Saudi Arabia's IPO Fail? : The Indicator from Planet Money After years of teasing, deliberating and negotiating, oil behemoth Saudi Aramco finally looks poised to go public. But the IPO is shaping up to be a lot more modest than the original plan.

Saudi Arabia's IPO Fail?

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Saudi Arabia's state-owned oil company Saudi Aramco is legendary. The company owns and runs Saudi Arabia's oilfields. Aramco is also known to be an incredibly secretive company. It bankrolls the Saudi royal family and its thousands of princes. Aramco makes up most of Saudi Arabia's entire economy. So when Aramco announced that it was going to go public and start selling shares of stock, people went crazy. Exchanges all over the world were duking it out for the IPO. The New York Stock Exchange, exchanges in London, China, Japan - everyone wanted to be the exchange that was selling Aramco stock. Banks were also fighting it out for a piece of the action. There was just so much money at stake. Rumors put the company's value at $2 trillion, which would make it the biggest company in the world - wealthier than Apple, Exxon, even Alibaba.

And this was set to be the biggest IPO ever. But going public means the public owns a chunk of your company, usually around 20%. And that comes with a bunch of regulations and transparency. You have to open your books and subject yourself to all kinds of scrutiny. Saudi Aramco really didn't want to do that, and it spent more than a year jumping from exchange to exchange, trying to find someone who would bend the rules enough. That proved to be difficult. And, in fact, last week, Saudi Arabia announced that the search was over. It was just going to sell the shares of Aramco itself on its own local Saudi exchange, which seems like such a downshift from the initial, like, mega ambitions of the Aramco IPO. This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith. Today on the show, the Aramco IPO - what happens? And what does it mean for Saudi Arabia?


VANEK SMITH: Today on the show, we're talking with Samantha Gross. She's a fellow in foreign policy at the Brookings Institution.

Samantha, thank you for talking with us.

SAMANTHA GROSS: My pleasure; happy to talk to you.

VANEK SMITH: Do you remember when you first heard that the Saudi government was going to start selling shares of Aramco stock?

GROSS: Absolutely. I saw the interview that Mohammed bin Salman did with The Economist. My first thought was literally, does your daddy know that you're talking about this? - because this is really selling Saudi's family jewels. And I was shocked that they would go so far as to consider this.

VANEK SMITH: Well, I remember the thing that I was so captivated by was - so in an initial public offering, companies have to open their books. They're subject to all of these reviews. The idea is your company's now owned by the public. You can raise a lot of money, but the other side of that is you're subject to all these regulations. And everybody gets to see under the curtain, like, everybody gets to see all the things. And so I was all excited at the prospect of all this information coming out about Aramco. But it seems like from the very first time I heard about it and expected sort of a normal IPO, things changed a little.

GROSS: Well, it's been a real tradeoff. The reason why Mohammed bin Salman wanted to do this is because he wanted to sell 5% of Aramco, take it public in order to get money for his vision 2030 plan to revolutionize the Saudi economy and to make it less dependent on oil. And so that was a serious goal that he intended to bring in serious money for. However, the tradeoff is this transparency that there's never been around Saudi Aramco. This is a difficult thing for them to think about. The rewards are great, but also the risks and the challenges of that level of transparency are also great.

VANEK SMITH: I mean, you know, there is a real upside to an IPO - to going public, which is you raise a ton of money. There is a real downside, which is you are exposed as a company in a lot of ways. And it's, like - it's almost like they didn't want the downside, including what you just mentioned, which is that they wanted to put 5% of the company public, which is, like, a really tiny amount. Normally, it's much higher than that.

GROSS: But selling 5% of the world's largest company is still a ton of money.


GROSS: But then it doesn't mean 5% transparency. In order to sell 5% of the company, you need to do just as much transparency if you would if you were putting the whole thing up for an IPO. And so I think they wanted sort of some transparency, but it doesn't work that way. You need complete transparency to publicly offer any of the company.

VANEK SMITH: Right. So in the very beginning, I mean, this was going to be the prettiest girl at the dance, for lack of a better metaphor. And so it did seem like one by one, the major exchanges kind of backed away. And then Saudi Arabia was talking to some kind of more obscure exchanges.

GROSS: Well - and I think part of that was because the Saudis didn't want to meet some of the requirements that those exchanges had that they really couldn't bend. I mean, those requirements are there to protect investors. And so then the Saudis sort of backed away and started looking at different exchanges, at - looking at private placements with institutional investors and different ways to sort of float part of the company and get money back without this full level of transparency that was a lot for them.

VANEK SMITH: Yeah. This was supposed to be the IPO of, you know, the century. And then it...

GROSS: Absolutely.

VANEK SMITH: ...Just seems like it became sort of progressively ratcheted down to, like, more and more modest goals.

GROSS: Well, yeah. And I think it ultimately fell apart just last weekend, actually, because they had a herd of bankers. I'm not sure what you call a herd of bankers.

VANEK SMITH: (Laughter).

GROSS: But they had a number of bankers (laughter).

VANEK SMITH: Like a murder of crows or something (laughter).

GROSS: Exactly, a flock of seagulls - a herd of bankers who were there advising them on the IPO. And these bankers came in and said, if you place this publicly in western countries, this is what we think it's worth. And they came up with numbers as low as 1.1 trillion and some up to 1.5 trillion, but they weren't what the kingdom was looking for. And so the kingdom was very frustrated and felt like, well, you know, why should we sell this company to western investors for less than we think it's worth? Why don't we place it locally on the Tadawul, the Saudi exchange, and sell it to local investors? And maybe we can get more money for it.

VANEK SMITH: But even the local bankers wouldn't put a $2 trillion valuation on Aramco, right?

GROSS: No, they did not. They settled at about a 1.6- to $1.7 trillion valuation.

VANEK SMITH: Why wouldn't they just say yes to two trillion? Like, that seems - I was shocked to read about that pushback.

GROSS: You know, they didn't feel like they could place it at that level. And it's an interesting - when you think about what Saudi Aramco is worth, you have to look at a couple of different things. The oil is involved in sort political skirmishes in that part of the world. We saw what Iran did recently in attacking the facilities there. They demonstrated that those facilities are vulnerable, and that is important to the valuation of Saudi Aramco. Oh, yeah, there's no question that they can make money and no question that their oil will continue to be valuable going forward. But the question is what price they'll get for that oil. If we take climate change seriously, if we see the demand for oil go down, that oil's likely to sell at a lower price. So they, clearly, have a proven track record of making money. And they have a lot of inexpensive oil. But the question is, how long can they make as much money as they have in the past?

VANEK SMITH: And so now it seems like Aramco is in this weird position of going public for a lot less money than it wanted locally on the Saudi exchange and, apparently, kind of twisting people's arms to promise to buy the stock.

GROSS: They want to make sure that this public offering is fully subscribed. I've also heard tell of some pressure on sort of very wealthy people within the kingdom to buy stock; some of the same people that the kingdom rounded up a couple years ago and put them in the Ritz Carlton for a little while as a shakedown.

VANEK SMITH: Oh, right, like Ritz prison.

GROSS: Exactly.

VANEK SMITH: I remember this.

GROSS: Not nearly the kind of shakedown that that was, but I think some of them are being gently encouraged to buy Aramco stock.

VANEK SMITH: Which is crazy because $1.7 trillion still makes Saudi Aramco the most valuable company in the world. It is the most valuable company in the world.

GROSS: But the - I mean, this is the Saudi family jewels. And if you think about the pride and joy of your country, the thing - the engine that makes your country move and you have a thought in your head about what that is worth, it's very difficult to sell it for less.

VANEK SMITH: All right, Samantha, thank you, thank you.

GROSS: No problem.

VANEK SMITH: Today's episode of THE INDICATOR was produced by Jared Marcelle, fact-checked by Nadia Lewis. Our editor is Paddy Hirsch. And THE INDICATOR is a production of NPR.


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