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FEATURE

it’s time to cash in

the old ways of running your family business got you here, but they wonõt work forever. your next step is to go public. the incentives?

by steve fennessy

capital for growth and more money for you. just be prepared to open your books.

is your son more interested in running up your mobile phone bill than running the family business? do you need an influx of capital for that next big expansion or to restructure your company’s debt load? are you worried what will become of the company that’s been in your family for generations after you retire?

then go public. since january 1997, when cairo precision indus-tries became the first private company to sell shares on the egyptian stock exchange, 14 other companies have followed suit, whether through public offerings in egypt or global depository receipts in london. for the price of giving up some control, as well as opening their ledgers to the eyes of the public, the scions of some of egypt’s most prestigious companies are tapping into a vast re-source of capital. by going public, companies are letting the market decide the value of their company, and thus become institutionalized entities ð players fit to compete on the global business stage.

oh, and you might just get rich.

but insiders aren’t the only ones to benefit. investors are also reacting enthusiastically to private sector issues. little surprise: an efg-hermes examination of 11 private sector companies between the time the first went public in january 1997 and july 1998 showed that they had outperformed their privatized competitors by 164 percentage points over the period. analysts caution that such comparisons aren’t altogether fair. for example, there are no banks among the private sector companies to go public, sparing the group the damaged caused by law 5, which closed a key loophole regarding treasuries and crippled banking shares and much of the broader market. "at a certain stage, they’ll be a major player, but not before a year," ahmed el-helw, managing director of intercapital securities, said of the newly listed private sector companies. but even in its infancy, investors are unquestionably welcoming the trend.

"investors are fed up with the quote, unquote "boring" privatization companies," said hassan heikal, efg-hermes’ executive director of investment banking. "people are willing to pay a premium for companies with higher growth. they see a company they like that’s managed well and are willing to pay a premium."

said angus blair, head of middle east & north africa for abn amro: "you’re adding on a second tier of companies that is helping to diversify investment."

if you do decide to do yourself and investors a favor, you won’t have to worry about going it alone. the buzz about successful offerings has spread quickly, and companies are seeking out consultants like finrate and investment banks like efg-hermes and commercial international investment co. once a few companies go down the public road, others follow. heikal said efg is managing the public offerings of seven private companies over the next eight months. "big companies," he said, with a total capitalization of between £e 1.5 billion and £e 2 billion. "it’s an indication of success," said dr. m.b. harvey-phillips, senior vice-president at finrate. "you’ve moved into the world of international corporations."

indeed, efg-hermes has taken its own advice. in late july, it raised $57 million by issuing 4.83 million gdrs on the london stock exchange. the offering was five times oversubscribed, evidence of investors’ confidence in the much-admired efg-hermes, which was formed when two of egypt’s leading investment banking houses merged in 1996. legal considerations prevented heikal from discussing the reasons behind the offering at the time he was interviewed, but persons familiar with the transaction said the company would use income from the sales of the new shares to expand its retail presence in cities outside of cairo, build a family of mutual funds and maintain its 4 percent stake in arab investment co. s.a.e., a private-equity investment company that efg-hermes manages and which it founded with arab bank ltd. of jordan, in the event arab investment goes ahead with a planned capital increase.

income from the sales of existing shares in efg-hermes about half the total went straight to their previous owners.

that’s the upside. but claiming it takes a bit of vision. giving outsiders a look into your company, to say nothing of giving them ownership stakes and a say in management, may seem like a huge step. but to analysts, going public is hardly revolutionary. instead, it is a normal and healthy step in a company’s evolution.

take egypt. many companies here began as family enterprises. but after years of growth, the most competitive have reached a critical stage in their development and passing through this stage requires them to jump to the next level.

"the darwinian process has sorted out the ones that can’t make it, while the ones who have survived have become quite substantial," harvey-phillips said. "the company becomes too big. you [now] need a management structure that is not innately there."

while that may sound like basic business sense, it can demand a wholesale attitude change in some private companies. what worked before may no longer be effective. for instance, the philosophy of an owner immersing himself in day-to-day operations might work when the company is small. but as the firm expands, the job becomes too demanding. different aspects of the operation inevitably atrophy from neglect. going public enables the company to bring in a new management structure, removing the manager from the workplace floor and freeing him for vital strategic planning.

but going public takes a lot more work than just putting up the for sale sign and waiting for investors to pour in. for one, finding a competent management team is no easy feat. "one of the bottlenecks in this process is the [inadequate] supply of people with necessary corporate skills," harvey-phillips said. the pool of available local talent is small, and salary packages aren’t sufficient to lure home many egyptian expatriates, who are now making western-sized salaries in their adopted homes. ("i suspect if they come back here, they’ll come back to retire," harvey-phillips said). as a result, companies tend to rely on headhunters to chase after the talent that’s here, often raiding multinationals for trained candidates who, besides possessing other qualifications, are fluent in english.

owners of family-run companies looking to go public also have to steel themselves for a heavy dose of invasive inquiries. one of the legacies of being a family-run company is that, because it sprung from a household, its finances are run like one. capital needs are filled by banks, and balance sheets are simplistic. going public means adhering to strict accounting practices. it also means being willing to release information that could prove of as much use to competitors as it is to investors. not every owner is prepared for this. in fact, blair said many listed companies don’t meet good reporting requirements. still, tolerance of transparency is a critical factor in the decision whether to go public.

"is the management ready to open itself to questions? is it ready to open up to supplying information?" blair said. "they have to be ready for that psychologically. they must be ready for people phoning up and asking questions."

while harvey-phillips acknowledged that private companies can balk initially at the prospect of opening up their books, he said it doesn’t take much persuasion to convince them otherwise. "not when you explain that high transparency can very quickly be translated into higher prices per share," he said. "the problem is getting it applied, just through sheer habit."

whether it’s for management expertise or for an influx of capital, going public means, inevitably, one thing: giving others a voice in decision-making. the idea of ceding control any control is not a fashionable one in many of the world’s business communities, including some in the middle east.

"it is a cultural thing, especially in the gulf," said khalid kanoo, group managing director of the bahrain-based kanoo group, as quoted in the july 31 issue of meed. "the first reaction you get from people is that how dare you sell something your father built for you. if you sell you are looked upon as a failure. people think you cannot manage your business."

but the investment community says little such prejudice exists in egypt. "if anything," said harvey-phillips, "they’re too eager to go down the road. there’s a lot of money to be made, a lot of status."

the problem isn’t that egyptian family-owned companies aren’t willing to go public, but that they typically don’t issue enough stock. tranches offered thus far have typically remained below 30 percent. in this way, the original owners maintain a controlling interest. the danger is that the shares that are offered will be gobbled up by mutual funds, leaving little or none to trade.

the counterpoint to the problem of too little liquidity is that companies outside the very top tier could find, especially now, that there’s not enough demand for their issues at the price they want. the first seven months of the year have been pretty unkind to the egyptian market. government missteps like the surprise announcement of law 5, the slowdown in privatization, and the turmoil in global emerging markets combined by press time to knock nearly a quarter of the value off the hermes financial index of most-actively traded stocks.

el-helw said the sluggish market, trading now at a price-to-earnings ratio of between eight and nine, is giving pause to owners who would have made a lot more money had they taken their companies public a year ago, when the p/e ratio was 12.

the reason, overly simplified, is basic mathematics. if your company earns £e 5 per share, a year ago you could have offered your shares at £e 60 and not been out of line with the market. today, you’d have to issue those same shares at £e 40 or £e 45 to avoid looking overpriced.

the role of consultants like finrate is to help companies seeking to go public get past these difficulties. they start by studying the company and evaluating its strengths and weaknesses. they identify positions that need to be filled and help negotiate fees for the investment banks that act as placement agents. they also help negotiate with placement agents when it comes time to price shares.

"the placement agent has his own interests," harvey-phillips said. "there is a temptation to under-price the issue." higher prices enrich clients, but lower prices draw heavier subscriptions, helping the placement agent court future clients. "one of our functions is to hold the hand of the company," he said.

despite the obstacles, the trend started by cairo precision indus-tries is unmistakable. with macroeconomic figures strong and the government committed to privatization, private companies have come to an epiphany.

"the realization is that they’re too large to be run in the old manner," harvey-phillips said. "if they’re smart enough to build a company up, they’re smart enough to know that."

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