Corporate Finance » Dual-track – Turbocharging your exit strategy

Dual-track – Turbocharging your exit strategy

The goal is to play options of an IPO or sale against each other to secure the best deal for stakeholders, say partners Michal Berkner and Josh Kaufman and associate James Foster at law firm Cooley.

Exiting an investment is an uncertain process as final deal terms and valuation are typically guided by factors beyond a company’s control.

In the face of global economic slowdown, trade wars, Brexit and heightened market volatility, it is important to consider how deals can be run to maximize transaction certainty and achieve optimal valuation.

Pursuing a “dual-track” strategy involves preparing for an initial public offering at the same time as running a private M&A process, often through an auction. This approach can provide visibility of relative valuation and the benefit of optionality, maximizing the chance of securing the most favorable terms.

To determine whether a dual-track process is right for your company, consider these six key questions:

  1. Do you have buy-in from all relevant stakeholders?


As well as controlling shareholders, who may need to approve either transaction, the degree of alignment between common and preferred shareholders, the board and senior executives is important.

The nature of an exit will affect the value of equity held by shareholders, including employee option holders, so the short- and long-term effects of attracting, incentivizing and retaining the right team should be considered.

It is also important to consider the implications of any change of control provisions in material contracts in the M&A scenario, which may require consent from strategic or financial counterparties. Capital intensive businesses will also need to consider the implications of any M&A transaction under their financing facilities.

  1. Is the objective to achieve a partial or complete exit?

A private sale can be structured to achieve a complete exit for existing equity holders, with possible deferred consideration, earn-outs and escrows. An IPO, which is typically structured as a primary equity issuance, will generally permit such investors to sell down in the public markets, subject to contractual lock-ups with underwriters, insider trading and statutory resale.

Even where pre-IPO holders can participate in a hybrid primary-secondary IPO, the transaction will not serve as a complete exit for pre-IPO holders since new investors will ensure that they retain significant skin in the game.

For either track, a partial exit gives rise to the question of control. If the pre-IPO holders want to maintain influence over a business post-transaction, doing so may be easier in a private sale, through a shareholders’ agreement. In an IPO, selling shareholders may adopt a multiclass or an enhanced voting rights equity structure. However, both structures are only eligible for listing on certain markets, might not receive indexation (losing passive investor flows) and have been scrutinised by US investors due to perceived corporate governance failures at leading technology companies. In each case, the potential benefits of enhanced control rights must be weighed against the possible negative impact on valuation.

Where a partial sale process is primarily driven by the need for further investment rather an exit, a dual-track process can be suitable, but further considerations come into play. These include how debt and equity can be used by the business to optimize its cost of capital.

  1. Is the IPO track suitable for (and available to) the business?

The requirements of regulators and stock markets vary by venue, but it is necessary to understand whether the business, its track record and financial reporting (audited to the appropriate accounting standard), will meet those requirements. The intended post-transaction ownership will also affect how the offering is structured and its viability.

The usual pros and cons of being a publicly traded company will need to be considered. Benefits include the ability to use listed paper as acquisition currency and to offer liquid stock options to employees, heightened corporate visibility and public company premium valuation.

These should be balanced with the need to address any outstanding tax, legal or accounting issues before an IPO. It will be more difficult to deal with potential issues in the public eye, due to extensive disclosure requirements and increased exposure to litigation for any material misstatements or omissions in public filings.

Having the necessary infrastructure is also key. This includes the additional resources and know-how needed to maintain the extra administration and reporting requirements of a publicly traded company.

  1. What’s the time frame?

An IPO typically takes three to six months and much of the timetable is influenced by third parties who help prepare and review the offer document. Market timing is critical for an IPO, and even a promising offering can be stymied by investor reticence in a market downturn.

An M&A process can be much shorter, but can be equally sensitive to external processes, such as competition or regulatory clearances.

It is necessary to understand the expected timetable for both tracks. This schedule needs to be assessed in light of the business’ cash position, debt obligations and upcoming milestones, as well as the potential “staleness” of financial information.

  1. Which transaction is most likely to generate the best valuation?

The valuation of a business by public markets vs. a financial or strategic buyer can vary significantly. IPOs are affected by stock market sentiment, volatility and comparisons 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 is often driven by considerations such as realizing synergies, pursuing short- versus long-term business plans, obtaining critical assets, industry consolidation trends and recent comparable transactions.

With a private sale, it will never be possible to know with certainty how the stock market would have valued a business for comparison. But a private sale provides the certainty of proceeds that an IPO can rarely provide to selling shareholders. However, pre-IPO companies can assess market receptivity through confidential meetings with investors.

  1. Can the business and the deal team cope with the extra demands?

On their own, each of the IPO and M&A processes place significant demands on a business and its management. Dealing with two processes simultaneously will put even greater strain on time and resources, so it’s necessary to assess the capacity, expertise and experience of the team and whether new staff will be needed or a greater reliance on advisers.

Maintaining confidentiality is key to the success of a dual-track process, so it’s important to limit the size of the deal teams inside and outside of the company, and to obtain non-disclosure agreements from prospective M&A counterparties.

Opting for an IPO would not require an issuer to disclose the fact of the parallel (abandoned) M&A process, but leaks or intentional disclosure during the process may have adverse consequences for both tracks.

Conversely, knowledge that a company may be pursuing an IPO exit could drive the M&A valuation higher, particularly with strategic buyers. The optionality afforded by a dual-track should be maintained for as long as possible to keep maximum pressure on timing, valuation and competitive tension. Ultimately, the goal is to play each track off against the other to secure the best deal for stakeholders.


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