The scaling back of Saudi Aramco’s initial public offering — despite nearly every major investment bank being involved — raises awkward questions about the effectiveness of mammoth syndicates of advisers and IPO book-runners. More appears to be less.
Almost all of the big Wall Street and European investment banks are on the roster for the sale of shares in the world’s most profitable company. Alongside them were no less than three so-called “special advisers,” M Klein & Co., Lazard Frères SAS and Moelis & Co. Usually, that job would be to prevent the book-runners (who underwrite the offering) from setting a price that’s an easy sell but less than ideal for the vendor. They probably had a more general role here. Either way, with three firms in this category, it’s a wonder there wasn’t another layer of advisers on top.
The syndicate’s job was largely to sell the Aramco shares to big institutional funds in the West. Now, with Saudi Arabia focusing on a local sale, their work is pretty much redundant.
It’s hard to see how having so many banks on a deal is the optimal structure for generating frank, persuasive, timely advice — which is what this situation needed. It’s also questionable whether having this number of lenders helped in that failed effort to sell Aramco’s stock to a wider audience.
First, the advice. The notion that Aramco is worth $2 trillion has dogged the situation from the start despite early concerns among equity analysts that the valuation was aggressive relative to the listed oil sector. There were no incentives for advisers to reset that unrealistic figure early in the process. In fact, the dynamics would have reinforced it.
Every bank scrambled to get on the deal, mindful of the risk that proffering a conservative valuation might close the door. Moreover, the hit to their credibility would be shared across a wide group of peers if the number wasn’t delivered. Such a dilution of accountability makes it unlikely that anyone will deliver a singular, unpopular message to the client.
Finally, the huge distribution network for the shares looked excessive too, even if the advisers and book-runners had succeeded in getting a price range agreed that was acceptable to international investors.
Having myriad banks on such a deal contributes human capital. But it’s less clear that it adds much in terms of selling the shares given that there’s probably huge overlap between the banks’ investment fund clients. For a deal of this size, the answer may not have been more of the same, but rather adding alternative structures beyond the equity market: For example, a bond with generous coupons that would be repaid in Aramco stock 10 years hence.
Of course, a more focused group of banks for Aramco’s offering would still have run up against an irreconcilable difference between what international investors were willing to pay and what Crown Prince Mohammed bin Salman would accept. But at least that realization would have happened sooner.
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