Two Stage Exits: An Empirical Analysis of the Dynamic Choice between IPOs and Acquisitions by European Private Firms

Abstract

Using a dataset of European private firms, we undertake a dynamic empirical analysis of a private firm’s exit decision, previously modeled in the literature as a dichotomous, one-time choice between IPOs and acquisitions. We study how post-IPO considerations, such as the benefits arising from a potential post-IPO acquisition at a higher valuation, and the costs arising from a potential post-IPO delisting at a lower valuation, alter the initial exit trade-off between IPOs and acquisitions. Using a sequential logit model, we show that firms that are more viable against product market competition, characterized by larger private benefits of control, or lower information asymmetry, are more likely to choose an IPO over a direct acquisition as their initial exit mechanism. Post-IPO, firms that are more viable in the product market and are able to reduce information asymmetry to a greater extent using the IPO process are more likely to be acquired, while firms characterized by lower product market viability and higher residual information asymmetry are more likely to be delisted. We also quantify the valuation benefits and costs accruing to firms under alternative post-IPO scenarios. Overall, the results of our empirical analysis show how private firms may be able to incorporate the benefits and costs arising from post-IPO considerations into their initial exit decisions, and suggests how such incorporation may alter their initial exit choices.