The past few years have witnessed a resurgence in the mergers and acquisitions and initial public offering markets—particularly for health care. Many private companies have pursued a dual-track M&A/IPO process, in which the company simultaneously pursues an IPO and a confidential sale. The dual-track process has been growing in popularity among health care companies, since the IPO process can be helpful in generating momentum for a potential sale in a consolidating industry.
Examples of large private companies that have successfully gone down the dual-track road include Bausch & Lomb, which was nearing the launch of its IPO road show when it was bought by Valeant in May 2013, and Biomet, which had already filed with the Securities and Exchange Commission for an IPO when it announced its merger with Zimmer. And these are not the only examples.
Dual-track processes allow companies to leverage their preparatory work, and to some extent the publicity surrounding the SEC filing process for an IPO, to pursue both an IPO and a sale of the company simultaneously. In particular, the publicity around a potential IPO provides a deadline for potential acquirors, creating a greater sense of urgency to sign up a deal before the target goes public, since it is significantly more expensive and complicated–and riskier–to acquire a public company.
As more health care companies, including “emerging growth companies” (EGCs) under the JOBS Act, plan for monetization events, they need to weigh several considerations when planning for a dual-track process:
* Confidentiality issues EGCs are permitted to submit registration statements confidentially with the SEC, and only file publicly 21 days prior to the roadshow. Filing confidentially may allow for a smoother IPO process by avoiding market speculation about IPO timing and valuation–and the company’s responses to SEC comments. But a confidential filing will not be helpful in generating acquiror demand, and it cannot be used by potential acquirors to expedite their due diligence. Companies pursuing a dual-track process that qualify as EGCs should consider filing publicly, particularly if a sale of the company is their primary focus.
* Investor/Acquiror meetings EGCs are permitted to engage in IPO “testing-the-waters” investor meetings, even prior to filing a registration statement. Because the SEC may request any written materials used in testing-the-waters meetings, companies should make clear in meetings with potential acquirors that they are being provided in connection with a sale of the company and not part of the IPO process. To the extent written materials are used as part of M&A meetings, they should be consistent with the IPO registration statement, since they may be discoverable in any IPO disclosure lawsuit. Also, potential acquirors should sign nondisclosure agreements to help protect against leaks or misuse of information by a competitor.
* Due diligence The same data room used for due diligence by potential acquirors can be used as the basis for the IPO due diligence to be conducted by the underwriting banks. Typically, an acquiror would conduct more extensive due diligence than an underwriter, and, as a result, an M&A data room will contain more documents than an IPO data room. For that reason, companies can start with the M&A data room and pare it back for IPO due diligence.
Dual-track processes have become a common strategy for health care companies. As firms, including those that qualify as EGCs, consider pursuing this strategy, they should take into account the factors above in determining whether a dual-track process is a viable strategy, and, if so, how best to execute the dual-track process to maximize the potential success of both tracks.
Reprinted with permission from the November 24, 2015 issue of Corporate Counsel © 2015 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.