In the current economic landscape, it is increasingly difficult to persuade prospective buyers to enter into large, all-cash transactions on an accelerated basis. It is increasingly the case that interested strategic acquirers with sufficient resources to make all cash bids may be unable to participate in the acquisition of an entire business due to antitrust or other regulatory restrictions, while parties that are free of such restrictions may not possess sufficient resources to be serious bidders for all of the properties. In addition, other parties may be interested in certain portions of a business and may be willing to pay a premium, but only for selected assets. How to best structure a proposed sale can be, at best, unclear at the commencement of the sale process.
Faced with this dilemma, in order to maximize the end result, a company should be prepared to consider all available options such as (1) an auction of its business targeting both strategic and financial players, (2) the contribution of its assets into a joint venture with a third party with a view to a public liquidity event down the road, (3) a piecemeal sale of its assets in multiple transactions or (4) an IPO of all or part of the business. An increasing trend in these circumstances is to seek to explore all of these options simultaneously through a “multi-track process.”
Increasingly utilized to navigate unpredictable and changing market conditions, a multi-track process is the course of action by which a company concurrently pursues a trade sale or a joint venture transaction and an IPO. When executed properly, a multi-track process provides many benefits, including: (1) increased leverage on the part of the company that can lead to maximization of value; (2) multiple exit options that provide insurance against unsuccessful sale attempts and volatile market conditions; and (3) overlap in diligence materials and management presentations, fostering efficient use of resources. Perhaps most importantly, the threat of an IPO may cause an interested party to increase its bid or accelerate the transaction rather than lose the acquisition to the public market. Multi-track processes are not without their complexities and pitfalls, but, with thoughtful and strategic preparation, a well-managed multi-track process will ultimately prove worthwhile. A typical multi-track process could be implemented in six to eight months; a sample timeline is attached for your reference.
Navigating the Complexities of a Multi-Track Process
Timing and Document Sharing
Managing the due diligence process is an essential element of both a trade sale and an IPO. In a multi-track process, where prospective buyers will gain access to different company materials on a different timeline than those parties involved in the IPO, meticulous coordination of the process is critical. During a typical trade sale, a company provides bidders conducting due diligence with various information ranging from organizational documents and financial data to IP materials and customer contracts. In some instances, many of these materials, especially those that the company deems highly confidential, are released only at the late stages of the process after the most serious bidders have made themselves known. Such caution is required in an environment in which bidders are frequently also direct competitors of the seller.
Often in multi-track processes, bidders are first solicited soon after an offering document has been filed with the relevant securities regulatory authority. Depending on the jurisdiction, this filing may be required to be made public. However, certain exceptions apply to this general rule. In the United States, for example, filings of companies with revenues below $1 billion may remain confidential until 21 days before any road show, at which point they become publicly available. When a filing is publicly announced, bidders enter the process not only aware of a company’s multi-track strategy, but also possessing more information and at an earlier stage than they would in a typical sale process. Even in a confidential filing, a potential buyer is often made aware of the IPO process and provided with a draft of the company’s offering memorandum. While this narrowing of the information gap between bidders and sellers serves to drive the competition that is pivotal to a multi-track process, it is also a factor that sellers should be aware of and consider strategically. For example, if a company expects to favor a trade sale over an IPO, it may consider delaying the public filing of a registration statement until discussions with bidders are well underway. Conversely, a company that expects to favor an IPO may wish to file a registration statement and respond to initial comments from the relevant securities regulatory authority before initiating the trade sale process.
Compliance with Securities Laws
Controlling the dissemination of diligence materials is particularly pressing in the context of a multi-track process, where stringent securities laws are applicable. In the United States, for example, the Securities Act of 1933 prescribes strict rules regarding what an issuer is permitted to communicate about an upcoming offering and the timing of such communication. Significantly for the purposes of a multi-track process, it is unlawful for issuers or underwriters to sell or offer to sell securities during the pre-filing period. An “offer” is broadly construed and has been held to include the dissemination of any material that might “condition the market” for the securities prior to an actual offer. While certain safe harbors soften this rule, and the recently enacted JOBS Act permits certain pre-marketing activities, companies engaged in a multi-track process must be aware of the risk that some communication with bidders may be construed as improper conditioning of the market. In addition, companies should be aware that the government agency reviewing the IPO filings may request to review the data provided to the potential acquirers to determine additional disclosure required in the IPO documents.
Practically speaking, materials directed at potential acquirers relating solely to the trade sale process are not likely to be considered offers due to their content and audience—simply put, bidders in a sale process are unlikely to be IPO investors. However, extra precaution should be taken to avoid dissemination of such materials to the public. Information legitimately shared with a potential bidder could, if placed in the wrong hands, be construed as an offer that conditioned the market. As such, it is advisable to communicate by phone rather than by email at the early stages of the process and to make use of confidentiality agreements that protect the company’s interests. Standstill provisions should be utilized in all confidentiality agreements to alleviate some of the risks faced by the company. Such provisions typically limit the ability of bidders to acquire the company in a hostile transaction once negotiations have failed or to buy public shares for a period when it might have material non-public information. In a multi-track process, where there is by definition a substantial chance that the process will result in an IPO, this extra precaution is advisable.
While investment banks are typically engaged in both trade sale and IPO processes, their roles in the respective transactions differ substantially. As a preliminary matter, numerous banks are involved in the IPO process as underwriters and joint book runners, while a trade sale usually involves a single bank. How many banks to hire and how to delineate their roles is best considered at the outset of a multi-track process. In some instances, the responsibilities of both processes are shared among banks, while in others they are strictly designated. In the latter situation, it is worth noting that the financial institutions assisting in the trade sale process will have different economic incentives than those assisting in the underwriting process. As such, special consideration should be taken when negotiating the fee structure, including when and if customary tail provisions are appropriate. Often it is helpful to have at least one lead bank that is not involved in the trade sale process on the IPO team, allowing the company to seek independent advice.
Two separate issues surrounding certain disclosure requirements invariably arise in the context of a multi-track process when an IPO is the ultimate course pursued by the company. First, information about the trade sale process itself need not be disclosed in a registration statement. This information is typically not considered to be material to the company. Secondly, if a potential bidder was privy to information that was not provided in the registration statement, then the bidder may be restricted by securities laws from trading stock of the new public company after the IPO. As previously discussed, however, this issue is alleviated by adopting a standstill provision in the confidentiality agreement, which prohibits such bidder from pursuing shares in the IPO process.
Challenges Inherent to a Multi-track Process
Perhaps the greatest challenge posed by a multi-track process is the most obvious: the sheer amount of resources required to maintain both the sale option and the IPO option as not only viable but attractive to potential buyers and investors. Thoughtful and strategic planning is critical to the success of advancing both options in a multi-track process.
Management Distraction and Incentives
The intense focus of management on each of the exit options in a multi-track process may negatively impact the day-to-day operations of the company. Careful budgeting and allocation of management resources is key to avoiding such distractions. In addition, it is important to be aware that company management may have conflicts of interests causing them to prefer one transaction structure over another. Some may favor an IPO due to the possibility of a continued managerial role or the receipt of options in the new public company, while others may favor the more accelerated process offered by a sale. For an efficient process, companies must make every effort to ensure that the key players in management are on the same page.
Competing Demands and Missed Opportunities
By its very nature, the multi-track process will create multiple timing conflicts. Notwithstanding the strategically timed release of documents, market opportunities may be missed if delayed by acquisition discussions, and opportunities to finalize the sale process may be foregone if delayed by required securities filings. Multiple options, even within the trade sale category (such as a joint venture or a piecemeal sale of the business), add to these complexities. Establishing a preferred outcome early on in the process, while still maintaining flexibility, may serve to alleviate such dilemmas.
In some circumstances, there is a risk that bidders who are aware of the multi-track process might be hesitant to invest resources in a costly acquisition process, especially if they suspect a company’s preference for an IPO. The more effectively the company is able to manage the process, the more able it will be to present both options as viable, thereby limiting bidder reticence.
Not surprisingly, operating a trade sale and an IPO process simultaneously presents a particular set of challenges. With preparation and thoughtful management, however, the process allows sellers the unique opportunity to weigh options with the advantage of real-time market feedback. As recent empirical evidence has confirmed, the additional competitive pressures created by the multi-track process allow the seller to maximize value, whichever transaction is ultimately pursued.
10 Practical Tips to Ensure a Successful Multi-Track Process
- Conduct weekly or bi-weekly status calls to ensure communication among the team.
- Clearly delineate responsibilities among team members; lawyers and bankers need to know who is in charge.
- Obtain confidentiality agreements from trade-sale bidders that contemplate a potential IPO; include appropriate standstill provisions to best protect the company.
- Prepare diligence materials in such a way that they are readily divisible by asset or division so that a sale of all or part of the business can be managed smoothly.
- Involve tax attorneys early and often throughout the process to ensure up-to-date consideration of the tax implications of the multiple transaction options.
- Know the potential buyer and the relevant antitrust laws - going down the road with the wrong buyer can waste time and money and lead to missed opportunities.
- Request regular valuation updates from banks to frequently assess preference between transaction options.
- Understand the consents required for each potential transaction and the periods required to obtain them. Particularly in the mining industry, obtaining governmental consents can cause significant delay.
- Keep transaction options open for as long as possible; although it may appear one option is the clearly preferable path, market conditions and values change often and abruptly; the team must be prepared to shift gears with minimal notice.
- Do not underestimate the time required to prepare company financials; they often take longer than expected and can delay an IPO.