Two Stage Exits: An Empirical Analysis of the Dynamic Choice between IPOs and Acquisitions by European Private Firms

Abstract

A private firm's exit decision has been modeled in the existing empirical literature as a dichotomous choice between IPO and acquisition. In this paper, we take a dynamic approach and analyze how explicitly accounting for dynamic considerations, such as the benefits arising from being acquired after going public at higher valuations relative to a direct acquisition, or the costs arising from being delisted at lower valuations, alters the initial IPO vs. acquisition trade-off. We find that firms that are more viable against product market competition, characterized by larger private benefits of control and lower information asymmetry, are more likely to choose an IPO over a direct acquisition as initial exit mechanism. These firms are also more likely to be acquired post-IPO, while firms characterized by lower product market viability and higher information asymmetry are more likely to be delisted. We document that two-stage acquisitions are a valuable exit route for firms, that are acquired at a 44.7% premium, on average, compared to the valuation they could have obtained in a direct acquisition. On the other hand, firms that are delisted post-IPO suffer from a 31.9% valuation discount relative to a direct acquisition. The valuation premium is higher for firms with more viable business models and affected by lower information asymmetry. Our evidence indicates that explicitly accounting for the benefits and costs arising from post-IPO considerations will tend to push private firms with higher product market viability and lower information asymmetry more towards choosing an IPO rather than an acquisition as initial exit mechanism.

Essays in business strategy, sustainability and innovation

“…When we focused on the ESG issue components, the results were in line with the former of ESG issues, indicating a higher probability of delisting, from 20% to 38.6%, in the manufacturing sector for governance and social reputation exposure. This was consistent with the view that weak firms in product markets have a greater likelihood of delisting (Chemmanur et al, 2019). Overall, our results showed that governance and social issues in the manufacturing industry play an important role in firms' delisting.…”

Where do we go? VC firm heterogeneity and the exit routes of newly listed high-tech firms

“…A firm's innovative capabilities improve long-term performance and shape a firm's exit decisions Marsili 2012, 2019). Chemmanur et al (2014b) found that compared to IVC-backed firms, CVC-backed firms are more innovative, younger, riskier and less profitable. However, the authors also suggest that CVCs are better able to nurture innovation because of the technological fit of their parent companies with the entrepreneurial firms they back and because of their greater tolerance for failure compared with their IVC counterparts.…”

“…Thus, distinguishing between intra-and extra-EU deals is more appropriate in order to understand the forces at stake. We consider first the impact of VCs in post-IPO acquisition in a general way, by The literature has identified several types of assets and characteristics that make firms more likely to become acquisition targets shortly after their IPO (Jain and Kini 2000;Brau et al 2010;De and Jindra 2012;Chemmanur et al 2014b). However, these studies have little to say on differences across domestic and cross-border transactions.…”

“…These authors also explain that selling the company after going public might be considered as a dual-track strategy that helps entrepreneurs to increase their harvest value. Indeed, this strategy allows high-tech companies to reduce the problem of asymmetric information (Chemmanur et al 2014b) by pricing the value of a firm's intangible assets (Brau et al, 2010). For high-tech companies, studies show that patents are considered to be more easily identifiable and transferable intangible assets that increase the likelihood of a firm being an acquisition target after IPO (Useche 2015;Wagner and Cockburn 2010).…”