Getting Ready to Float

Anytime a company lists itself on a stock exchange, it’s a big deal. Now, for a company to do so, they have to be open to a lot of scrutiny in a literal sense by “opening” their books to regulators so that they can be allowed to sell shares on an exchange. Of course, not all businesses list themselves in the stock market and some are part of the over-the-counter market that you need to go to an unlisted shares dealer to buy and trade. But, today we will just be focussing on the exchanges made on the stock market.

Every exchange is its own thing (important to remember), and that’s why you’ll hear about the FTSE100 or NYSE all the time, but never something like Euronext, which is a European based exchange.

Companies that are looking to get ready to float have to navigate a lot of hurdles to get there, with the end goal being that once listed on an exchange their value/share is at a level which puts it vastly beyond its value beforehand.

So how do financial companies get big and stay big?

Ever wonder why companies grow, or even how they manage to stay so big when money is always moving?

Major financial institutions from your high street bank all the way to the big guns like Citigroup and JPMorgan Chase are pretty hard to move or break. There are ways in which these big companies stay big, and it mostly has to do with how they invest.

Even though you can buy shares za in any financial company, that company can still invest privately or even limit how much of the company they want to go private. Yes, companies can in some cases only offer a percentage of their business to go on an exchange.

It is extremely difficult to pull off only offering up a portion, and there’s a recent example of this kind of move going belly up at the last minute, in the case of Saudi Aramco.

Who is Saudi Aramco?

Unless you’ve been living under a rock (which they haven’t checked for oil) Aramco is a Saudi Arabian oil company that is estimated to be one of the wealthiest companies in the world. In 2018 their revenue was $355.9 billion. With them being an oil company, and oil being something that won’t be there forever, one way to get more revenue quickly is to go public.

The company wanted to make a significant impact by going on the NYSE, but they had one major obstacle; regulation. In order to be deemed eligible, you have to show all your financial records. Seems easy enough, but when a company is tight-lipped and private, they don’t want people knowing how much they make.

(Side note: Netflix is an excellent example of a private company that everyone uses but keeps all data steeped in mystery).

Aramco said they wanted to be valued at $2 trillion if they wish to be on a stock exchange, and because exchanges make money from selling shares back and forward, obviously everyone would clamour to get them there, right?

Well, with the lack of transparency, it made it incredibly hard for corporate finance specialists to be able to look at the numbers and tell investors that Aramco was worth investing in. This then leads to a wary situation where exchanges feel tetchy putting a company on which won’t divulge information, and a company not getting the desired value it wants.

Why is the valuation important?

Going back to privacy, Aramco only wanted to sell 1.5% of the company on an exchange. It’s a tiny percentage of the company, but if it were valued the way they wanted, then the little piece of the pie would still be around $25 billion on an exchange. To put that into perspective, at the time of writing, Twitter is sitting around $23 billion.

Having a reasonable valuation makes your investment worthy from the get-go and makes the float easy, so everything worked out as planned, right?

Staying at home

After all the back and forth Aramco had with trying to get listed on a major exchange, they ended up on TADAWUL, the local Saudi exchange. They were able to float with less scrutiny and could keep more financials secret.

This piece is being written just a day after Saudi Aramco had its first day of trading on the exchange. After that, their market value is sitting it $1.9trillion, close to the $2trillion target they couldn’t get in the west.

If it remains steady is yet to be seen, but as a crash course example in how not to get a company to float, it’s extremely valuable.