2017/02/20

A Boutique Investment Bank’s Aramco IPO Grand Slam

oil-drillingVeteran dealmaker Kenneth D. Moelis has pulled off a coup that his colleagues on Wall Street should well envy: a coveted role as an independent adviser to Saudi Aramco as it prepares for the world’s largest IPO that could value the sovereign oil company at $2 trillion. Indeed, the potential windfall from the offering has “kicked off a scramble among banks for a role in a deal that could generate $1 billion in fees and help define success or failure on Wall Street for years to come,” noted The Wall Street Journal.
Moelis & Co. is expected to advise Aramco on the choice of underwriters, choosing exchanges in which to list its shares and the execution of the offering, among other tasks. JPMorgan and Michael Klein, a former Citi investment banker with his own firm, have already been selected to advise Saudi Arabia. Other banks including Goldman Sachs and HSBC have been asked to pitch for an advisory role as well, according to Bloomberg News. Aramco plans to sell a 5% equity stake and raise around $100 billion.
So how did Moelis & Co., a boutique investment bank, beat back some of the titans of Wall Street to get the advisory role? Moelis’ interview with Knowledge@Wharton some years ago provides some clues to the firm’s strengths. (He declined to comment for this article.) “We are trying to go back to what I call old-fashioned relationship investment banking,” he said. To him, that means adopting “a very hands-on, very relationship-based, long-term partnership concept with these companies that we’re advising.”
Moelis said that kind of relationship used to be prevalent on Wall Street, but “seems to not exist in the market today.” As investment banks get ever bigger, their workforce can easily number in the hundreds of thousands across the globe. As such, clients seeking that personal touch can be left wanting. “Investment banking was always an industry where you were the CEO’s partner in his or her strategic plan and what they really wanted to accomplish. [They want] a confidant,” he said. “It’s hard to maintain that culture in organizations that grow to the size of 25,000, 50,000, 100,000.”
Moelis continued, “I tell our people, you do great work, you become partners. Every meeting you have put yourself in the shoes of the person across the table, whether it’s a board of directors or a CEO. Don’t think about what Moelis & Co. needs. … We’re well-capitalized, we are a partnership, we have no bad debts on our books, we don’t have to feed a distribution machine. All we have to do is be excellent advisers and trusted [by them].” He explained that if his firm provided that kind of close relationship that’s “unobtainable anywhere else” it becomes an “irreplaceable relationship. It’s a valuable relationship, and over time they will find ways to make our company successful.”
“The investment banker who wins is the one who cares the most.”–Ken Moelis
For example, Moelis said, his firm would assign a 20-year veteran to serve the client and nurture a customer-centric relationship instead of always seeking to land the next sale. “They’re not selling cash management or foreign exchange or commodities or convertible bonds on a Friday, and on Monday they come in with the next product du jour, but are actually trying to think through the problems that are important to the person on the other side of the table at that moment.”
Investment bankers who truly care about their clients will win the day, according to Moelis. “Our clients can tell right away who you care about when you walk into the room,” he said. “Do you care about them? Do you care about you? Are you worried about your job? Are you worried about your bonus or are you worried about the future of the company you are about to advise? I’ve always said that the investment banker who wins is the one who cares the most. … Do you actually care about the outcome? Are you up at two in the morning wondering about the details?”
Moelis noted in his interview that investment bankers “get a bad rap. I think they really do want to give good advice, they want to be free to be [a purely customer-centric] partner. [But because they work] in large companies with budgeting and annual bonus cycles, 360 [degree] review processes, and the constant pressure to sell another product to their clients, it becomes a very difficult thing to do.”
Since its founding in 2007, Moelis & Co. has been involved in many major deals including the $26.5 billion sale of Hilton Hotels Corp. to The Blackstone Group that same year; Microsoft’s unsolicited $44.6 billion bid for Yahoo in 2008; Anheuser-Busch’s sale to InBev for $61.2 billion also in 2008; AMR Corp. (American Airlines) Chapter 11 reorganization ($29.6 billion) and merger with U.S. Airways Group for $17 billion in 2013; Omnicom’s merger with Publicis Groupe for $35.1 billion in 2013; Dell’s acquisition of EMC Corp. for $67 billion in 2015; and Oracle’s acquisition of NetSuite for $9.3 billion in 2016, among others.
As for Saudi Aramco, it helps that Moelis has an experienced team of advisers based in the Middle East, making its name in the region through involvement in such agreements as being the exclusive financial adviser to the Dubai government on the $24.9 billion debt restructuring of conglomerate Dubai World and $23.7 billion restructuring of its Nakheel real estate subsidiary in 2011. Moelis also worked on the UAE-based The Abraaj Group’s sale of a 49% stake in Network International in 2015.
Moelis & Co. reported record 2016 revenues of $613 million, up nearly 18% since 2014 when it went public. Its shares recently hit a new 52-week high. The company has a market cap of $2.2 billion. Moelis has 17 offices worldwide and 650 employees, of whom 450 are investment bankers. Its managing directors have on average 20 years of experience each.
Diversification of the Saudi Economy
But Aramco is more than a bean-feast for bankers. As the national Saudi oil company, it is “integral to the social fabric of Saudi Arabia and the survival of the ruling Al Saud dynasty, providing up to nine-tenths of government revenues,” writes The Economist. The IPO is part of a strategy by deputy crown prince Mohammad bin Salman Al Saud to diversify the country’s revenue base from petroleum.
“We’re going into a post-hydrocarbon economy, and the risks of oil dependence are going up and up.”–Marshall Meyer
“Our vision is our determination to become a global investment powerhouse,” according Saudi Arabia’s Vision 2030, which is a blueprint for the structure of its economy in the future. “We will transform Aramco from an oil producing company into a global industrial conglomerate.” The need for diversification is especially acute as oil prices remain in a slump in the face of U.S. shale oil and growing shift to alternative energy sources.
As such, Saudi Arabia is taking the right approach to reduce its dependence on oil revenues. “We’re going into a post-hydrocarbon economy, and the risks of oil dependence are going up and up,” says Marshall Meyer, Wharton emeritus professor of management. “It’s good insurance against the decline of the hydrocarbon economy.” He notes that long-haul heavy transportation has been steadily switching its fuel from diesel to liquefied natural gas, and that many harmful petroleum-based products face bans on their usage. “The Saudis are anticipating this and they are looking to diversify their economy.”
But it remains unclear how exactly Saudi Arabia plans to become a diversified economy in short order after decades as an oil producer. “Are they going to compete with Samsung in electronics? With Apple in design of electronics to be produced elsewhere? With China as a manufacturer? With the U.S. as a producer of software? Or are they going to become a trading powerhouse and compete with Berkshire Hathaway?” asks Eric Clemons, Wharton professor of operations, information and decisions. “I don’t yet see the transition to industrial conglomerate or to an investment powerhouse.”
However, those pathways do exist, according to a 2015 McKinsey Global Institute report titled “Saudi Arabia Beyond Oil: The Investment and Productivity Transformation.” The report said, “A productivity-led economic transformation could enable Saudi Arabia to double its GDP and create as many as six million new jobs by 2030.” But Saudi Arabia must invest $4 trillion in the following sectors: mining and metals, petrochemicals, manufacturing, retail and wholesale trade, tourism and hospitality, healthcare, finance and construction.
“Are they going to compete with Samsung in electronics? With Apple in design of electronics to be produced elsewhere? With China as a manufacturer?”–Eric Clemons
In mining alone, the country has enormous potential. The crown prince told Bloomberg News in 2016 that Saudi Arabia has 6% of the world’s uranium reserves, and as such, it is “another oil that we have not exploited.” The nation also only uses 3% to 5% of its mining resources such as gold, silver and phosphate.
The Dawn of a New Order
A bigger issue for Saudi Aramco is that it has to get used to increased transparency since it is becoming a publicly held company. The crown prince indicated this would be a welcome change. “People in the past were unpleased with the fact that Aramco’s files and data are undeclared, unclear, and non-transparent,” he said in an interview with Al Arabiya. But the IPO would make all that transparent “and it will be under the supervision of all the Saudi banks, analysts, and thinkers,” he added. “All the international banks and the studying and planning centers in the world will supervise Aramco intensively.”
The crown prince also emphasized that although he is the chairman of the Public Investment Fund, the owner of Aramco, its board of directors will take the final call on how to run the fund. “I cannot take a decision unless it complies with the governance.”
Still, transparency might only go so far. It is likely to structure its IPO in way that it keeps the size of its oil reserves hidden, says Wharton finance professor Erik Gilje, who teaches energy finance, and co-authored a recent paper on investment strategies of public and private firms in the natural gas industry.
“There is a concern that if there is ever civil strife or some sort of governmental change, expropriation could be on the table.”–Erik Gilje
“They’re going to be [disclosing] either upstream assets where the reserves are well-known, or downstream or midstream assets as opposed to giving a clear visibility into what their actual reserves are,” Gilje adds. “That is a secret that apparently only a handful of top people at Saudi Aramco and the Saudi government know.” The purpose of that secrecy “is to not show their hand to the world oil markets, and I don’t think this listing is going to force them to disclose any of that secret information.”
One cause for concern is that minority shareholders owning 5% of Saudi Aramco “can be a much different situation than owning 5% of any other company,” says Gilje. “Depending on where the assets are of the entity that will be publicly traded, there is a concern that if there is ever civil strife or some sort of governmental change, expropriation could be on the table in a way that people may not imagine right now.”
Gilje notes that the oil industry has a history of expropriation. Aramco stands for Arab American Oil Company and it used to be owned by four U.S. major oil companies before it was expropriated, he points out. Aramco’s original owners were Standard Oil of California (through a subsidiary), the Texas Company (later Texaco), Standard Oil Company (later Exxon), and Socony-Vacuum Oil Company (later Mobil). The Saudi government took over in stages between 1952 and 1980.
One model Aramco could follow is that of Temasek, the sovereign wealth fund of Singapore, Meyer says. It has been free from political interference and brought in robust gains. Since its founding in 1974, Temasek has posted compounded annual returns of 15%, and its net investment portfolio was worth Singapore $242 billion (US$170 billion) as of March 2016, nearly doubling over the past decade, according to the fund’s report.
Whatever the future may hold for Aramco, one thing is certain: the impending IPO and Moelis will play a vital role in shaping it.

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