The US IPO market rebounded in 2017 as 133 domestic companies went public raising US$30.4bn, 33 more IPOs and 79% greater value than the previous year. As 2018 sets into gear, the market continues to evolve, with more companies considering a listing in one of the thriving economies of Asia, and some filers using innovative methods of joining a public exchange.
In order to understand the driving forces, opportunities, and challenges in the US IPO market in 2018, Toppan Vintage commissioned Mergermarket to interview leading experts in the field.
Toppan Vintage question: U.S. IPOs rebounded strongly in 2017 from a year earlier, but alternative forms of exit – especially selling to strategic or private equity buyers – continue to gain in popularity. Are there particular types of companies or situations in which an IPO still makes more sense than selling in an M&A deal? Leading deal experts weigh in...
Alex Wellins, Co-founder and Managing Director, The Blueshirt Group says: First of all, we believe that this is a great time for companies to go public. The markets are at record highs, the volatility index is relatively low, and we believe that the performance of IPOs generally, and technology IPOs specifically, as an asset class is quite strong. That has been demonstrated by the cohort of IPOs that went out in 2017. One example is Roku, a streaming media company, and a client
of ours that went public in 2017. This was the best-performing technology IPO of the year. It's not one of the larger companies by revenue, but I think it does show that exciting venture-backed technology companies, particularly those that are disrupting an industry like Roku is, can have an excellent result. I think there are three points I’d make here: number one is that it's a great time for companies to go public; and two, as an asset class generally, tech IPOs have performed extremely well. Three, I would point to Roku as an example of a really successful IPO that went out during 2017 that has provided very strong returns for investors.
Patrick Schultheis, Partner, Wilson Sonsini, Goodrich & Rosati weighs in: Companies that are looking at the IPO market currently are those that have a positive, long-term business plan. These companies have a business plan that shows solid growth and a path to cashflow positivity. There will also be a period of executing on that business plan and developing historical financials that show revenue growth, depending on the type of business. While the company does not need to be cash-flow positive or profitable at the time of the IPO, they should be able to identify the factors that are going to turn them into a cashflow-positive business, and have a good sense as to when that's going to be.
On the flip side, young companies that have an interesting asset or technology but don’t have a path to cash-flow positivity are possibly not in a good position to go public because the public company investors are going to heavily discount them. It might be a good product, good technology, or a good service that could be very valuable to people. But, as a standalone, independent business, it's not going to capture the valuation that a strategic buyer in particular could put on it.
Monika Driscoll, Partner, Brunswick Group adds: In terms of M&A vs. IPO, each situation is different. For companies that can find a great partner to execute their vision, M&A is a good option as they are going to be able to deliver on their strategy without having to undergo the stress of an IPO process and bear the responsibilities and costs of being a public company. There are also plenty of companies where the IPO path makes much more sense because they want to pave their own road and the opportunities are significant enough that long-term success translates to value for many different stakeholders, including employees, customers, shareholders and others.
Elizabeth Lim, Senior Analyst and Research Editor, Mergermarket says: Generally, an IPO makes sense when the equities market is strong and a company wants to move past the startup or buy-and-build phases by raising additionalcapital while also providing liquidity for investors and an exit for founders. M&A, which involves more strategic considerations in addition to those financial, peaked in 2015 in the US as well as globally. Though it has fallen slightly since then, it has still been quite strong. Now, with tax reform, those numbers are expected to rise a bit.
Both strategic and private equity buyers have been trying to take advantage of the low interest rate environment of the post-crisis period, which is one of the reasons we’ve seen record levels of M&A activity in the last couple of years. Interest rates began to rise slightly in December 2015 following seven years of being near-zero, and now with a recovered economy many dealmakers want to seize this moment. As interest rates go up, so does the cost of borrowing to finance deals – so companies have been wanting to get in on as many transactions as makes sense before rates rise further. So it’s to be expected that M&A would then be the preferred form of exit for some investors versus an IPO. Deals that had been in the pipeline during the financial crisis finally have an outlet.
In addition, technology has forced a number of long-standing firms in traditional industries to re-think their long-term strategies – companies such as Ford, Disney, and Walmart – forcing them to consolidate just to survive. All of this has put an intense amount of pressure on firms, and they tend to favor M&A over listing publicly, as transactions often involve a more strategic component.