Saudi Aramco is set to begin floating shares in what is the largest company in the world and what will be the largest initial public offering in human history. Saudi leaders claim their company has well over a $1 trillion market value if it were sold off entirely, while more modest estimates still make it bigger than most or all other firms around. The numbers are absolutely massive, with over $300 billion in annual revenue coming into the company per year.
Of course, more numbers around the mysterious and privately held Saudi giant are harder to come by—but they won’t be for soon. As a private company, Aramco could hide details about its earnings and revenue from just about anyone. As a public company, it will be subject to the laws and regulations about disclosures within the country where the new firm is listed.
Herein lies problem #1. Where should Aramco be listed? While there is prestige in basing the public firm in New York, American disclosure laws are much stricter than anywhere else, and accounting principles are arguably the strictest too. London, Dubai, and even Hong Kong are alternatives, with their own advantages. However, perhaps out of hubris or perhaps out of a desire for liquidity (and probably a bit of both), the Saudis decided to pick New York.
That decision is just one of thousands that need to be hammered out by Aramco’s current owners. But as much as they may know about the international oil business (and their knowledge on that may be debated by some), they are relatively new to the public finance game. Public finance itself is very different from other kinds of finance, with many layers of legal, regulatory, and exchange-based principles limiting what companies can and cannot do. Aramco didn’t need to follow any rules set by a higher power in the past, so this is a pretty significant transition.
In making such a transition, good advice from good bankers will be extremely valuable. Just informing Aramco of what kind of restrictions they will face is enough to make the bankers earn their fees.
On top of that, however, is valuation.
Estimates of Aramco’s total value range from $600 billion to $10 trillion, depending on who you ask and when you ask it. That’s a massive range to say the least. Part of the reason for this range is the different ways companies can be valued, but the main reason is that the market just doesn’t know all that much about Aramco. It’s kept itself hidden from sunlight for very long, and Aramco’s owners realize that the valuable information they’ve kept secret is going to lose a lot of value very soon because they will need to disclose it to comply with the rules set out by public companies.
Again, this is where bankers’ advice kicks in.
Then there are other issues such as float, capital structure, timing, and a variety of other things that bankers will be helping Aramco sort out.
But the most important thing bankers will do, after helping Aramco understand what it’s getting into, is matching buyers with sellers. In an IPO, introducing potential investors to the company about to be traded is actually quite easy and is considered one of the more exciting parts of high finance. The company does a “road show” where they will quietly meet with institutional investors like hedge funds, registered advisors, and mutual fund companies. They’ll introduce the company, give some financial details, and the bankers will follow up to find out how many shares the investors want to buy. In some cases, like Snapchat’s (SNAP) recent IPO, those initial investors will make a very quick profit very soon. Then they’ll have to figure out whether to sell all or some of that stake or keep it because the company has years of growth ahead of it.
This is often a relatively easy thing for bankers to do, especially if they have contacts with big funds. But Aramco is massive. Even if Aramco floats only 10% of the company and it’s valued at $1 trillion, that’s $100 billion in stock to sell at once. Most of the big asset management firms will have anywhere between $2 to $50 billion in assets under management. Since those firms either cannot or most likely will not put more than 1% into a new issue like Aramco, the bankers will need to find at least 400 institutional investors to buy up all of those shares. There are hardly that many firms with $2 billion or more in AUM in the world, and many of those just won’t be interested. So the bankers will need to go smaller and find even more people to buy into the IPO.
That’s a herculean task even after the headache of guiding Aramco’s owners through the process. The IPO is destined to be a highly complex and messy one. What happens after shares are floated may be even messier, especially if the bankers don’t do their job right.