S-1 Registration and M&A- Converging Strategies?
By guest blogger Jarrad Zalkin
Vice President
TM Capital Corporation
Over the last several quarters we’ve seen a distinct resurgence in mid-market M&A activity. Strategic buyers are back on the playing field “en masse”, and financial players are again toeing the line as credit becomes more accessible. Alongside this up-tick in M&A, I’ve also noticed an increase in mid-market IPO registrations.
At first glance, this IPO activity is a bit perplexing. For several years the public markets have been effectively closed for small to mid-sized companies. Complex and costly compliance requirements, challenging and volatile pricing environments and milder growth expectations have combined to make the public offering journey an arduous one. So we’re left to wonder, “Why in today’s strengthening, but still fragile market, are we seeing more companies queue up to test the IPO waters?”
I think the answer to this question requires both short-term and long-term consideration. In the long-term, I think the public offering route continues to hold considerable appeal for shareholders looking for a premium exit. These prospective issuers are well served in preparing to explore this route at some point. Yet, in the current market, the risks, costs (both in dollars and distractions) and pricing volatility seem to outweigh the potential rewards. So why the up-tick in registrations?
I think companies are using the S-1 process to smoke out potential acquirers.
Attractive companies are very hesitant to let word escape that they are in the throes of a formal sell-side auction. The fear of a failed sales process looms large for both management and the company’s shareholders. However, without the threat of a structured acquisition program and a competitive process, there is little motivation for an acquirer to move through diligence with alacrity and minimal leverage for the seller when negotiating price and structure. To combat this dynamic, I think a number of strong companies are using the S-1 process to lure acquirers to the table, quickly and quietly. If acquisition discussions falter, the issuer can proceed with the underwriting process. If the market does not support the desired pricing levels, the issue can be delayed and the market itself can shoulder the blame due to volatility. Unlike a failed M&A auction, I do not think a delayed public offering brands the potential issuer with the same “scarlet letter”.
Of course, this cannot be viewed as a blanket strategy. The situation really has to be ideal. The issuer must have a prime public company profile. The threat of losing that target to the public markets must also be very real for potential acquirers. It’s definitely tricky and requires careful management, but properly pursued I think this route can provide strong companies with a unique set of alternatives.
For any further commentary or questions, please don’t hesitate to contact me at jzalkin@tmcapital.com.
