The Jumpstart Our Business Startups (JOBS) Act has thrown a new wrinkle into the “dual track” strategy, in which late-stage private companies pursue an initial public offering while they negotiate with acquirers. Companies often use this strategy to signal to potential buyers that they are serious about going public and that acquirers may therefore lose their chance to buy them at an attractive price.
The JOBS Act enables companies to submit a draft S-1 statement for confidential review by the Securities and Exchange Commission before they go public. That gives sellers even more leverage, allowing them to put competitive pressure on acquirers without publicly disclosing information like trade secrets and names of key customers. (Companies will still be able to share their confidential registration statements with individual potential buyers.)
In the past, all IPO filings were public, which may have kept some companies that were considering a sale from filing at the same time, notes Bill Kelly, a partner at Davis Polk & Wardwell. “Those companies [previously] had to choose between filing publicly [versus] not filing and not having a credible IPO alternative,” he says.
Now, however, the issuing company “[doesn’t] have to tip its hand,” says Michael Nall, founder of the Alliance of Merger & Acquisition Advisors. Further, under the new law, a company that used the dual-track strategy to drive up its selling price would have little to lose. Even if the IPO fell apart, if the company filed privately, it would not face the stigma that often comes with pulling an offering, Kelly adds.
As a result, more companies may pursue the dual-track strategy. “Now they can sort of have their cake and eat it, too,” says Kelly. Some studies have shown that dual-track companies sell at a 20% premium to other companies.
Still, businesses that file confidentially may give up some of the ancillary benefits of a highly visible share offering. Often, a public IPO filing can indicate that a company is doing well, “and [that] visibility helps with customers and recruitment,” Kelly says. By attracting outside buyers, a public filing can also stoke competition for a company, says Nall. “There’s no doubt that the bigger the number of potential buyers, most often, the higher the price, because the company gets bid up,” he says.
Since they lack the extensive networks of large companies, small companies in particular may benefit from filing publicly. “Private companies keep a very tight circle, and inevitably there is a trade-off,” Nall says. At the same time, says Kelly, “if a company has a competent banker, it should know who the potential acquirers are, and the company shouldn’t have to file something [publicly] with the SEC in order to attract them.”
The JOBS Act also gives pre-IPO companies more latitude in testing the waters of the public market. The firm’s advisers can premarket an offering, even before filing with the SEC, to gauge how much interest investors have in a firm’s shares. This new rule allows companies to gather more information before deciding whether to sell or go public, says Kelly.