Regulatory: Navigating the “dual track” IPO/M&A process

How to obtain maximum value by combining the two processes

Tom Bachtell, IPO Land 2012 © tombachtell.comAs the global economy continues to show signs of improvement and markets chart all-time highs, the prospects for initial public offerings (IPOs) look promising and, in particular, the pipeline for IPOs in 2013 appears robust. As has been the trend for the past several years, many companies pursuing an IPO, particularly private equity-backed and venture-backed companies, are expected to run a “dual track” process by pursuing an IPO while simultaneously running a confidential, private auction to sell the company.

The dual track approach is popular because it offers sellers a number of perceived advantages in their search for liquidity and maximum value. The possibility of an imminent IPO lends a sense of urgency to the sale process by creating a “now or never” dynamic for buyers, which can lead to higher sale premiums. A dual track process also allows sellers to preserve optionality as they evaluate the attractiveness of multiple exit (or partial exit) options while hedging against IPO market volatility (which can cause capital markets “windows” to close overnight) and overall deal uncertainty.

Throughout the time that the sale process is progressing, the company will continue to file amendments to its IPO registration statement in response to SEC comments, which further communicates the viability of the IPO path to potential buyers and creates the necessary “tension” that forms the desired competitive dynamic. Typically, the seller will seek to preserve all options until it has a clear view of the preferable path, with the culmination of the dual track process ending in the signing of definitive documentation to sell the company or commencing the road show and pricing the IPO.

Companies should carefully consider which investors to contact in connection with the sale process, because potential buyers who are provided detailed written information about the company will be “boxed out” of purchasing the company’s stock in the IPO if the company sale process falls through. This is due to the fact that under federal securities law requirements, companies may not provide written materials to potential purchasers in an IPO until a prospectus complying with the requirements of the Securities Act of 1933 is available. Such a prospectus is commonly referred to as a “preliminary prospectus” or “red herring prospectus.” Using a non-compliant preliminary prospectus could be viewed as an illegal “offer” in violation of the Securities Act and potentially provide purchasers who were offered stock a right of rescission under the Securities Act.

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Cathy Birkeland

Cathy Birkeland is the Deputy Office Managing Partner in the Chicago office of Latham & Watkins. Ms. Birkeland’s practice focuses on capital markets, mergers and...

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Roderick Branch

Roderick Branch is a partner in the Chicago and New York offices of Latham & Watkins. Mr. Branch's practice focuses on capital markets transactions and...

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Ryan Maierson

Ryan Maierson is a partner in the Houston office of Latham & Watkins. Mr. Maierson specializes in corporate transactions in the energy industry, with an...

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