IPO vs. M&A

Lynn Norris: Welcome to Navigating Beyond the Expected, a podcast from Truist Securities. In capital markets, strategy and preparation go hand in hand. Today's guests specialize in guiding companies through one of the critical choices related to growth, whether you go public or pursue the company sale path. I'm your host, Lynn Norris, and today I'm talking to West Riggs, who is the head of equity capital markets at Truist Securities, and Ryan Hubbard, who is managing director of mergers and acquisitions. Hi, West and Ryan.

West Riggs: Hey, Lynn.

Ryan Hubbard: Hey, Lynn. Great to be here.

Lynn Norris: West and Ryan, let's set the stage a little bit. We're going to be talking about how companies prepare for an IPO or for sale or for both at once. But let's get a little context first about how the markets and capital strategies interact. West, you've seen a lot of IPO cycles come and go. What are some common characteristics of times when IPO markets are active and also when they're more challenged?

West Riggs: Great question, Lynn. When you think about an IPO market, you really start at the very top. You think about an economy and how it's trending. Positive economy tends to set up for businesses doing really well, making a lot of strong earnings and creating momentum in the broader stock markets. So when we see the stock markets performing well, that creates opportunities for existing companies to issue stock and raise money in the stock market. When that is performing well and public companies are issuing stock, that then creates momentum for private companies to consider an IPO. So it really can be very predictable sometimes, but at other times it can be very unpredictable as to when IPO windows open and close.

Lynn Norris: So you just mentioned an IPO window being open or closed, and that refers to the favorability of conditions for going public. So what's your advice to companies wondering how to know when that window is open enough for them? I'm sure there are lots of variables beyond broad market trends.

West Riggs: That's right, Lynn. When we say the window is open, this suggests a broad population of IPO candidates can go public. So how do companies, or should I say their management and owners know if the IPO window is open for them? One, like we just talked about, are the broad markets performing well and are valuations increasing at the same time? Second, I'd look at the sector that the company is in. For example, biotech. How is the biotech sector trading in the public markets and how are valuations looking there? Third, I'd look at the company itself. Is the company a compelling, investable target? Do they have a growth story that will be attractive to investors? And that's very important.

All that said, it's pretty impossible to completely time the IPO windows. So my best advice to clients, it's to really think about, are you ready and are you a good candidate? And then prepare, not knowing exactly when a window will be there, but it's easier to slow down preparations; it is impossible to speed up to jump through a window.

Lynn Norris: Right. So, Ryan, on the M&A side, how do deal cycles typically line up with IPO activity? Is it that when one is up, the other is usually down? Or is it more complicated than that?

Ryan Hubbard: There's a really high positive correlation between the two markets, largely driven by equity valuations, interest rates, and CEO confidence. And while they generally move in lockstep, I would say the M&A markets are structurally stickier and more resilient than the IPO markets, which is far more sensitive to short-term market volatility and valuation.

If you look back at a couple of key periods in the history of both the IPO and M&A markets, there's a couple of sort of guiding time periods, in the first, the dot-com frenzy leading up to 2000. This was probably the area of highest alignment between those two markets. IPO volume peaked in '96, with around 700 offerings. And as that tech bubble matured, the exit shifted more towards large macro strategic M&A transactions, which we all remember the AOL-Time Warner merger for 165 billion, which remains one of the largest transactions in history. But when that bubble burst, both of those markets collapsed simultaneously. Not too dissimilar from the post-global financial crisis in 2008 where IPO activity remained subdued for a number of years and M&A recovered a bit more quickly, and really the only viable exit path towards liquidity for companies for a number of years.

And we saw the same sort of movement in tandem around the 2021 post-pandemic timing for both the equity and M&A markets. IPO proceeds peaked, I believe at an all-time high in 2021 with a lot of SPAC and high-tech growth activity that lined up really well with a record M&A year in 2021, largely driven by private equity firms deploying capital with an unprecedented level of dry powder. And then of course, rate hikes in 2022 to 2023 caused both of those markets to contract relatively sharply, showing their sensitivity to cost of capital.

Lynn Norris: So what drives confidence for buyers and sellers? What makes companies feel like it's a good time to pursue a sale or acquisition?

Ryan Hubbard: On the M&A side, most of the factors that West talked about generally hold true for M&A. Economic and geopolitical stability are key. Having an attractive cost to capital moves the needle in willingness to undertake M&A. But probably the least understood, but equally important piece is buyer and seller valuation expectations. We don't have a transaction unless there's a buyer willing to transact at the level sellers are looking to achieve. That became very noticeable just after that 2021 robust M&A environment where valuations stretched to multi-decade highs. And as the markets retracted as cost of capital went up, buyers were not willing to participate in transactions at the multiples that had been achieved in 2021. So you had a couple of years of relatively stagnant deal activity. So in a lot of ways, finding a willing buyer and a willing seller who are of like mind on valuation is probably the least understood, but one of the most important sort of pieces outside of the factors that West already articulated.

Lynn Norris: Sounds like it. So when markets are volatile or uncertain, as they often are, what other factors that might be more under a company's control should they be looking at when they're deciding what path to follow, or whether to just wait? West?

West Riggs: Yeah, it's true. Companies often focus too much on the external conditions to guide their strategies, when in fact, there are a lot of internal factors within their control. When you're thinking about whether you're going public or possibly engaging in a sale process, a couple of the things to think about are leadership and management readiness. Are they ready to be a public company management team? That takes a very different skill set than managing a successful private company. When you're in the public world, you are at the rigors of public investors. You need to have a very vibrant investor relations process. So much more goes into that senior management. Some management teams can succeed in public and private markets, but not all management teams are capable of both.

Another one is just thinking about financial reporting. Financial reporting is critical in both public and private companies, but the pressures in the public world are very different. You have quarterly reporting. You have to have guidance out there. So having the experience, systems, and controls in place is a must-have. Missing earnings as a young public company can be a death knell for the company's stock price.

I'd say the company culture is another thing to consider when choosing your path. Can the culture survive the rigors of the public markets? Or is the culture better staying private? Private companies enjoy the ability to be more flexible. Once public, the scrutiny, again, on the quarterly performance can have a profound impact on the culture. Ultimately, the owners of the companies will have the ability to pick the path they think is best. It's a balance of a lot of factors, but ultimate valuation is going to be one of the biggest drivers.

Lynn Norris: Let's dive a little deeper into that decision-making process between going public or selling the company, or even taking a dual-path approach that prepares the company for both at the same time. Ryan, I'm sure sometimes the choice is clear upfront. So when is pursuing one strategy over the other an easy, or at least easier, decision?

Ryan Hubbard: The choice between an IPO and a strategic sale is rarely binary, but there's some structural constraints in market realities that often make that decision somewhat easy as you're engaging your advisors. There are three things to think about. The first would be the scale floor. Companies need to be of a certain size to be attractive in the public markets. And a lot of founder-owned business and even private equity-owned businesses fall below that scale, where IPO, frankly, is not a viable option to them.

The second I would define as information asymmetry. There are companies that have complex proprietary technologies or operate in really niche-y industries that public investors may struggle to understand and may lend themselves better to a sale to a strategic buyer with sort of deep sector expertise that can justify a higher valuation for the business. On the other side, clean, high-growth companies with more predictable cash flows that are easier to sell into the public markets may push them more towards West's world and the capital markets.

And then that last category is distressed or declining growth businesses rarely make attractive IPO candidates, but are often part of a story that can be crafted to an investor set on a strategic sale.

Lynn Norris: So talk to me a little bit more about these certain kinds of companies. You mentioned size. Is it also industry or ownership structure-based? Are they better suited for one or the other just in general, or is it more a factor of all of those things plus their own goals, like West was mentioning?

Ryan Hubbard: Outside of the structural elements that I just mentioned, I think the other big decision point is around the need for liquidity versus a currency. So the ultimate goals of the shareholders are certainly coming into play here. If you're looking for 100% immediate liquidity, a sale tends to be a superior option. An IPO will typically lock up the shareholders for some time period and may even include a multiyear sell down process, which would expose shareholders to market volatility and waiting for their proceeds.

As we think about having an M&A currency, an IPO can be a very preferable path if a company plans to be an active acquirer. Listed stock can be a very powerful currency for future acquisitions to roll up other companies, one that private companies don't have the ability to match when they're competing in the markets. But there are no real constraints as we think about industry or sort of defined metrics around growth. I think every individual company that we take a look at with our clients can go down the IPO path or the strategic sale path if it meets some of those other criteria we talked about earlier.

Lynn Norris: So, West, an IPO can raise a lot of capital, of course, but what are some other important strategic trade-offs that companies should consider before they start down that road?

West Riggs: When you go public, you're selling a percentage of your company to public shareholders. Usually this ranges between 15 and 25% initially, and over time, that percentage will expand as the original owners sell more of their stock. This means that the control of the direction of the company starts to shift from the current owners that are taking the company public to the management team and, ultimately, the public shareholders. So you've got to be comfortable with this shift in control. Of course, there are ways to mitigate this with super-voting structures.

Governance and regulatory requirements is another important factor to consider. Going public means you'll need to disclose a lot more information around the structure of the company and the financial performance. These disclosures means a lot of public information and an elevated cost.

However, being public does create opportunities. It creates opportunities to incent and attract key employees by giving them stock options and/or stock grants. This can play a major role in attracting and retaining key talent. When you look at a lot of companies, name some of the big ones, Nvidia, Meta, Google, and many other public companies, they've created hundreds of millionaires just through the performance of the stock that were given to the employees.

Finally, of course, valuation. One large reason to go public is either the ability to capitalize on a valuation arbitrage that exists between public companies and private companies, or to capitalize on a view that going public and only selling a portion of your company will create longer-term value as you ride the wave of valuation growth over time. So there's a lot to consider.

Lynn Norris: Well, Truist Securities has helped take many companies public. Are there things that you find still surprise companies or executives who've never been through an IPO the most about this process? Is there something they're never ready for that you always find you have to explain?

West Riggs: Absolutely. I've worked with a lot of CEOs over the past 25 years, and without a doubt, CEOs and executives are very surprised in a couple of things. First, I'd call that the human side of going public. At the end of the day, it takes dozens upon dozens of people to successfully execute an IPO. From the many employees that are part of the deal team, to the large, vast group of lawyers, bankers, accountants, and other consultants, the coordination needed is really important, and it's a real factor. The IPO process is long, and I think CEOs and other executives get surprised by that. And while you're trying to run your day-to-day job and run the business, having to work on the IPO process is a big undertaking. It can take six months to well towards a year, start to finish.

And while the preparation, diligence, documentation is all really important, the last part of the process is the most important. And CEOs and executives at the tail end of the process can be worn out, but it's when the most important part starts, and that is the investor roadshow. So being prepared for that roadshow is important and surprising to executives. They think they know their company and how to tell the story really well, but at the end of the day, they are now needing to tell the story to investors. And telling the story that way is a very different story. It's a 25-minute presentation geared towards investors in a very different mindset. And so, the preparation for that is critical. And when you're preparing at the end of this long process, executives again are surprised by this. Then, of course, you go on that roadshow and you're telling the story 10 times a day over and over again for two weeks, and that's mentally and physically exhausting. So the stakes are high, and every interaction can influence the outcome of that IPO.

And then, finally, you get to the end of this process and the moment you've completed the IPO, the moment you're standing there and ringing that bell and your company starts to trade, it's both rewarding, but also very relieving. It marks a culmination of this very long journey, but it's only a point in time, the start of the next chapter of the company. And you look back as not just a business milestone, but it's a transformative experience. It strengthened their leadership and, oftentimes, team dynamics.

Lynn Norris: Right. So that's a lot to think about for them. Ryan, are there similar clear trade-offs when a company considers a sale when it comes to valuation and liquidity at close?

Ryan Hubbard: Yeah, absolutely. In a company sale, they're often a trade-off between valuation and immediate liquidity. A higher headline price frequently requires the seller to accept deferred, contingent or some sort of equity consideration to achieve those higher values. The way deferred and contingent consideration generally come into place is through an earn-out structure, where part of the proceeds for the transaction would be dependent on either future financial performance of the business or achieving some other milestones, such as regulatory approval for a product. When it comes to equity consideration, it depends on whether the acquirer is public or private. In the public context, taking a share of your proceeds and equity will often enable a buyer to stretch on valuation. It will also allow the seller to participate in potentially the synergies of the transaction, but those shares may be locked up for some period post-close.

In the private company stake, thinking about a private equity example, often sellers can achieve their highest valuations by agreeing to roll some of their equity alongside the private buyer. That often takes place in the private equity context of a roll of equity in the 20 to 30% of the equity of the business. Those acquirers will often stretch on valuation when they feel like the selling shareholders continue to have skin in the game and have aligned incentives for a second bite of the apple, meaning their eventual exit. But of course, that delays the liquidity of that portion of the value until the next sale, which in the private context could be five-plus years.

Lynn Norris: So there's a lot to consider there too for buyers and sellers. So, say I'm an executive at a company, and by my analysis, there are pros and cons to both going public and to a sale. How viable is it to put off that decision and start preparing my company for both at once? West?

West Riggs: Putting off that final decision and preparing for both an IPO and a sale is not only viable, but it's often the recommendation that we make to our clients. The goal is to ensure the best strategic outcome for our clients, and, oftentimes, that means preparing for both an IPO and possible sale and working as a team to continue to work for that best outcome.

Lynn Norris: So if this dual path is a viable option, let's talk a bit more about how it happens. Ryan, how does it work operationally? Aren't they two different teams?

Ryan Hubbard: Yes and no. And I don't want to sugarcoat this, because it's a lot of work for management, ownership, bankers, lawyers, accountants, and consultants. Coordinating two different and distinct deal paths, each with its own requirements, timelines, and audience is very complicated, and there are going to be debt, legal, and accounting costs in pursuit of the path, not ultimately taken.

That said, the companies that pursue the dual track really enhance the range of positive outcomes and typically in a better position to maximize value and exit certainty. A dual track requires strong coordination and preparation and resource management from your advisory team to focus on the process, while not disrupting the business that we're trying to provide liquidity for. If we get down into the weeds, the advisory team within equity capital markets and M&A will leverage one common diligence stream. So there's coordination among the teams around the initial stages of understanding the business at an incredibly deep level.

A lot of the work related to positioning the business, the financial performance, and the operations can be used between the teams, but there's some differences in what each team is trying to pull out of the company and, ultimately, market. On the sales side, strategic buyers are highly focused on synergies, integration potential, and cost takeout, where in West's public market world, there's much more emphasis on stand-alone growth prospects, long-term margin trajectory, and so the teams that you hire to do this for you have to be able to understand the different objectives of those different work streams.

If you think about how you pull that together on a timeline, think about two teams working in parallel through what I would call four phases. So, there's a preparation phase, an engagement phase. There’s sort of building the book, sort of attention stage, and ultimately an execution stage that each team are working in parallel. On the preparation side, on the IPO end, that's financial audits, SOX compliance readiness. Whereas, on the M&A side, it's quality of earnings reporting, preparation of marketing materials, like an 80- to 100-page confidential information memorandum to really get buttoned up before we go out and start talking to potential investors on both sides of the house. That engagement phase, your IPO team is drafting and filing the S-1 and sort of testing the waters. On the M&A side, we're launching likely a targeted auction and distributing those materials to put information in the hand of investors.

That third, what I would call the tension phase, is West and his team are out building the order book, roadshow presentation, whereas the comparable piece on the M&A side is management presentations where we're out in front of a handful of investors and forcing everybody through diligence of a data room and into final bids. That's the point where you have to pick a side, but that sort of leads to either the pricing on the IPO side and trading or signing the merger agreement and closing the sale on the M&A side.

Lynn Norris: So it sounds like there's still a lot of commonalities and prep work, although you mentioned a number of differences as well. Is there anything that's unique to one or the other that needs to be kept separate in some way? West?

West Riggs: I think there are. Capitalizing what Ryan said, there may be unique work streams, but it's leveraging a lot of the same information. So, on the IPO side, the unique thing is typically an IPO is going to have a handful to several underwriters. So engaging and working on that with that deal team is going to be a little different than the M&A side, which I'll get to in a second. So you're engaging with a larger set of underwriters. You're preparing your prospectus and registration statements, so all of the public disclosure. You're planning and executing the roadshows with investors. Again, that's a unique work stream on the IPO side. And you're thinking about, once public, the investor relations strategies.

When you flip over to the M&A side, the M&A team is going to be the one that's reaching out to and having all the negotiations with potential buyers. That is completely separate, and they are walled off from my team. Detailed buyer-driven due diligence, negotiating terms, and addressing maybe some structural items or antitrust if it's large enough. So there are a lot of things that the M&A team will be off doing, but the broader part is, and where dual-path comes together and works well, is that the base has a very leverageable amount of information.

Lynn Norris: So this seems like a potential conundrum, because IPOs are all about transparency, because you have to lay it all out there and all your public filings for your investors. But confidentiality is important in M&A, and you have nondisclosure agreements and tight controls on information. So Ryan, how do you handle that?

Ryan Hubbard: You're absolutely right. Confidentiality is incredibly important. When you're running an auction, you want to keep details around the process as close as you can, because that will help maximize the outcome. I'd also note, the amount of information prepared and shared with an investor in a sale process is much greater than that of an IPO, which makes sense when you're asking an investor to buy the entire company versus a small fraction of the company. And the way that we handle that is twofold. You mentioned nondisclosure agreements. Yes, those are very helpful, but I think we think more about restriction of access to information and gates to information as the true controls of how we keep the company's secrets private. A couple of things that we'll use are, in the early stages of a sale process, we are not going to share what I'd call data room access, so deep access to the company's information to bidders until they've put forth a viable and interesting proposal.

So we will receive what we call indications of interest from buyers, generally down-select to a single handful of names before we provide access to that second level of information. We also will often restrict access to information for competitors. So, while a private equity buyer may have unfettered access to the company's financials, operational data, and KPIs, a competitor in the space, who may or may not prevail in our process, needs to have much tighter controls on information shared with them. And then, of course, with antitrust and other factors, you can also bring in what's called a clean team to bring in a very limited scope of folks from a potential buyer to have access to the most sensitive sort of crown jewel information of the company to further enhance the controls on access.

Lynn Norris: So how long can a company keep this up? You mentioned earlier, at some point they're going to have to decide, what is that point?

Ryan Hubbard: We talked a little bit before about the pivot decision. The timing at which the board or the shareholders of the company need to make the decision to pursue the IPO or sale of the company generally happens right after the roadshow, and on the M&A side, at the time of final bids for the process. At that point, there's a valuation comparison where we may weigh headline M&A price against the long-term equity upside or currency value of being a public entity. We'd also weigh certainty of closing. If the M&A bids were to have heavy regulatory risk or earn-outs, the IPO may become a more attractive option.

There's also a market timing piece where factors outside of the control of the company or the advisory team may push you one direction or the other. There may be euphoria in the public markets where valuations have recently spiked or attractive. There may be recent M&A transactions that pushed multiples higher that push you one direction or the other. And so, that's part of having the flexibility, but you can put off that pivot decision pretty far to the end and learn a lot about the ultimate exit before having to make it.

Lynn Norris: Sounds like a lot goes into making all of this work. So, West, how do you pull the right people together at Truist to try to guide your clients toward this successful outcome?

West Riggs: For us, I think it's rather easy. We here at Truist are a big believer in one team. When you think about one team, what does that mean for us? It's being myopically focused on delivering the best strategic advice, the best strategic advice for the client, and then executing flawlessly on the client's behalf. When we bring multiple parts of the firm together, whether it's our M&A team with Ryan and the ECM team that I lead or any other part of the firm, we don't think about our specific products. There'll be times when the client will execute on a successful IPO, and there'll be times when they sell their company. In both instances, we view that as a successful outcome for the client, and when that happens, it's a successful outcome for us at Truist.

Lynn Norris: Well, those are some great insights on navigating this whole challenge of IPOs and M&A strategy. Public offerings, mergers, and acquisitions are some of the biggest decisions companies can make, so your thoughts are really helpful. Thank you.

West Riggs: Thank you.

Lynn Norris: All right, but before we let you go, I have just a few more questions for both of you, and I want you to answer them rapid-fire style. We'll go back and forth and we'll start with you, Ryan. Are you ready?

Ryan Hubbard: Sure.

Lynn Norris: All right. Are you a morning person or a night owl?

Ryan Hubbard: I'm very much a morning person. Up very early and first to bed.

Lynn Norris: All right. That's great. I am not. West, are you beaches, mountains, or just give me a city?

West Riggs: Beaches and the water all the way.

Lynn Norris: Great. All right. Ryan, what's something people are always surprised to learn about you?

Ryan Hubbard: Well, one of the biggest things that I am involved in outside of work is coaching youth baseball. So I coach a couple of baseball teams in my off time in Atlanta for my three sons.

Lynn Norris: Wow, that's great. West, what is a small joy you never skip?

West Riggs: Huh, that's a great question. I would have to say dessert. It's always a nice reward at the end of a great meal.

Lynn Norris: That is a small joy. All right. Ryan, what's one habit that helps you be a good teammate?

Ryan Hubbard: I think it's communication with our teams, bringing even the most junior teammates on a deal team into the process of communicating with clients and having them see how you handle different situations and react to different situations as part of their learning process. And so, the more we can communicate with our teams broadly, I think that's really helpful as a teammate if you're looking to create experiences and grow our talent base so that they can progress in their career.

Lynn Norris: That's great. All right, West, who influenced your leadership style early on?

West Riggs: I would say it was one of my first bosses in investment banking. I was working at a firm called Alex. Brown, and my boss really influenced a lot of how I think about client-first approach, and it's stuck with me all along.

Lynn Norris: That's great. All right. I have one more, same question for both of you, and you can each take a little more time with this one if you like. What's one way you try to go beyond the expected in work or in life? Ryan, to you.

Ryan Hubbard: So M&A is a really personal business where relationships and trust are often more important than the qualitative and quantitative analyses that we do for our clients. I like to go beyond the expected for our clients by acting like I have a real stake in their business. And that often means having brutally honest conversations about deal risks, timing, valuations. And I think that unbiased advice goes a long way to go beyond what folks expect from their other advisors.

Lynn Norris: I'm sure they really appreciate that too. West?

West Riggs: One of the things that I try to do to go beyond the expected is for the last 25-plus years of my career, I wake up every day super excited about the markets. I wake up and there is a news flow that has happened every night. I have 100-plus emails in my inbox about research reports, news reports, releases. And I'm excited every morning because there's something in there. There's something that's going to happen that will trigger an idea or a thought to be able to, working with our clients, to bring them an idea for a deal, an IPO, a market update, investor feedback, whatever it is, to have that energy and that excitement to continuously do that drives me beyond the expected to help our clients.

Lynn Norris: Well, that was great, guys. Thank you so much for being here on Navigating Beyond the Expected, and I hope we'll get to have you back soon.

Ryan Hubbard: Thank you, Lynn.

West Riggs: Thank you.

Lynn Norris: Listeners, thank you for joining us on Navigating Beyond the Expected. Each month, we bring you new conversations with Truist Securities experts on the issues shaping corporate and investment banking. Subscribe today so you never miss an episode and check out more Beyond the Expected insights, videos, and articles on the Truist website. You can also subscribe to I've Been Meaning to Do That, the podcast from Truist Wealth. I'm Lynn Norris, and we'll see you next time.

Truist Securities is the full service corporate and investment banking arm of Truist Financial Corporation. With a rich history extending back more than 125 years, Truist Securities offers a robust capital markets and investment banking platform that includes a comprehensive array of strategic advisory, mergers and acquisitions, and capital markets capabilities for corporate and institutional clients, including sales, trading, and research services in both fixed income and equity. The firm also provides corporate finance, asset finance, risk management, liquidity, and treasury management solutions to meet clients' full spectrum of financial needs.

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