National Company KazMunayGas (NC KMG) is expected to launch an IPO in 2020. Will this IPO be a success? To answer this question, we first need to agree on how to define success. In doing so it is important to take time and consider a broader range of issues beyond the financial metrics of the shares placement.

A potential listing and offering of NC KMG shares on the stock market has been under consideration for a few years. Officially, no formal IPO decision has been made yet. Nevertheless, the readiness of NC KMG for the IPO was discussed at a meeting of the president of Kazakhstan Kasym-Zhomart Tokayev and Alik Aidarbayev, the CEO of the National Company in May 2019. This is one indication that the IPO in 2020 can be viewed as a so-called base case scenario.

The potential IPO of NC KMG would be an extremely important event for Kazakhstan. Firstly, KMG is the largest asset in the governmental privatization program. NC KMG group is estimated to generate about 5% of the country’s GDP. Furthermore, the group is responsible for a large share of export revenues and tax receipts while being a large employer as well as a buyer of goods and services for many Kazakh companies.

Secondly, NC KMG represents the strategic resources sector which plays a crucial role in the Kazakh economy. For this reason, IPOs and any other developments that improve transparency and accountability in this sector boost the attractiveness of the broader economy.

Thirdly, given its size and position in the strategic oil sector NC KMG shares are destined to become a “blue chip” of the local stock market, contributing to its development and thereby attracting investors to all sectors of the Kazakh economy, in particular via the recently created AIFC financial hub.

Besides, as the first large privatization deal after the 2019 presidential elections, NC KMG IPO would become one of the indicators of confidence of international financial markets in the Kazakh political system, its ability to maintain stability, predictability and market friendliness in the process of so-called transit of power.

Given such importance of the upcoming public offering, the NC KMG team will undoubtedly do its best so that the IPO can be confidently called a success. The more important is then to consider what should be viewed as a successful IPO.

Evaluation of IPO results can be done in different ways leading to starkly different conclusions. Take the IPO of the Brazilian national oil company, Petrobras, in September 2010 as an example. The deal amounted to a record $70 billion which translated into the entire company valuation of $200 billion, the fourth biggest in the world at the time. Shares of various types were placed domestically and on the New York stock exchange, the most prestigious and demanding stock market in the world. Furthermore, investors accepted high valuation per barrel of reserves of the Brazilian company. Petrobras confidently took its place among global oil and gas leaders. Why not an example of a successful IPO, it would seem?

However, looking at this transaction from the point of view of its participant, a long-term investor who bought Petrobras shares in New York in 2010 at the placement price of $34.5 per share (for example, instead of investing in ExxonMobil trading on the same exchange at about $60 per share), the picture may be completely different. At IPO the investor made a bet that assuming fairly high oil prices hold on, the massive subsalt oil reserves of Petrobras would be efficiently developed through an ambitious capital investment program, financed by IPO proceeds among other sources, and this would lead to share price appreciation.

Fast-forward a few years. In April 2015 Petrobras issues, with a delay, financial statements for the year 2014. These statements reflect the assessment of the damage caused to the company by corrupt activity of managers and contractors in the process of implementing that impressive capex program investors were betting on. Corresponding losses are valued at about $17 bn. By this time Petrobras has been in the center of an international investigation called “Carwash”, the one that uncovered cases of inflating contract prices for bribes and led to charges against over 30 executives at Petrobras and its contractors. Add to that lower oil prices, reduction in capital investment, suspension of dividend payments, sales of oil and oil products at reduced prices on the local market (as demanded by the government), and you get the outcome for our investor: shares trading at $5-7, five times lower than at the IPO 4.5 years before. For comparison, ExxonMobil shares went up from $60 to $80 per share during the same time.

In this example, we see two sides of the same IPO. On the one hand, a professionally conducted share placement for a record amount at a good price on a leading stock exchange. On the other hand, an investor with an 80% loss and a company with a seriously damaged reputation. Should this IPO be regarded as a success or a failure?

Going back to the planned IPO of NC KMG, one suggestion is not to rush with evaluating its results.

There is no reason to doubt that such company as NC KMG is capable of going through a standard procedure of listing its shares on international exchanges. Specific financial parameters of the shares placement would depend on a variety of factors that would range from the IPO team efforts to external conditions such as oil price dynamics, stock market conditions at the moment of placement, news flow, competitors’ activities. If the placement does go ahead than surely on terms that NC KMG management advised by experienced bankers will regard as attractive.

In sum, if the IPO of NC KMG happens in 2020, there is every reason to believe it will be called a success. And this success should not be underestimated, as it would represent the result of significant efforts in preparing the company for the listing. IPO in like launching a new ship, the result of huge work and a good reason to celebrate. However, what really matters for a ship is how it will be able to conduct its missions, under various sea conditions.

For the key company stakeholders including employees, the state, suppliers and contractors, the population of the regions where the company operates, what matters most is not the IPO transaction as such, but the public company that emerges as its result. Will this company be financially stable? Will it behave predictably? Will it be transparent? Shall it deliver on the promises made to the shareholders? Will it provide work for its suppliers and ensure fair competition? Will it be fair in distributing profits? Will it behave responsibly in terms of safety and environment?

In other words, a successful IPO is not the same thing as a good public company

The main assessment of the successfulness of the NC KMG IPO can be done only over time taking into account the extent to which expectations of new shareholders, as well as all other stakeholders, have been met.

An important condition for such long-term success is harmonization of interests of different stakeholders of the company. This is a difficult task because in addition to balancing their interests between themselves the existing pre-IPO stakeholders need to collectively give up part of their claims on the company’s results to accommodate the interests of new minority shareholders.

For example, minority shareholders expect that free cash would be distributed as dividends while management and employees would prefer to keep extra funds on the company’s accounts. Minority investors would normally prefer to avoid unprofitable investments made at the request of the government for social purposes while beneficiaries of such investments and contractors responsible for implementing them would welcome such spending.

If at the IPO preparation stage the issue of compatibility of stakeholders’ interests is not addressed, this may lead to negative consequences for the company later on. In the Petrobras example, the government-mandated sale of oil products on the domestic market at subsidized prices, not anticipated at the time of the IPO, was one of the factors causing significant loss of shareholder value.

A similar issue was successfully addressed in the IPO of KazmunaiGas Exploration Production, an NC KMG subsidiary, in 2006. Prior to the listing KMG EP and its parent company signed an agreement for delivery of certain volumes of produced oil to the domestic market at regulated low prices. Although such sales were unprofitable compared to free-market trading, investors had no problem with this arrangement because it was known before the IPO, priced in during the placement and did not prevent healthy share price performance after the public offering.

So, if meeting stakeholders’ expectations is the goal of a successful public company then this company needs, before the IPO, to develop a clear understanding of what these expectations are and how to resolve contradictions between them. Maybe, to achieve the harmonization of stakeholders’ interests, the level of state control over the company should be reduced or shareholder returns (and IPO valuation) should be partly sacrificed in favor of social responsibilities, or hiring practices should be revised. The key is to work out a single set of “the rules of the game”, accepted by all parties so that the company could be free to move forward implementing its IPO story.

If such a set of rules, acceptable to all, cannot be found, then the idea of an IPO should be questioned. What if the status quo is not so bad after all? However, if a single understanding of the company’s obligations can be developed and shared by all stakeholders, the management will have a chance to build a long term success story of such a scale that the specific parameters of the IPO will go down as details of limited significance.