Canada: M&A Transaction Or IPO: Why Not Pursue Both?

There may be legal advantages to a dual-track strategy in the current Canadian marketplace


Over the past year, as Canadian capital markets have regained their footing, Canadian private companies in search of greater liquidity have generally had a wider range of strategic alternatives to explore. One increasingly popular option is the "dual-track" or "parallel-track" IPO/M&A process, in which the company simultaneously pursues both an initial public offering and a negotiated or controlled auction sale process (or other specific sale process). Because market and economic conditions have not generally favoured dual-track processes in recent years, some boards and shareholders may find the concept relatively unfamiliar. The purpose of this article is to highlight, from a Canadian legal point of view, some of the potential benefits of pursuing a dual-track strategy for Canadian private issuers, Canadian portfolio companies of private equity groups and Canadian subsidiaries of multinational companies.

Factors to consider

Issuers considering a dual-track process must carefully compare the costs and benefits of pursuing such a strategy. They will need to consider and analyze not only the hard costs involved in completing a transaction (i.e. legal, accounting and professional advisors and related transaction expenses), but also the soft or opportunity costs of taking time from management and other key personnel of a business to participate in a transactional process that can be burdensome, complex and which realistically may not result in a transaction for the company.

Other significant considerations in a dual-track scenario are similar to those that are typically considered when making an "either-or" choice between an M&A sale process and an IPO:

  • Partial or total exit: One of the most important things to determine is whether the desired liquidity transaction would result in a total divesture of the business by shareholders (perhaps leaving no ongoing management role for the existing principals). The alternative is a partial sale or planned two-step sale transaction (whether in an IPO or an M&A context) under which the controlling shareholders will maintain a controlling equity position (or at least a significant minority position) in the company and some or all of the existing principals will remain an integral part of management of the business.
  • Liquidity issues: Another key consideration is whether the proposed exit strategy will produce instantaneous liquidity (total or partial) in the form of cash or freely tradable public company securities. In an M&A transaction, privately held illiquid securities can be exchanged for public company securities of the purchaser (freely tradable or restricted securities) or for securities of another private issuer (subject to resale restrictions). Similarly, a cash payment can either be subject to an escrow or holdback arrangement or fully paid at closing. In an IPO transaction, private issuer securities be sold for cash as part of a concurrent secondary offering, but the remaining securities can also remain subject to standstill or "lock up" arrangements or securities escrow provisions (whether imposed by stock exchanges, applicable securities laws or contractually by underwriters in accordance with market practice).
  • Indemnity profile of sellers: The indemnity or liability profile of an entity and its directors, officers and shareholders depends on the process involved: a controlled auction can differ significantly in this respect from a negotiated purchase and sale agreement and each of these scenarios in turn differs from a public offering (with respect to an underwriting agreement or as a result of statutory liability under prospectus or registration statement).
  • Time constraints: The time constraints applying to a sale process should be carefully compared to those that apply to an IPO. A fully marketed public offering typically takes 3 to 6 months to complete; a similar timetable would typically apply to a traditional controlled-auction process with customary regulatory approvals required to be obtained. Like a prospectus in a public offering, a sale process would typically utilize a comprehensive disclosure document on the issuer and its underlying business in the form of an offering memorandum. The timetable for a bilateral negotiated transaction could be significantly reduced without significant conditionality. In either case, the level of complexity increases (along with potential timing issues) to the extent that an IPO or M&A process involves multiple parties or multiple jurisdictions, including the existence of several regulatory authorities, different financial standards and overlapping legal regimes.
  • Completion risk: The variables impacting the completion risk of an IPO are very different from those that tend to affect a negotiated sale transaction with one or more prospective purchasers. In each case these variables must be carefully monitored.


These points illustrate one of the main challenges of a dual-track process, specifically that those participants involved in such a process will generally have to be willing to accept any of a very wide range of possible outcomes, particularly with respect to their ongoing participation in the entity. Of course, this somewhat naïvely supposes that a dual-track process is invariably carried out with the intention of securing the best deal, no matter which side of the IPO/M&A divide it comes from. Traditionally, that has not always been the case: the IPO announcement has often been used to force potential acquirors out of the woodwork with a view to encouraging a negotiated sale. However, over the past year, in a climate where the emphasis has been on finding investors of any description, some commentators have observed that the dual-track process is more frequently being employed with no preconceptions about the outcome.1

Advantages of a dual-track approach

Dual-track processes are well-known in Europe and the U.S., with particular prominence in certain industry sectors, such as technology, that have been forced by the weak economic climate to shift from what has traditionally been a more exclusive focus on IPOs.2 Where a dual IPO/M&A sale process is a practical alternative for a company in Canada seeking liquidity, the case for pursuing it is equally compelling here. Among the more significant underlying advantages are:

  • Greater transaction certainty: Pursuing a dual-track strategy provides greater transaction certainty in the event that an issuer is not able to access the capital markets in a timely manner, e.g. because of underwriters' objections or unanticipated delays arising from regulatory processes of stock exchanges or securities authorities;
  • Better pricing and multiples: Pursuing both paths will ideally create price tension that produces a more robust competitive process in terms of the pricing of securities in an IPO and/or enhancing negotiated multiples on the sale of a business - for example, where IPO investors are encouraged to pay a premium price because private equity has shown an interest in the company that suggests a possible future bid;
  • Lower valuation uncertainty: Academic studies have pointed to the reduction in valuation uncertainty resulting from IPO filings as a major reason for the higher acquisition premiums typically attained through dual-tracking, noting that private targets with higher valuation uncertainty, such as low-profitability companies in research-intensive industries, are traditionally among the major users of the dual-track process;3
  • Less impact on timetable: Moving forward simultaneously with an IPO and a sale process ensures alternative liquidity options without negatively impacting the transaction timetable in the event that one strategic alternative ceases to be available to an issuer;
  • Complementary strategy: The legal requirements of an IPO process and the preparation of a comprehensive disclosure document with the requisite financial information assists with, and can be complementary to, the M&A process. The two processes are not mutually exclusive. Due diligence investigations can also be streamlined without incurring additional transaction expenses;
  • Protection of stakeholders: Pursuing a parallel process allows the issuer flexibility in ensuring that the desired treatment for employees, customers, suppliers and other key stakeholders is achieved;
  • Efficiency: Being engaged in both processes imposes competitive and time discipline on the participants in each of an IPO and a M&A negotiated or controlled auction sale process; and
  • Flexibility for unexpected events: A dual-track approach gives issuers the flexibility to switch to another course of action should any of a range of unexpected extraordinary events occur (e.g. CEO termination, inability to obtain an auditor's report or to complete the requisite audited financial statements, deficiency in an expert report, inadequate funds to meet working capital requirements, etc.). Pursuing both an IPO and a sale process as part of an issuer's exit strategy ensures that fewer issuers will be subjected to unilateral determinations not to proceed with a transaction in the late stages of a controlled auction process by a prospective bidder or an IPO transaction by a financing syndicate member.


In addition, even in the "worst case" scenario - i.e. where the IPO does not go ahead and no buyer materializes - the IPO process may act as a profile-builder for the company, putting it on the radar of potential acquirors who may keep it in mind for further consideration when economic conditions have improved.

Minimizing cost duplication

While the cost of pursuing a dual-track strategy may at first instance appear to be "double", potential economies and efficiencies can be exploited to ensure that the increased incremental costs of a dual-track strategy are only marginally higher than a single-track strategy. For example, costs can be minimized for a dual-track strategy by

  • Retaining experienced transactional, financial, accounting and legal advisors to assist in leading the processes;
  • Using key dedicated and experienced personnel of the issuer to establish and manage the processes;
  • Creating, populating and maintaining a fully integrated and robust global electronic data site for completion of transactional due diligence by underwriters, lenders, prospective purchasers and their advisors; and
  • Cross-utilization of work product (e.g. disclosure documents) for both processes.


In all cases, the key to minimizing cost duplication lies in planning the process carefully in advance.

Situations in which a dual-track process may not be feasible

In many instances, it may turn out that one of the alternatives (IPO or an M&A sale process) is simply not available to an issuer as a result of:

  • The nature of the industry in which the issuer operates or the underlying business not being suitable to prospective purchasers or a capital markets transaction;
  • The jurisdiction in which the business operates being in a state of conflict or unrest;
  • The existence of past legal or regulatory compliance issues, or other similar extenuating circumstances, with respect to one or more key stakeholders;
  • The added burden of a dual-track process in situations where management is already preoccupied with other significant "core" business related issues;
  • Inadequate financial records or the risk of restatement of the financial statements of the business; or
  • Other significant risk factors such as expected changes in applicable law or accounting practices.


In addition, in most distress transaction scenarios, participation in an IPO process will generally not be available, yet in such scenarios the complexities of a M&A transaction can be significantly increased due to the involvement of a statutory bankruptcy and insolvency regime with court supervision of the sale process or as a result of the utilization of alternative less customary sale processes such as stalking horse bid processes or live auctions. Conversely, in a down market such as we experienced in 2008, earnings deterioration, lower multiples for certain targets and/or industries and limited or reduced credit availability made effecting a sale transaction on the desired commercial terms very challenging. Under such conditions, a poor response to an IPO could potentially deflate the enthusiasm (and offers) of potential acquirors.

Conclusion

Following the economic uncertainty in late 2008 and in early 2009, several multinational companies seeking liquidity utilized this strategy in Canada for their Canadian subsidiaries as part of the implementation of various strategic alternatives. At the end of the day, each issuer will need to consider its own unique objectives, together with the objectives of its key stakeholders, the environment in which its business operates and its ability to realistically pursue both avenues given its existing resources, management team, board of directors, the existing state of its business and other key situation-specific variables.4

Footnotes

1 See, e.g., Liam Vaughan, "'Dual track' IPOs return", The Wall Street Journal, October 26, 2009, p. C5.

2 See Steve Schaefer, "Mergers Re-emerging", Forbes.com, January 5, 2010 and Amanda Lyle, "Keys to Success: Experts Offer Tips for All Stages of Partnering", BioWorld Today, October 14, 2008.

3 Qin Lian and Qiming Wang, "The Dual Tracking Puzzle: When IPO Plans Turn into Mergers", unpublished working paper (March 2007 version), pp. 5-6. In their study of a sample of 132 firms that withdrew IPOs in favour of acquisition by public bidders from 1984 to 2004, Lian and Wang found that the dual-tracking targets commanded a 58% acquisition premium over targets that did not dual-track. (p. 26)

4 I would like to acknowledge the contributions to this article by Andrew Cunningham of Stikeman Elliott LLP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.