More than half of all United Arab Emirates-based family businesses that begin preparing for a public float are turned off by the intense scrutiny and corporate structure of a listed company, advisors have told Arabian Business in a rare insight into the mindsets of family-run organisations.
As the market again becomes attractive for initial public offerings (IPOs) after years of little interest following the onset of the global financial crisis, scores of companies are re-engaging advisors to help them go public.
But the fear of family squabbles becoming public and patriarchs losing their overriding control of the company have seen majority abort their planned IPOs before the process is completed – and usually without it being publicly revealed – advisors at KPMG and Ernst & Young said.
“There’s a lot of aborted IPOs,” KPMG partner Abdul Wahab said.
“Some of them find corporatising and preparation for an IPO too onerous. Some of them find they want to do it … but when they do it they think ‘my gosh the scrutiny is too intense when I’m public’; they don’t want the scrutiny so they back off.
“And sometimes big families don’t talk to each other and they see the impact that has [when it becomes public].”
Wahab said more than half of the businesses that had sought KPMG’s advice in the past four years had decided the process of becoming a listed company was “too painful and they back off”.
“There’s a lot of devolving of decision making and that, often in family groups, is not something that is common,” he said. “Typically it’s the patriarch that makes all the decisions, and suddenly we’ve got to have a management committee.
“Once you’re listed you have remuneration committees and boards and corporate committees that review what you can announce, and all that process can be cumbersome.
“Sometimes [going public] is perceived as limiting growth, so stopping people from being able to do other stuff.
“Sometimes it’s seen as ‘I know my business better than anyone else, no one’s going to come and tell me how to run my business empire’.”
Cultural differences also came into play in some cases, particularly when local businessmen were forced to take on Western board members with conflicting views.
Wahab gave the example of a Middle Eastern businessman wanting to invest in Egypt now because “his gut feeling tells him to”.
“I know it’s the good thing to do and it feels good so we’re going to do it,” Wahab said explaining the mentality of a family businessman. “In a different context, where you have a proper board, they say ‘have you studied the market, have you studied the economic environment, have you done a consultant’s report, have you thought of x, y, z’ … and they suddenly think ‘if you do all that of course everybody’s going to think don’t go into Egypt now’, but some of the best money has been made by making bets like that.”
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Dubai markets have not had a major public listing since Drake & Scull International in 2008.
In December, Al Habtoor Group, owned by one of the wealthiest UAE families, postponed its planned US$1.6bn listing in March or September this year, in what would have been one of the largest IPOs in the UAE’s recent history.
In the lead up to the planned IPO, the company had for the first time publicly announced its earnings.
“It is a moral issue not taking the group public at this time,” chairman Khalaf Al Habtoor said at the time.
“I will continue to focus on best practice and growing the company in a sustainable way.”
Ernst & Young Middle East and North Africa Head of Transaction Advisory Services Phil Gandier said preparing for an IPO was a “transformational” event for many family businesses.
“I think family owners under-estimate what’s required in terms of change for an IPO,” Gandier said.
“[It’s like] if you have never exercised in your life and you think ‘I’m going to start exercising’ and I really promote the idea of running a marathon … then all of a sudden you have to start running 1-2 miles a night, you realise no way am I ready to run a marathon and put that on the back burner.
“They just don’t understand the amount of change that’s required, whether it’s cultural or changing the financial systems, the management talent, the government [or] the IT.”
Gandier said some families pulled out of IPOs as soon as they were told of the requirements, while others got cold feet when it came time to sign on the dotted line.
“Separating the family ownership from the business is one stage when they drop out,” Gandier said.
“You [often] find out that not everybody [in the family] is on the same page, so when they realise that there’s going to be some massive changes one of the family members was keen for that but not everybody was.”
Market conditions also weighed more heavily on families’ decisions to launch an IPO. Many were not listing specifically to seek capital but to purposely implement a corporate structure during generational change, to make it easier to enter new markets or to divest their own interests in the company.
Gandier said in those cases it made better financial sense for family businesses to pull out of an IPO if interest in their sector declined.
“If the pricing suddenly dropped there’s no burning point to sell at a low price,” he said.
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