JEDDAH, 18 January 2004 — Challenges facing family businesses in Saudi Arabia are greater than ever. The latest reforms introduced by the Kingdom in anticipation of its entry into the World Trade Organization (WTO) have put more pressure on family companies to compete. One of the strategic options that family business may turn to is going public. While there are clear benefits for taking a family business public, some may argue against it. By going public, the family business will improve its financial condition and obtain funds that do not have to be repaid. Also, injection of new funds into the company can be used in part to finance acquisitions in other companies. Company stock in the form of stock options can be offered to employees as a meaningful form of incentive compensation. The public market for the company’s shares provides an irrefutable valuation of the company on a daily basis.
Furthermore, company shareholders benefit from holding shares that are subject to certain restrictions, freely marketable and usable as collateral for loans. Shares that are publicly traded generally command higher prices than shares that are not. Shareholders are able to diversify their investment portfolios due to the increased marketability of their shares.
From the management side in publicly held companies, senior management is generally compensated at a higher level than management in private companies. Also, management personnel upgrade their experience and employability by virtue of having served in responsible executive positions in a publicly held company.
On the other hand, some believe that there are negative aspects to the going public option. When a company goes public, management loses some of its freedom to act in certain matters without board approval and without approval of a majority of shareholders. Shareholders tend to judge management in terms of profits, dividends and stock prices. This can cause management to emphasize short-term strategies rather than long-term goals. When a company becomes publicly held, the forthcoming new regulator for such activity in Saudi Arabia requires it to reveal sensitive information on an ongoing basis, including business strategies, financial results and executive salaries and compensation arrangements as the company is required to have its financial statements audited on a regular basis. From the point of view of cost, by going public, the company will have continuing costs for periodic reports and proxy statements filed with regulatory agencies and distributed to the shareholders. Also, a substantial portion of management time must be dedicated to initial and ongoing reporting requirements of regulatory agencies rather than to management of company operations.
Furthermore, management’s marketability of shares is partially constrained by prohibitions on insider trading, prohibitions on short sales and classification of their shares as restricted securities. Control of the company, as well as management positions, can be taken away from existing management if a dissident investor or group of investors obtains majority control.
There are at least 45 family businesses among the Top 100 Saudi companies. Their 2003 turnover exceeded SR140 billion. They employ some 200,000 people. The majority are in diversified businesses. About 25 percent of the companies are managed by the third generation, about 50 percent by the second generation with 25 percent still managed by the founders.
To demonstrate the very surprisingly limited number of Saudi family business which went public, compared to other Arab countries, there are only four — Al Rajhi, Fitaihi, Al-Zamil and Jarir. NCB is expected to be listed this year with the Public Investment Fund divesting its majority stake in the bank. There are not many success stories to tell about the Saudi family experience going public.
Looking at the experiences and performances of most family business in the Arab world which have gone public — the majority are in Egypt — there are lessons to be learned. Going public is not for everyone. It is crucial for the management to pay attention and to listen to shareholders and, most importantly, management should be very transparent. Transparency is a key success factor in the long term. Many active players in the Saudi stock market can single out only two of the listed family companies that showed sustainable growth and “up to expectations” transparent management with profitable track record and performance. Family business is the driving force behind a free economy. As most family businesses struggle for survival after the third generation, taking the family business public (through an IPO) could be a permanent option to save and expand many family businesses in Saudi Arabia.
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(Basil M. Ghalayini is CEO of BMG Financial Advisers.)
