The Day Ahead: IPO Today, Acquired Tomorrow?

Qian W Mao,Mingshan Zhang,Lin Zou

doi:10.22158/jbtp.v6n2p184

Abstract

We study the double exit phenomenon—new IPO firms get acquired quickly in the M &amp; A market. In this paper, we attempt to discern the distinct characteristics of new public firms that made them acquired soon after their IPOs. Specifically we find that double exit firms are those backed by venture capital. Double exit firms generally have prestigious investment banks underwrite their IPOs. High technology firms are more likely to be taken over soon after their IPOs. Also, double exit firms have higher level of intangible assets. We suggest that IPO may play an important role in firms’ following acquisition incidence. First, IPO helps to reduce ex ante transaction costs between firms and financial markets, such as raising external capitals. Second, IPOs wink signals concerning the quality of the firm.

Highlights

We study the double exit phenomenon—new Initial Public Offerings (IPO) firms get acquired quickly in the M & A market
77.9% Double exit firms are underwritten by prestigious investment banks, 14.4% higher than rest of the IPO firms, which confirms hypothesis H3
We attempt to discern the distinct characteristics of new public firms that made them acquired soon after their IPOs

Summary

Introduction

We study the double exit phenomenon—new IPO firms get acquired quickly in the M & A market. Press constantly reports firm’s decision between an IPO and takeover In another more well known example, analysts articulate that “Online payment company PayPal is trying to test the dismal initial public offering waters, and some analysts are speculating that its filing may serve as a tool to get its finances out in front of potential acquirers, including rival e-Bay” (Note 2). Venture capitalists, early stage investors, who wish to cash out and diversify their risks, choosing an optimal exit strategy is a complex undertaking. They consider traditional strategies, either Initial Public Offerings (IPO), or acquisition by another firm in the Merger and Acquisition (M & A) market. As most of the previous paper in this area examines IPO or takeover as a separate and independent path for private firms, the increasing number of double exit firms shows the evidence that firms are seeking www.scholink.org/ojs/index.php/jbtp

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