Why the IPO advocate should be resisted by Middle Eastern families - Campden Family Business, April 30, 2009, Web Exclusive
Walid S Chiniara, Co-Founder and Principal at The Family Business Advisory Group LLC, Dubai, UAE (walid@walidchiniara.com).
For many years I have been peacefully, yet passionately, advocating the need to institutionalize and introduce family governance systems for the benefit of the family business community in the GCC region, writes Walid S Chiniara.
The purpose is to address certain challenging issues and to offer solutions based upon an understanding of family dynamics, society and legal and business frameworks in this part of the world, where family companies control over 90% of business. However, it seems I have a new nemesis - the Initial Public Offering (IPO) advocate.
Over the years I have met my fair share of “consultants” claiming to be interested in family business, only to reveal themselves later as corporate governance policy salespeople. This has been tolerable as I do not actually disapprove of corporate governance or corporate restructuring type policies – I just do not try to sell them as the ultimate solution for an ailing family business. However, the IPO advocate requires a far sterner approach.
I have always agreed that a closer look at the corporate framework of the family business is healthy and most likely should form part of the overall advice given to a family business in transition. Where I tend to annoy the salesperson, however, is when I produce examples of why this, on its own, is never going to be effective. Equal attention must be given to the family. And yes, by “the family” I refer to the human beings; not the soulless corporate entities that these phony consultants would rather focus on.
Granted, the forming of an LLC or PJSC (Private Joint Stock Company) to replace highly exposed sole proprietorships is definitely a sensible course, not to mention far more enduring. A PJSC, however, cannot stand up in the middle of the room and start mediating a 12-year-old conflict between father and son.
So, whereas I am well aware of the relevance that a solid knowledge of corporate governance and restructuring has to family business advice, I am utterly bewildered as to the link that the latter has with the IPO craze.
It has become the fashion that every time an “analyst” speaks about the stock market he must add a statement to the effect that it is waiting for families in business “to get their acts together” so that they can register for an IPO.
As if egged on by these analysts, we then start to hear the “revolutionary” news from regulators that family businesses will be able to list only a small percentage of their shares to retain “control”.
Apparently, family businesses should have absolutely no reservations remaining about making this great leap into IPO.
Does anybody really believe that the majority of family businesses would be better off as publicly-listed companies? Even in the US, where the IPO phenomenon has reached unprecedented heights, IPOs remain the exception (less than 10% of companies are actually listed.) I am yet to receive a satisfactory answer as to why an IPO is suddenly being so overly publicized as an attractive strategy for the family business in the GCC region. Let’s look at the so-called advantages.
Capital raising: The overwhelming expense of starting and completing the IPO process should be enough to raise doubts. The fact that, some exchanges do not allow for a system of valuation by investment banks (left instead to the ministry to perform the valuation) does not do much to improve this negative. If anything, it adds another weakness to the process for those companies looking to list. Even if it were a positive, the transaction fees, the prospectus writing and the “circus” that the business will have to perform to try and attract investors can reach well into the millions depending on the size of the IPO.
Those businesses listing on regional exchanges also have extremely high issuance fees to pay to the underwriter who will already have cost them money by valuing shares at a discounted price in order to ensure that they are snapped up. Factor in the amount of less costly, less risky capital raising options that are available (e.g. private equity, private borrowing and government funding) and the IPO idea seems all the more ludicrous.
Prestige: Some consider the IPO promotion to be a play to the vanity of family businesses who seek greater press coverage and attention. Again, this troubles me. The perceived prestige of the IPO will soon be replaced with the stress of the process – I have seen families fall out over writing the prospectus. They then have to deal with the stigma of having failed to reach that first day of trading.
Moreover, any prestige gained from listing will be short lived when the market takes over and the family business has to succumb to the whim of the market “analysts” or speculators. Family businesses may enjoy being on the cover of a newspaper, but they usually do not enjoy the other side of that coin which is everyone and anyone (including their competitors) having access to all of their financial data and annual reports.
Having been used to decades of privacy, they become subject to speculation and criticism from anyone who feels like it. Operations then start to be compromised as the key decision makers spend more time selling the company, and addressing analysts’ expectations, than actually running it.
The UAE in particular is not yet at a level of advanced investor education. According to a recent study, 69% of the investment community believes that more investor information is required in the local market.
I have worked with many clients who have a variety of concerns. There is always, however, one consistent objective: the preservation of their legacy for the benefit of their children. In this part of the world the family name is part of the legacy and has an instant value attached to it. This should be protected at all costs and should not be frivolously traded for vanity’s sake.
Increased transparency: An IPO is a rather backward solution to encouraging family businesses to become more transparent. Family businesses in the region are just getting used to the idea of corporate governance. For the families that I work with, the development of family governance structures and the separation of family from business is a huge commitment and a very long process. Whereas we always seek to implement best practice policies, the transition process has to factor in a degree of flexibility in order to ensure that these policies are actually realized. A sudden obligation to comply with the various regulatory regimes imposed by stock exchanges is an unnecessary over complication.
Crucially, family businesses in this region are facing unprecedented challenges. We are witnessing a new renaissance in the GCC and the MENA region across many levels; social, geo-political, legal and cultural.
Moreover, 70% of business-owning families are facing a transfer of wealth from one generation to another for the first time in their history.
These challenges are cumbersome enough for families to resolve, even with the help of certified and experienced family business advisors. It is definitely not the right time for them to be hit upon with strategies that, at best, do not address their immediate needs and, at worst, could lead to the death of their legacies.
I implore non-family business experts who insist on attempting to lure families into the IPO world to reconsider. I also urge families with an IPO dilemma to rethink the motives of those advising them. An IPO does not resolve family conflicts and does not fix broken communication among family members. In fact, it has just the opposite effect. It tends to exacerbate conflicts and reinforce the barriers between parents and children and between siblings and cousins in second generation companies and beyond.
If you find that you are still convinced that IPO is the only way to go then ask yourselves the following questions as a final check:
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Do you see this as a potential exit strategy?
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Are you happy for your shares to be listed at a discount of what they are worth to ensure sale?
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Are you prepared to spend millions on the pre-IPO process?
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Are your customers ready for a possible/probable change in management and management style brought in by outside (anonymous) shareholders and market analysts?
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Are you ready?
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Are your employees ready for rigorous compliance protocols?
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Do you think that privacy is over rated?
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Are you happy for everyone to know your earnings, profits and losses?
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Is an ability to make quick decisions unimportant to your business?
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Is your family system working in harmony with the business system?
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Do you have a family governance policy and consensus of such with every member of the family?
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Do you have a clear succession plan?
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Is this the only option available to you to grow your family business?
If the answer to any of the above questions is No then you most probably have your answer to the IPO dilemma.
Walid S Chiniara is speaking at Campden’s Middle East Families in Business Conference. This exclusive, closed door event takes place at the Sharq Village & Spa, Doha, on 11 & 12 May2009.