Initial public offerings in Saudi Arabia : motivations, barriers and effects

Abstract

This research has taken the form of a field study to gather empirical evidence capable of providing an overview of current initial public offerings OPOs) in Saudi Arabia. The main thrusts of this thesis are: to identify empirically the motivations for going public in Saudi Arabia; to find the barriers to going public in the Kingdom; to investigate the effects of IPOs on the performance of companies; to investigate the relationship between an increase in the number of IPOs and economic performance; to find which kind of companies are more likely to go public in the country, and to identify some suggestions which could increase the number of IPOs in Saudi Arabia. To answer the research questions, the researcher undertook three studies. Firstly, data was collected through a case study of a single company that had made an IPO in the Kingdom. Financial ratio analysis was employed to capture the changes in the financial Statements before and after the IFO, and two in-depth interviews were conducted with the company's CEO and financial manager to discuss the financial changes and other IDPO issues. Secondly, more data was gathered through a comprehensive questionnaire. The sample studied in the questionnaire was taken from the top management of the 500 largest companies in Saudi Arabia. A total of 145 companies from 7 different business sectors in Saudi Arabia participated in the study. This represented a response rate in excess of 29%. Thirdly, extra data was obtained from personal interviews with three well-experienced and educated businessmen who have taken their companies public. The results obtained from the single case study, the questionnaire, and the interviews showed firstly, that companies in Saudi Arabia are motivated to go public in order to use the money raised for more expansion and growth, to be more competitive, and to separate the company's life from that of the previous owners. Secondly, with regard to the most important barriers to going public in the Kingdom, the study finds that private fin-ns are reluctant to go public because of the failure of many joint stock companies listed on the Saudi Stock Market to generate profit; because of the possible loss of control; and because of the lengthy procedure for going public. Thirdly, this research also discovers that whereas most of the questionnaire survey participants believed that IPO performance would decline after the transition, and also confmned by the results from the case study, the interviewees thought that performance would improve after the IPO. Fourthly, with regard to the effect of IPOs on economic conditions, there is a great consensus between the questionnaire participants and all the interviewees on that an increased number of IPOs in Saudi Arabia would have a favourable, effect on economic welfare. An increase in joint stock companies in the Kingdom would improve several economic factors, such as the growth rate, foreign investment, the balance of trade, and the unemployment rate. Fifthly, this research also finds that while most of the questionnaire survey respondents thought that companies owned by more than one investor and large companies (in terms of size) are more likely to go public, most of the interviewees believed that companies working in industrial sector are more probably to seek public equity. Sixthly, this research finds that the rate of going public in Saudi Arabia could be improved if the government creates a complete financial system, prepares clear guidelines that explained the procedures for going public, and eases the procedures for IPOs. The rate of going public in Saudi Arabia also could be improved if the decision makers in private firms separate management from ownership and hire professional personnel to lead the companies. In conclusion, the study suggests that since going public would add many advantages to firms, like strengthening financial position, increasing public trust, and attracting well qualified personal, the flotation decision could solve some of the problems that the Saudi private sector has, such as severe competition, poor management, constraints of finance, and generation shift (lock of family succession and control). Nevertheless, the study also confirms that IPOs would create new problems, especially that of more restrictions on private transactions.