Insights

Why Companies Should Consider an IPO Instead of M&A
POSTED 6.4.19 M&A

Most companies are built for acquisition, and they can either go M&A, which is the usual route, or go through an IPO. But M&A isn’t right for every company, and there are certain cases where a company should consider an IPO instead.

To set some context. There were 190 IPOs in 2018, compared to 11,208 M&A transactions. For many companies, an acquisition just makes for a cleaner exit.

The big-name IPOs get a lot of attention in the press. But generally, they’re not good for investors because the majority of growth for those unicorns is already done. And you can’t expect much return.

For example, rideshare app Lyft got big fanfare for its IPO, but its stock price soon dropped. And now investors are suing Lyft for allegedly making misleading statements ahead of the public offering that inflated the share price. Shares are down 4% over the last month.

If your company has particular capital needs for expansion, an IPO can be a good way to secure that money. This is particularly the case where private money is hard to come by.

Why would a smaller company reject an IPO? The owner/founder is concerned about giving up control; if they go public, they’ll have to answer to the board. Keep in mind that if the owner still holds a majority of the shares, the board acts as a sounding board and can give advice, but he or she can essentially do what they want.

Just think of Jeff Bezos and Mark Zuckerberg.

When you have a board, you may not be as autonomous as you want to be, but it’s good to have oversight. Look at Elon Musk and how his social media comments, public behavior, and business decisions have been causing trouble for his companies.

The idea of having a big personality like Musk out there isn’t always the best for a company. It might be good for startup getting to $2 to $3 million. But after that you need adults in the room. A good board can rein in a founder while still letting their creativity flourish.

Owners are also concerned that if they go public, all their dreams and plans for their business go out the window. They feel they are giving long-term flexibility for short-term goals… that the focus will be on looking good on quarterly reports.

But a good leader will be able to integrate the long-term vision and still meet quarterly goals. Example: Jeff Bezos.

There’s never been a better time to go public for companies with those needs.

It’s a more business friendly environment now. Compliance reporting requirements are more routine and not as cumbersome as they once were. After several years into Sarbanes-Oxley, the process has been streamlined.

IPO is not the killer it was seven or eight years ago.

And even simply starting the IPO process can have an unexpected benefit. The first step if you’re considering an IPO is the S1 Filing. It’s the first set of disclosures to the SEC. The minute you submit it, that report, full of financial information about your company, becomes public record.

Strategic buyers will get a copy and know how much your company is worth… and consider buying it in an M&A deal. The valuation comes back at $100M, and they offer $200M.

It’s a good idea to put up a for sale sign.

Whether a company pursues an IPO or an exit through M&A depends on several factors specific to that business. But both can be viable options to be examined.

We focus a lot on M&A and IPOs in the tech space. And it can be helpful to examine the trends impacting Silicon Valley.

Download this free report for what’s on the horizon in this sector:

2019 Silicon Valley Trends Cheat Sheet