If we consider this from an outsider’s point of view, when looking to float a company on one of the worldwide stock markets the likes of New York and London are the main contenders. It seems fairly straightforward, investors want large growing companies, growing companies need finance and what better way to crystallise the value of a company than floating on the stock market? However, it is not quite as straightforward as it seems!
Saudi Arabia and Saudi Aramco
The Saudi Arabian authorities are looking to float the state energy company Saudi Aramco on the stock market with a 5% free float. This effectively means that only 5% of the company’s shares will be available to investors although this will be one of the largest ever IPOs and 5% will be an awful lot of money. It is believed that different factions favour New York and London as the stock market of choice but recently the situation seems to have been impacted by potential legal issues.
We all know that the US has a litigious culture with a variety of class actions and legal threats commonplace amongst shareholders. The advisers to Saudi Aramco have clearly stated their preference will be London because of the potential legal issues in New York. Recent new US terrorism legislation could open the door to victims of the 9/11 terror attacks suing Saudi Arabia. Then there is the issue of abiding by US rules on making public the reserves and trading data surrounding oil companies.
We all know that the US has an extremely aggressive shareholder lobby sector and many believe that the introduction of a state-controlled Saudi Arabian company would have them salivating at the mouth.
Is London the best choice?
The idea that London is somehow more welcoming of companies such as Saudi Aramco and any baggage they may bring is a little misleading. There are extremely strict regulations regarding listing requirements and indeed the need to float at least 25% of a company shares to gain access to the likes of the FTSE 100 has been in place for some time. As the Saudi Arabian authorities are only looking to float around 5% of Saudi Aramco this could cause a potential issue. So, on one hand you have potential legal issues in the US while on the other the UK authorities demand a minimum 25% float to be listed on the likes of the FTSE 100.
Let’s make it clear, the issue of just 5% of a company shares does not stop a company from listing on the London stock market but it will block access to the likes of the FTSE 100 index which for many large companies is vital.
Which way will Saudi Arabia fall?
It will be interesting to see how the Saudi authorities address this issue of floating in New York or London, or will they look elsewhere? It is unlikely they will look elsewhere because these two markets are world leaders and any other reputable stock markets will have the same or similar regulations. We wait with interest for details of the company’s valuation, where it will be floated and the final decision on how many shares will be sold. There is talk of the London regulators offering some kind of exemption to Saudi Aramco with regards to the 25% float issue and allowing the company to become part of the FTSE 100. Is this really the way forward?