A Blog by Jonathan Low

 

Aug 4, 2016

Why More Companies Are Choosing A Sale Over An IPO

Cost and convenience apply to the benefits of finance as well as technology. Becoming a public company is expensive, time-consuming and fraught with regulatory oversight, as well as peril from perennially dissatisfied activist investors.

But once you sell to a 'strategic buyer,' (Wall Street speak for someone who will pay more than you are worth by any rational accounting of value), your investors can cash out, while you can wait a year or so, then hit your golden parachute and start all over again. JL

Maureen Farrell and Matt Jarzemsky report in the Wall Street Journal:

2016 (is) the slowest year for U.S. IPOs since 2009. Bankers and investors say the downtrodden IPO market can’t compete with buyers who are willing to pay big to take potential listings off the board.“There is a lot of wariness about how returns will ultimately be realized in the public market. The bar has gone up for seeing a public company as an alternative.”
Investor Bill Costello perked up when Centennial Resource Development Inc. filed for an initial public offering in late June. The oil company drills in the prolific Permian Basin, and Mr. Costello was on the hunt for promising new listings.
Weeks later, Centennial scrapped its IPO plans and agreed to sell itself to a company owned by investors including private-equity firm Riverstone Holdings LLC.
“We were really interested in Centennial,” said Mr. Costello, a portfolio manager at investment firm Westwood Holdings Group Inc., WHG -0.82 % which has $21 billion under management. “I was bummed when Riverstone walked in and took it.”
So it goes in 2016, the slowest year for U.S. IPOs since 2009. Lately, bankers and investors say, the downtrodden IPO market just can’t compete with buyers who are willing to pay big to take potential listings off the board.
In addition to Centennial, the 2016 IPO market lost out on cybersecurity company Blue Coat Systems Inc., Canadian auto marketplace Trader Corp. and Performance Health Holdings Corp., a manufacturer of consumer health products.
Buyers also have snapped up several startups that were viewed as 2017 IPO candidates. Dollar Shave Club in July reached a deal to sell itself to Unilever UL -1.69 % PLC for $1 billion. In June, Vista Equity Partners announced a deal to buy software company Ping Identity Corp. for an undisclosed amount.
Though it isn’t unusual for companies to weigh a public listing and a sale at the same time, a process known as a dual track, this recent spate of sales is the latest bit of bad news for investors struggling to fill holes in their portfolios.
While they’re typically considered among the riskiest equity investments because of their shorter track record, IPOs offer investors a chance to beat market benchmarks by investing in growth stocks in the early days. This year’s IPOs are up 16.7% on average, far higher than the S&P 500’s 6.3% gain, indicating that investors are piling into the few new listings that have come to market.
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While it is difficult to quantify how many companies have chosen a sale over an IPO, bankers and lawyers say the proportion that have chosen to sell is well above typical levels.
“We see a lot of amazing franchises that we would want to own and add to the portfolio if they were public,” said Brad Slingerlend
a portfolio manager of the global technology strategy funds at Janus Capital Group Inc. JNS 1.23 %
 So far in 2016, 55 companies have debuted on U.S. exchanges, down from 121 in the same period last year and 180 in 2014, according to Dealogic. This year’s U.S. IPOs have raised $11.6 billion, down 51% from last year and 70% from 2014.
U.S. mergers, though down 25% year-to-date from 2015’s record levels, haven’t fallen off as sharply. Corporate balance sheets remain stuffed with cash and low interest rates have kept deal funding costs low.
One reason sales are winning out over IPOs: Many private-equity firms, a key source of new listings, are looking for a quick exit from older investments.
It can take several years for a private-equity firm to fully sell off its stake in a company after it has gone public, and a sale offers a less risky alternative to the drawn-out process.
The stock market performance of some recent IPOs has made other private-equity firms worry about when they might be able to unload shares of companies after they debut. Since KKR KKR 2.00 % & Co.’s First Data Corp. FDC 0.00 % went public last October in the largest IPO of 2015, the stock has largely traded below its IPO price. KKR hasn’t sold any shares.
“There is a lot of wariness about how returns will ultimately be realized in the public market,” said David Golob, chief investment officer at Francisco Partners, a tech-focused private-equity firm. “The bar has gone up for seeing a public company as an alternative.”
Trader Corp., an online automotive marketplace owned by private-equity firm Apax Partners, was days away from publicly unveiling its IPO plans in early July when it announced a deal to sell itself to Thoma Bravo LLC for about $1.2 billion, according to several people close to the deal.
The move surprised many of the company’s IPO bankers, who expected the company to fetch a higher valuation in a public offering, according to people familiar with the matter.
Sometimes, the offers are just too good to pass up.
Blue Coat was planning a summer IPO when it switched gears in June and accepted Symantec Corp. SYMC 1.06 % ’s offer of $4.65 billion, nearly twice what Bain Capital LLC paid for the company a year earlier—and about the same as the IPO was expected to value the company.

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