In yesterday’s Wall Street Journal Telis Demos and Corrie Driebusch presented a solid case for the downtick in IPOs – companies prefer to go the M&A route, especially in volatile financial markets.
We concur but actually the M&A route is only part of the story. It’s important to think about why companies want to go public in the first place. Reasons may include liquidity for shareholders and employees, capital for growth, currency for acquisitions and probably ego, all are part of the IPO equation. As M&A bankers we discuss the viability of an IPO with a lot of businesses and it’s surprising that a Founder or CEO’s desire simply to run a public company can really drive the decision. But as the data shows, companies opt more and more to stay private, either by doing a private financing (which can be a liquidity event, a capital raising event or both) or by selling the company (basically a private transaction liquidity event).
This theme is interwoven with my two posts on the increasing number of M&A deals being won by private equity players over strategics. PE players’ ability to remain patient and not be beholden to “short term-ism” helps them win, and for the same reason, companies may be less amped to go public.
Many of the current cast of unicorns have done private financings that look a lot like an IPO. Mutual funds driving public markets and private equity players alike have invested in firms such as Uber, Airbnb, Snapchat, WeWork, Pinterest, Dropbox, Theranos and Zenefits. Many of these so called “mega-rounds,” where venture backed financings of $100 million go to late stage companies, typically bring in outside expertise (such as in international expansion or cybersecurity) in addition to the funds for IPO-proceeds like activities. While some investors, notably Fidelity, have had to write down the valuation of some of these investments, many of these mega-rounds carry plenty of downside protection.
Also, trading in private shares has become more prevalent – see Nasdaq’s acquisition of SecondMarket in late October.
It’s also expensive operating as a public company. The SEC has estimated that “the average cost of achieving initial regulatory compliance for an initial public offering is $2.5 million, followed by an ongoing compliance cost, once public, of $1.5 million per year.”
In sum, there are many reasons to skip the IPO track. M&A is a good one, but not the only one.
— Jason Panzer
