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Thomas Holden, Ropes & Gray securities & public companies partner, analyzes the benefits of dual-track IPOs, particularly in choppy markets, and discusses considerations in managing a dual-track process.
The IPO market has shown some signs of life through the first quarter of 2017 and while we may not see a full reversion to the mean, we do certainly expect 2017 to be a better environment for new issues than 2016. Until the new issue market is firing on all cylinders, I think we will continue to see a number of dual-track IPOs. A dual-track IPO occurs when the issuer explores both a potential initial public offering of its common stock and simultaneously explores the possibility of selling the full company to a strategic or financial buyer.
A dual-track process, particularly in choppy markets, can have several benefits. First, it provides a kind-of market check on the IPO valuation process, which in many ways, is more art than science. Second, it gives existing investors an opportunity to lock-in the value of their full investment and achieve immediate liquidity. Many times, existing investors do not get to sell in the IPO, so liquidity is a longer-term prospect for them, which is a more difficult calculus in choppy markets.
While there are a number of benefits to a dual-track process, they need to be carefully managed to be successful. The two tracks should be managed separately, but remain closely coordinated. Since the company is in registration on the IPO, written offers are not permissible. As a result, written communications to potential buyers need to be carefully managed. On the IPO side, the deal team will be well aware of these restrictions. On the M&A side, written materials should have clear legends that the information is being provided solely in connection with the possible sale of the whole company and not in connection with an offer or sale of securities. It is also important to maintain the consistency of information that goes to each side. You don’t want to be telling conflicting stories
Questions may also arise about what to do with financial projections. Again, clear legends are critical. It is also important to understand whether the projections being given to the analysts are the same as the projections being given to potential buyers. If they are being provided different sets of projections, you should understand why they differ. If the company is an emerging growth company, there may be a question about whether to file publicly in order to put M&A buyers on notice that the IPO path is real. Another possibility is a Rule 135 press release announcing that an IPO registration statement has been filed. If the company has bonds outstanding, it may also need to consider whether testing-the-waters meetings or meetings with potential buyers trigger disclosure obligations. With the markets starting to show increased signs of life, it is a good time to begin thinking about how to manage the path to liquidity.