Sales and Mergers Versus IPOs

A company facing a merger or a sale is often confronted with the dilemma of choosing between selling the company at an early stage or continuing the development efforts in order to take the company public. Within these considerations, the interests of the investors, who regard sales and IPOs as alternative exits, are also important.

IPOs

An IPO entails important advantages for young companies, such as the creation of a readily-available source of capital for the company; an efficient means of promoting awareness of its existence and products; credibility among potential partners, customers, and investors; liquidity for investors; the possibility for investors and entrepreneurs to continue holding the company's shares after the IPO (as opposed to a sale, in which normally the company is effectively eliminated); and maintaining their independence in management (see the section on the advantages of going public for a more detailed discussion on the subject).

On the other hand, in order to reach the stage of an IPO, there are several prerequisites such as having the status of a market leader (or reasonable prospects of becoming one), a broad line of products, and excellent and experienced management (see the section on whether the company is ready to go public for a further discussion on the subject). In addition, IPOs involve high costs and a long and exhausting process from the entrepreneurs' point of view. After the IPO, the company becomes the subject of close scrutiny by investors and analysts. This situation drives the management to focus on the company's short-term results and may divert it away from the company's long-term strategy. In addition, an IPO requires extensive and expensive preparations on the part of the company, including adjusting its control structure and accounting system. Therefore, a company limited by time and market constraints and requiring capital immediately may prefer other financing methods, including a sale.

Sales

A sale can entail many advantages to both the acquirer and the target. For a young company, a sale is an alternative to independent activity and an IPO. It is important to note that many companies are founded on a solid technological basis, but some lack experience in other keys to success factors such as marketing capabilities. Typically, in order to successfully penetrate new markets, it is beneficial to develop ties with leading companies which already operate in such markets, and merging with a larger company provides an efficient solution to such problems.

For many companies, the plunge of technology stocks from the second half of 2000 reduced the likelihood of using an IPO as an exit, relative to the likelihood of acquisitions of private companies by publicly held companies. This increase in the ratio between acquisitions and IPOs followed a sizzling period of capital raising and public listing of technology companies, using the money they raised and their shares to acquire other companies. However, as it was described in the previous chapter, the continued crisis in capital markets severely affected the M&A market as well.

In other words, there is a positive and direct correlation between the condition of the stock exchange and the number of acquisitions and mergers, and there are also certain substitutions between IPOs and acquisitions.

In many cases, it is the venture capital investors (who invested competitively in similar companies during prosperous times) who encourage mergers in times of crisis, when they join forces to reduce the chances of portfolio companies withering away. In addition, during these periods the reputation of the venture capital funds which invested in the company becomes increasingly important, since such reputable investors are sometimes the first to be contacted by potential acquirers and their network of contacts significantly increases the likelihood of an acquisition. However, since most transactions involve exchange of stock deals, such sales should not necessarily be deemed as an exit, because long lock-up periods in the case of an acquisition by a publicly traded company may postpone the actual exit or may keep the company's investors interested in the success of the acquirer.



From Concept to Wall Street(c) A Complete Guide to Entrepreneurship and Venture Capital
From Concept to Wall Street: A Complete Guide to Entrepreneurship and Venture Capital
ISBN: 0130348031
EAN: 2147483647
Year: 2005
Pages: 131

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