IPO Vs. M&A: By Chance Or By Choice?
Should companies be built to last or to sell? Well, it would be righteous to believe in former or practical if your ecosystem is mature. But in India the runway to highly regulated public listing that can take minimum of 10 years has given way to the strategic or secondary sale as the de facto exit route. So, that's by chance not by choice.
IPO is the best exit option for any company, however the mergers and acquisitions (M&A) market starts getting ignited when going public becomes an option for the company. In the recently held acquisition of nine-year old San Francisco-based applications management company AppDynamics by technology behemoth Cisco for a jaw-dropping $3.7 billion, AppDynamics could have been listed at around $2 billion. And this deal happened right before its IPO.
"If IPO is not an exit option then the company's price gets depressed in the M&A market. Google and Facebook can keep fighting with its competitors but the moment they see their competitor going public after which it will be independent, that's when the M&A market picks up," says Avnish Bajaj, Founder and MD, Matrix Partners India.
The good part is that in IPO the entrepreneur and investors are not dependent on a single buyer. "For me the next biggest evolution of that needs to happen is for Indian companies to become large scale enough to go public," envisions Bajaj. Matrix portfolio companies believes Bajaj such as Quikr, Practo, Ola, Mswipe, Dailyhunt have achieved scale to list themselves in few years.
Going public, however, often is a case-to-case subject. There are times when private markets are ahead of public markets and vice versa. If public markets can give better valuation then going for IPO is the obvious choice. In case, private markets run ahead and companies are better off capitalizing their value there then acquisitions makes more sense. At the end, it is more about value maximization.
"In India, companies take a bit longer to mature to be IPO ready. Consequently, for early stage investors in most cases acquisitions seem quicker and bit simpler opportunities for exit. For IPO, there are a lot of regulatory requirements and market attractiveness and thus it adds few more years to the exit that investor seeks," opines Kumar Shiralagi, Managing Director, Kalaari Capital.
No Surprise if Investors Call the Shots
Nonetheless, in few cases, acquisitions are driven by investors, not entrepreneurs if the company is taking more than stipulated holding time of investors and give them returns or if it is turning to be a distressed asset. But most of the time it is entrepreneurs' call. "Unless there is a prominent shareholder driving the board agenda, in most cases entrepreneur will drive direction of the company even if he/she has less than 50 per cent ownership. It also relates to going public," says Sandeep Singhal, Co-founder, Nexus Venture Partners.
But in cases where investors do call the shots is because institutional investors invest someone else money who are limited partners (LPs) and seeks timely returns and not when entrepreneurs want to return. "We inform and even document at the time of investment that we would like to exit in x number of years and we cannot stay whether we like it or not for any period beyond that," adds Shiralagi. So entrepreneurs shouldn't be too surprised when investors knock the exit door. "These are natural constraints," reasons Shiralagi.
Other than the reason that a private or strategic buyer is willing to pay a premium to what the listing price is likely to be that takes away the risk of timing and execution of IPO and effectively locks investors' gain, there are companies which seem better from private market perspective instead of going public. "There are companies which have seasonal earnings like ice cream business which performs well in summers. If you go public, then there will always be a whiplash. As a public company, the market expects certain predictability to your results that you can forecast, and show growth month-on-month or year-onyear," explains Singhal.
(This article was first published in the March issue of Entrepreneur Magazine. To subscribe, click here)