The Dual Tracking Puzzle: When IPO Plans Turn into Mergers

Abstract

We examine a sample of 132 dual tracking targets - private firms entertaining acquisition offers at the same time as preparing for initial public offerings (IPOs) and eventually withdrawing their IPOs to be acquired after spending considerable time, money, and effort preparing for IPOs. We find that dual tracking private targets sell at a 58 percent acquisition premium relative to comparable private targets that never file IPO registrations, while their acquirers still earn a substantial average abnormal announcement return of 2.6 percent. Controlling for endogeneity effects does not change our results. The significant acquisition premium is due to neither dual tracking targets' improved bargaining power in negotiations nor higher potential synergy benefits for bidders. The premium is more consistent with the explanation that dual tracking private targets can signal their valuation to bidders and reduce valuation uncertainty by filing IPO registrations.