Saudi family businesses sink under debt
Parmalat, Saad Group and Al Gosaibi have one thing in common: they are private companies that grew big and then faced serious problems with creditors through one mishap or another. Italy's Parmalat was founded by Calisto Tanzi as a milk conglomerate based in Milan. Mr Tanzi aspired to make Parmalat the Coca-Cola of the milk world. He introduced long-life milk products and the famous Tetrapak carton for dairy products.
Saad, owned by the al Sanei family, grew from a local Saudi real estate company to a multinational diversified group in finance and international investments, while Al Gosaibi diversified from its core beverage and trading business into finance and construction. These family companies have similar characteristics: success goes to their head and, as with many other businessmen who play around with borrowed money, they are not held accountable if the company is doing well.
Suddenly they are in the limelight for all the wrong reasons. A common factor is the lack of transparency in their operations. Where was the problem then for these household names and the lessons for others in the Gulf? Parmalat, with debts of ?13 billion (Dh66.65bn), was Europe's worst business crash, while to date little public information has been released as to the size of the losses faced by Gulf banks to Saad and Al Gosaibi.
How could this happen? Parmalat's insatiable appetite for credit and loans for its expansion made it a valued client of numerous banks that did everything possible to get it as a customer, but did very little in really determining what the true picture of this giant company was. The same can be said of the two Saudi groups and others in the spotlight in the Gulf, as bankers who had asked too few questions are suddenly ruing the day for not asking enough.
Banks once again have learned that for a company to be "very big" does not necessarily mean "very profitable". For listed companies, investors must learn to use their voting shareholder power and start to question companies that seem to be selling them ever-brighter stories about the company's performance. But it takes investor education and critical analysis of balance sheets and market information to do that. The problem becomes more complicated when the troubled institutions are closed family companies, the beloved model of Gulf business, but which is now being seriously reconsidered by both governments and family groups if they wish to survive.
With the news of the Al Gosaibi and Saad problems, transparency has become a hot topic. Not a day passes by in Saudi Arabia without someone mentioning it, as though by repeating it incessantly we are all suddenly taken to the land of financial and business transparency that leads us to everlasting happiness. Can this ever be achieved in the cut-throat world of business, and what are the bare minimum benchmarks that one can live with?
The demand for more transparency from businesses is a legitimate one. Investors are taking the risk by placing their money into corporations in the hope they will get it back, plus a bit more. At the minimum, they expect to be told all material events concerning the company's performance which might lead to adverse effects. The issue of transparency is where to draw the line in material reporting. Should this be confined to the financial assets, liabilities and cash flows of the company, as seems to be the case in the Gulf, or should it include information of a deeper and personal nature about the management and board?
Is the health of the chairman a material issue or a private one? Are the inter-family alliances, bloodlines and affiliations of concern to outsiders, or should they not be revealed? This seems to have been the major factor between the Al Gosaibi and Al Sanei families, where marriage played a key factor in who obtained what credit facilities backed by cross-family guarantees. If the answers are that the business definitely depends on the state of health of the chairman, as he is the driving force of the corporation, or that new contracts can be obtained only through the use of inter-family alliances, then transparency deems that these material facts are disclosed. If transactions are done on arm's length and transparent bidding system, then such information need not be disclosed.
In the Gulf, businesses are still dominated by family firms. Some have listed part of their company on the local stock markets, especially in the boom days of ever rising share prices, when not too many questions were asked and transparency, or the lack of it, was of little concern on Gulf investors' minds. At the least, what is expected now are material facts on new projects, signing of significant new banking facilities or capital issues, board and management changes, loan-loss reserves, market share positioning, and non-sensitive new product developments.
Given the significant economic and social implications of family businesses failures, the issue is no longer one of maintaining a quixotic way of doing business in the Gulf, but safeguarding the health of key economic sectors. Gulf governments can either advise Gulf family businesses to adapt and go public, or insist on more open and transparent book keeping. Not doing anything is no longer an option.
Dr Mohamed A Ramady is a former banker and visiting associate professor, finance and economics at King Fahd University of Petroleum and Minerals, Dhahran.