Last week, question marks over the Al Gosaibi and Saad businesses were causing ripples way beyond Saudi Arabia.
Gulf business dynasties must learn to adapt
The al Gosaibi family has faced business disaster before. Michael Field, the author of the classic study of the great trading families of the region, The Merchants, tells of how the family, from humble origins in the poverty-stricken village of Gassab, north of Riyadh, had risen to prominence in Saudi Arabia and Bahrain by 1930 through tax collection, sheep and camel farming and, most importantly, the pearling industry.
The al Gosaibis made money not just from the global trade in Gulf pearls, then much in demand by the ostentatious classes from Shanghai to New York, but also from financing the pearl diving business. Loans to boat captains had brought the family a steady stream of revenue, as well as influence at the court of Ibn Saud, the founder of the Kingdom of Saudi Arabia. In modern business parlance, it was a diversification into financial services from a core commercial activity.
The disaster that overtook them in 1930 was not just the onset of the Great Depression, but the invention by the Japanese of cultured pearls. Virtually overnight, the market in real pearls was destroyed, in a wave of collapses that spread throughout the Gulf and affected all the communities that had made their living through pearling, including many in Abu Dhabi and Dubai. The analogy with the present day plight of the al Gosaibis is not complete. This year there is no equivalent of the Japanese to blame for the family's troubles.
But at the heart of their current problems is the same diversification into financial services. The problem for Al Gosaibi, as it is also for the Saad Group, the other Saudi conglomerate facing hard times, is a financial one caused by an over-ambitious expansion into banking, bond issuance and foreign investment. Last week, question marks over the Al Gosaibi and Saad businesses were causing ripples way beyond Saudi Arabia.
Assets of the Saad group were frozen by central bank authorities in Saudi. International creditors began a fire sale of Saad assets including equity stakes in overseas companies, notably the UK home builder Berkeley and the investment group 3i. Doubt remains on the status of the 3 per cent stake held by Saad in HSBC, with no clarification coming from the international bank. But an imminent sale of the holding looks likely.
Other banks have been told they can offset assets against liabilities of the Saad group; in effect, they can call in outstanding loans in a foreclosure process. In a new twist, last week Al Gosaibi said it had discovered evidence of "financial irregularities" in its financial services arm. Al Gosaibi and Saad are vaguely connected through marriage. Though there is no firm corporate connection between the two groups, there was at least enough linkage in the mind of financial authorities to class them together.
Both have promised to keep creditors informed in a series of letters and meetings this week, and it is to be hoped this will signal the beginning of a process of communication from the troubled Saudi firms. The international investment community has not been well served with information since the problems arose two weeks ago, and continuing silence will only prompt more fire sales and closure of credit lines. The ratings agencies Moody's and Standard & Poor's withdrew their ratings of the Saad Group.
In a perverse way, if "financial irregularities" are discovered at the heart of Al Gosaibi it will be a cause for a certain amount of relief. If a "rogue trader" of some kind is found to have been the cause of problems, it will help remove doubts about the business model of these big family-owned trading conglomerates, which are crucial to business life across the Gulf, not least in the UAE, where privately held family businesses such as these factor significantly in commerce.
There is no suggestion any of these companies are experiencing the kinds of difficulties witnessed in Saudi Arabia, but the news from there should be a timely reminder to all that sound accounting standards and modern governance procedures are crucial. Some of the big UAE groups have advanced plans to come to market via initial public offerings (IPOs), and if the current benign market conditions persist this could happen as early as the coming autumn.
The process will in any case demand higher standards of transparency from the family-owned firms. As listed companies they will have access to capital and financial leverage on the international stage. It will be a further step in their inevitable evolution towards becoming modern global trading conglomerates. After the collapse of the pearling business, it took the al Gosaibis another three decades to re-establish themselves in the Saudi business establishment, and then it was through involvement in the energy-services industry, international trading and import of consumer goods to the oil-fuelled Saudi economy.
But those years in the wilderness should serve as a reminder to the other Gulf merchant families that they must adapt to the modern business world. firstname.lastname@example.org