For anyone watching the global investment market, it’s increasingly clear that the first half of 2016 has been something of a surprise in terms of the number of initial public offerings (IPOs). According to a report published by Dealogic, a mergers and acquisitions (M&A) research firm, this year has had the lowest volume of global IPOs since the financial crisis of 2009. This represents a decrease of 54 percent year-on-year in IPO volume, with figures totaling $47.8 billion during the first half of the year.
Due to extreme declines in the major stock indexes in 2009, it’s somewhat easy for experts to comprehend that year’s weak IPO market. In 2016, however, with relatively stable markets, a growing economy and improved employment figures, it’s less clear why the global IPO market is experiencing such meager activity.
In his Investopia article, “4 Reasons for the IPO Market Slowdown in 2016,” John Burke puts forth a theory stating that four factors are combining to drag the number of IPOs lower: startups staying private longer, overinvestment in startups, the Jumpstart Our Business Startups (JOBS) Act, and weak performances by 2015 IPOs. Another hypothesis to consider is that for a variety of reasons, companies are choosing to pursue acquisition rather than move forward with an IPO.
Why Acquisitions are an Attractive Alternative to IPOs
For worldwide deal making, 2015 was a record-breaking year, with $4.7 trillion in announced mergers and acquisitions, according to data from Thomson Reuters. This explosion of activity and deal value was due in large part to mega-deals—deals that are over $5 billion, such as Pfizer’s $191.6 billion offer for Allergan PLC—which account for 51 percent of the overall M&A value in 2015.
Given that the strength of 2015’s M&A market was unprecedented, it’s not entirely surprising to learn that M&A volume for the first half of 2016 is down 18 percent year-on-year, according to Dealogic. Regardless of this decreased volume, the benefits of M&A deals are often quite attractive and this may be influencing the IPO market slowdown.
Award-winning entrepreneur and value investor Warren Cassell theorizes that there are four reasons why companies may choose acquisition over an IPO: cheaper financing, speed, less stress and more resources. In his Investopia article, “Why IPOs are Becoming Less Attractive for Companies,” Cassell states that because interest rates in the U.S. are at record lows, leveraged buyout firms and corporations are able to finance acquisitions, using debt, inexpensively. This easy and inexpensive access to capital has led to increased M&As.
In addition to cheaper financing, Cassell argues that investors who want to liquidate their stake in a company quickly may opt for M&A because listing a company on the stock market can be extremely time consuming—taking from several months to years to complete the necessary regulatory requirements for an IPO. Stress is another factor noted by the 16-year-old investment wunderkind. Public companies face significant scrutiny from their investors and the press—an experience that is avoided by their private counterparts. Finally, companies that are acquired receive more than just funding from their buyer, with access to a variety of resources including valuable connections, expertise and sometimes a client base.
As experts continue their attempt to solve the puzzle surrounding the 2016 investment market, one thing is clear: Executives considering an exit strategy for their companies are rich with options.
As a firm providing PR counsel to growing technology companies, the team at Communiqué PR has assisted numerous clients through M&A transitions, with at least one client per year being acquired, on average. Keeping with the 2015 trend, we saw an increase in client acquisitions last year, with former clients Volometrix and Mobidia being acquired by Microsoft and AppAnnie, respectively.
For insights into developing effective messaging and communications plans, or for more about how Communiqué PR has helped clients facing M&A transitions, check out the following articles:
Working Yourself Out of a Job – The Right Way
Reflecting on Our Work with Mobidia
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