Two IPO stories dominated the financial media in recent weeks. Investors are falling over themselves to buy shares in Aramco, in what could be the largest IPO ever, although achieving that status will obviously depend on the final valuation.
Estimates range across not tens, but hundreds, of billions of dollars, which hinge in large part on their respective oil price forecasts and future supply/demand assumptions. Which ever way it turns out, the Aramco investment case is a straightforward one: it has vast reserves of one of the world’s most valuable commodities, climate change concerns notwithstanding.
It is more profitable and cash generative than any other company in the world, as well as one of the most professionally managed. And it has a simple business model: explore, drill, develop, produce, refine and sell.
An IPO implodes
Contrast that with WeWork, which so spectacularly aborted its planned multi-billion-dollar IPO in September, after its SEC filing revealed an opaque business model, a maverick and commercially agile (and conflicted) CEO, and a labyrinthine corporate structure. These, as well as a myriad of other risks, were enough to spook investors and the deal cratered.
At least the disclosure requirements of the New York Stock Exchange smoked out these gremlins early, so that the house of cards built by Adam Neumann collapsed before too many investors suffered.
Policing excesses
Financial scandals are very often personality driven. Think Robert Maxwell, Asil Nadir, Bernie Madhoff, to name but a few. They managed to evade the clutches of regulatory frameworks that were considered at the time to be best in class.
Closer to home, Dubai’s Financial Services Authority has correctly identified the need for better communications between a regulator and the market it serves in the wake of the Abraaj scandal, as well as between companies and their investors, as a means of building confidence in the system. It was also right to identify more aggressive financial policing and the promotion of financial literacy as measures that could better protect investors.
Abraaj highlighted the extent to which organisations of any kind seeking outside investment must be transparent, not just one that is seeking a stock market listing. This ought to be obvious: how can you invest in a company if you do not know everything about it? Certainly, when a document offering shares for sale to new investors is prepared, it should always be subjected to a high degree of verification by lawyers as part of the legal due diligence and regulatory process.
Laxness
The more stringent the exercise, the more confidence the investor has and the more informed their investment decision; and from the offeror’s perspective, the less open it will be to future accusations of fraud or misrepresentation. WeWork demonstrated this in spades.
To pick up on the DFSA’s comments around the need for better communication, it is generally recognised in the communications industry that the same principle applies: if you do not know all the facts, you cannot give the best advice to promote an investment case, manage a reputation or provide a coherent explanation for something that has happened. That said, it would be naive to apply the rule of full disclosure to every company or individual in every situation, if the objective is to protect or enhance their reputation or investment case.
Although it ticks the transparency box, simply giving out all the information about a company is clearly not, in itself, good communications. Good communications revolves around what is and what is not disclosed, how it is packaged, the facts that are given the most emphasis and priority, whether information needs to be simplified and if so how, the context in which the story is placed and the means by which it is transmitted.
For one thing, it would be quite legitimate for a company to refrain from disclosing information because its publication would give its competition an unnecessary advantage. Investors in a company would not thank it for volunteering information that would benefit its competitors at its own expense, unless there was a legal or regulatory obligation to do so.
There will also be cases where a company giving too much information can simply confuse and erode confidence in its ability to make itself understood. As Paul Weller’s Changing Man says, “The more I see, the more I know, the more I know, the less I understand.”
Ultimately, it comes down to trust. Companies need to have sufficient trust in their advisers’ discretion; while advisers need to trust their clients to provide them with all the facts to be able to give the best advice.
Truly strategic advisers will be at their most effective not only when they have all the tools at their disposal to give a good story maximum impact and credibility. But also when they are able to anticipate the implications of a damaging piece of information coming out, rather than being taken by surprise.
Archie Berens is Managing Director at Hanover M.E.
