Are MENA family businesses ready for listing?
A stock market launch, or initial public offering (IPO), is the first sale of stocks by a company to the public, the famous recent example of course Facebook, the highest IPO in history. Krishnaswany Venkatesh looks at how the GCCs individual or family businesses can perform a successful listing and become a publicly traded enterprise.
The majority of first timers in the public market fail because they focus on the destination rather than the journey. Family businesses wanting to list their shares in a stock exchange continue to carry a lot of apprehension.Questions often revolve around control (business and the board) and share price. But the question they need to ask is why do we need to list or go public? Must they establish the need or succession? First and second-generation family businesses in the region see the need driven by succession planning. Most family businesses think that taking their business public automatically cushions it from failing as it passes on to the next generation. If this were to be true, it probably is the easiest way to do in order to protect businesses from disintegrating through generations.Medium to large family businesses in the region have interests in everything from watches, sun glasses, electronics, cars, diamonds, cleaning and maintenance services, electrical, mechanical, manpower supply to manufacturing (cement, readymix etcetera) apart from real estate holdings that is unrelated to business activities. Company borrowings have personal guarantees of shareholders, business assets are in personal names, and personal assets in books of the business, and the list seems endless.Individual BusinessesLook at where individual businesses within the group stand in terms of size, growth prospects, maturity, need for capital, technical expertise or updated technology, management pool, systems and integration. Unless one understands the current state, it will be impossible to shape the future with certainty.Unfortunately most businesses look at a listing as a regulatory compliance matter. In most cases the first questions asked are: What is the requirement? Is it two year profits? Three year balance sheets? QR100 million capital? 100 shareholders? Whatever the case, the journey comprises a number of steps, most importantly a full commitment from existing shareholders, and the family who need to live with the decision of going public.People Issues
Let us deal with the most important people issues. People in this context include the board, senior and middle management, and remaining employees. In the case of family businesses, people will also include immediate family members who have an indirect interest and therefore participation in the business. While businesses looking at the people issue typically appoint a reputed consultant and assume he or she will solve the problem, people and culture are factors that need to come from within an organisation. In this instance, for example consultants will help draft appropriate guidelines for the board, management, and role of family members, and family governance.
However, unless there is commitment from all stakeholders to implement those guidelines, one will not have a successful business model that will sustain in the long term. Research has shown that this is most often the single reason for failure in any transition from privately held business to a public company.
This is one of the reasons, most businesses make a two staged transition stage one is introducing certain private third party investors into the business and the board prior to opening up to the larger public. This process helps the business, and more importantly the family shareholders and non-shareholder family members to achieve emotional detachment from the day-to-day operations of the business, thereby achieving separation between the board and management. Once this separation and comfort is sufficiently achieved, then a wider public shareholding can be achieved with more ease.
Valuation and IPO Pricing
How does one define a successful listing? Are the shares being regularly traded? Is the movement in share price steady and healthy or is it volatile? Are shareholders making money or is the IPO aggressively priced?
This leads us to a single most important question in any initial public offering valuation. Sellers expect the maximum price, often forgetting that the buyer also needs to make money. A buyer will pay only what the business will make in the future rather than its glorious past a truth conveniently forgotten by sellers. Another important factor is an IPO price is confused with the value or notional price of the assets the business holds (most often real estate) rather than what profits or yields those assets generate for shareholders liquidation value versus concern value.
There are however a number of ways to make this attractive for the incoming investor without existing shareholders giving away their jewel: separate personal assets from business assets, put in place appropriate financing/leasing structures for some of the assets to improve financial efficiency of the business, plan for and target an appropriate leverage in the business. The most forgotten and sometimes very effective tool to improve pricing is to be open and transparent. Investors price uncertainty and risk, both of which can be minimised by full and transparent disclosure after all, an investor putting his money in the business has every right to know where that money will be going.
Not many businesses in this region take communication with its shareholders seriously. There is hardly a regular update to investors, rarely analyst coverage of the business, no revenue or profit guidance. In most cases the only interaction with shareholders/investors is at the Annual General Meeting (AGM). The power of regular and transparent communication with the market is under estimated. Regular communication not only generates active interest in the stock that enables a healthy trading volume, but also helps check volatility in the price. This also helps the stock move away from a dividend driven stock to one that gives healthy capital gains as well. The board and management have a key role to play in this aspect, and should be encouraged by the regulators. The state owned listed entities can clearly take the lead here.