DealLawyers.com Blog

Investors in portfolio companies that are attractive IPO candidates often pursue a “dual track” exit strategy that involves preparing for initial public offering while also soliciting potential buyers for the company.  Done properly, this dual track process can help investors maximize the valuation of their investment by allowing them to choose the path that looks most attractive as conditions evolve.

If you’re working with a company that’s thinking about a dual track exit strategy, be sure to check out this Cooley blog, which discusses some of the things that companies and their advisors should consider before going down this path. This excerpt discusses how to determine which track is most likely to result in the highest valuation:

The valuation of a business by public markets versus a financial or strategic buyer can vary significantly. IPOs are affected by stock market sentiment, volatility and comparisons (whether valid or not) with the recent trading performance of peers. When equity markets are strong, the IPO track can act as a “stalking horse” in eliciting M&A buyers. Valuation in an M&A process, on the other hand, is often driven by considerations such as realizing synergies, pursuing short- versus long-term business plans, obtaining critical assets (often intellectual property), and benchmarking off of industry consolidation trends and recent comparable transactions.

The factors that shape the ultimate choice include:

• Valuation dynamics: Does the M&A market fairly value long-term potential? Is an acquirer offering a premium that reflects its strategic rationale?
• Execution risk: Are there concerns around market conditions or investor appetite? Is an M&A transaction actually actionable?
• Strategic vision: Does the company prefer independence or believe it can achieve greater impact as part of a larger organization?

 

What makes a dual-track truly effective is leverage. The question is whether a credible IPO story can be maintained in parallel to creating heat in the auction and how speed through diligence, deal terms and consideration can be leveraged in the most effective manner.

Something to remember: Testing the waters remains essential. With a private sale, it will never be possible to know with certainty how the stock market would have valued a business for comparison. However, pre-IPO companies can and should take the opportunity to assess market receptivity by taking advantage of confidential meetings with investors – dubbed “testing-the-waters” meetings in the US – that carefully comply with applicable regulations. These meetings provide valuable intelligence about where public market investors are likely to price your company and thereby indirectly inform how aggressively you should be pushing M&A buyers on valuation.

Other considerations addressed by the blog include the need for stakeholder buy-in, the company’s viability as an IPO candidate, whether investors desire a complete exit, the time frames involved in a dual track process, and the ability of the team to execute two processes at once.

– John Jenkins