Saudi Aramco, one of the most profitable and largest companies in the world, has shown interest in selling a stake of their business to the public markets. They produce 12.5% of the crude oil supply of the world according to their “Intention to Float” release. With an operating cash flow of $121 Billion in 2018, it has become a very attractive IPO to analyze in 2019 that no investor should miss out on.

However, there has been a growing trend in the public equity markets since the early ’90s, which is the de-equitization of market value. De-equitization is the process where less equity is available due to the decrease of IPOs (where an inflow of equity streams into the public markets) in combination with the rise of private equity and mergers and acquisitions (where there exists an outflow of equity from the public markets) as private equity either buys companies and makes them privately held or two companies merge into one, which results in a decrease in total companies listed in a given market.

Since there are fewer companies to choose from to invest in as an investor, we tend to invest our money into the same companies. When this happens, a surplus of demand enters a given stock resulting in an increase in the value of the stock.

As Saudi Aramco is likely to go public now, many investors need liquidity to participate in their IPO. Most investors have their liquidity in stocks and other assets and not in cash. Therefore, they will need to sell stock in order to buy Saudi Aramco shares. From previous events, such as the “DotCom bubble” we see that the markets go down as people start selling shares and start investing in other opportunistic projects. This is exactly what happened during the “DotCom bubble”, where many companies went public to raise funding and investors wanted to participate in the new hype that was being created. Of course, this did not end very well.

The big question is; will Saudi Aramco cause investors to sell stocks across different markets to participate in their IPO?

Well, this would be very unlikely, but it shouldn’t go unnoticed. The operating cash flow is almost twice as large as the operating cash flow from Apple. Imagine if two different companies went public very soon that are the size of Apple. Many investors will rethink their portfolio strategy and might decide to invest in the fresh new company that just went public. We have not seen an IPO this large as most companies go public to raise funds when they are relatively small and need capital to grow. Saudi Aramco is prepared to share a dividend totaling $22.9 billion, which is roughly ten McDonald’s companies to put that into perspective, on a yearly basis. Furthermore, it is quite complicated for the average retail investor to even participate in the IPO as you need to meet many predefined qualifications and other requirements, reducing the overall impact of the public equity markets. In addition to that it will only be listed on the Saudi Stock Exchange - Tadawul.


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