on the Saudi Aramco IPO as the state-owned oil giant prepares to go public in the next 12 months.
- Low investor appetite: The venue for the international listing has yet to be revealed. London, Tokyo and Hong Kong are possible contenders, but for a large company like Aramco, finding a market where potential investors are willing to put huge sums of money into the company is not easy.
- The issue of asymmetric information: The state-owned oil giant has, up to recently when it issued public debt, never had to publicly disclose information about its earnings and performance, so potential investors are unable to compute its actual value. When you bring a company to the market for the first time, you need to ensure that enough information is available to all parties. At this stage, there is very little that we know about Aramco.
- Interests of stockholders: Once a company is in the public market, there are investors’ interests to consider. When Aramco is eventually listed, the question that begs to be asked is: what happens if the interests of the shareholders are not aligned with those of the Saudi government? In such a situation, it is possible that an agency conflict may arise.
- Lack of diversification of Aramco’s facilities: Last weekend’s drone attack shut down more than half of Saudi Arabia’s production capacity. This is tremendous. Because Aramco’s facilities are concentrated in one site, potential investors ought to be wary about the element of risk involved, should a natural or man-made disaster occur.
An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded.