Sale or IPO? Some Companies Take the Dual Route

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By Michael Greene

Nov. 10 — More companies may be pursuing U.S. initial public offerings (IPOs) while simultaneously shopping themselves out for an acquisition, due in part to a sluggish IPO market.

A review by Bloomberg BNA identified at least 14 out of 52 companies (27 percent) that withdrew their U.S. IPO registration statements in 2016 after which they were partially or totally acquired within six months of the withdrawal. This compares to 11 out of 79 companies (14 percent) in 2015. Overall, nearly one-fifth of companies that withdrew their U.S. IPO registration statements since January 2015 have announced a sale within six months of the withdrawal.

The data suggests that more companies may be pursuing a dual-track process than in the recent past, attorneys told Bloomberg BNA. The dual-track process is more attractive when companies need to raise cash during volatile or flagging markets. It also can provide more flexibility and leverage to negotiate deals and may result in better sale prices.

An IPO filing can create a “sense of urgency that it’s now or never” for potential buyers to make a bid, Cathy Birkeland, a Chicago-based partner at Latham & Watkins LLP, told Bloomberg BNA. The credibility of the IPO is key to a successful dual-track process, said Birkeland, who is global co-chair of her firm’s capital markets practice. “If potential buyers don’t think a potential IPO is a realistic option then there isn’t that tension.”

PE or Venture Firm Backing

Use of the dual-track process has become increasingly popular, particularly for private equity and venture capital-backed companies, Birkeland said. Eight of the 14 companies that were sold in 2016 after withdrawing their IPOs were either venture capital or private equity-backed, according to Bloomberg BNA’s review.

Birkeland said she expects more companies will utilize the dual-track process. “It’s definitely a trend that has proven to be very effective.”

While Donald Trump’s successful presidential bid Nov. 8 may have injected more uncertainty into the calculation, it is unlikely to impact whether companies decide to pursue the strategy. “If, by chance, the IPO market heats up as a result of the election, then more firms may stay in and complete the IPO instead of withdrawing and selling,” Jim Brau, a finance professor at Brigham Young University, told Bloomberg BNA in an e-mail. “At this point, it’s hard to tell.”

Brau, who writes extensively about IPOs, published a study with other academics in 2010 showing that dual-track sellers earn 22 to 26 percent higher premiums compared to sellers pursuing only a buyout.

Volatile Market Conditions

Rates of filings for U.S. IPOs have been decreasing since the unprecedented highs of 2014. The volume of funds raised through U.S. IPOs in the first three quarters of 2016--$17 billion—is still the lowest in the last five years. At the same time, certain events have sparked market volatility this year, including decreasing oil prices and China’s devaluation of the yuan.

Increased volatility may cause more companies to consider running a simultaneous sale process, because the window for achieving a successful IPO can close overnight under such market conditions, Birkeland said.

In addition, the IPO process is taking longer than it used to because the market hasn’t been as robust as in years past, Joseph Theis Jr., a Boston-based partner in Goodwin Procter LLP’s technology companies and capital markets practices, told Bloomberg BNA.

Some companies may have started their going-public process when prospects for a public listing were realistic, but changes in market conditions could have caused the company to go down an alternative path, Theis said.

Volatility in the IPO market could also be leading more companies to forego an IPO, said Stephen F. Arcano, practice leader in Skadden, Arps, Slate, Meagher & Flom LLP’s New York M&A group. However, the IPO market isn’t homogenous, and in certain industries companies may ultimately find that an IPO is a better option for them, he said.

According to Bloomberg Law data, the pharmaceutical industry has been the most active in IPOs for the last four years, with the biotechnology industry in second place. Information technology companies—once a strong sector for IPOs—have shied from the market in recent years. Of the companies that became publicly traded in the U.S. through the first three quarters of 2016, only 20 are tech companies. These issuers raised a total of $2.5 billion, compared to the $4.2 billion that tech companies raised in the first three quarters of 2015.

Taxing on Management

For companies that are positioned to access both the IPO and M&A markets, the dual-track route may provide some efficiencies, since both processes normally require significant efforts in corporate housekeeping. However, attorneys warned that the decision to jump into the dual-track process shouldn’t be taken lightly given that it can be very time and resource intensive.

Before deciding to pursue the strategy, companies must consider how much of a distraction it will be for management, Arcano said. Companies may want to avoid having a dual-track process eat up management’s time when something else is going on that requires significant attention.

“At the end of the day, it is difficult for management to pursue both options with the same amount of intensity at the same time,” Theis said. “Management only has so much time to prep for a ‘road show’ or go meet with potential acquirers.”

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

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