Dual Track Process in IPOs

Investment bankers have got quite creative with their approaches to selling companies over the past few years. Their target is to get the best possible valuations for their clients. They follow a wide variety of strategies to enable them to do so. One such strategy which has been followed in recent times is called the dual-track strategy. The purpose of this strategy is to get different classes of potential buyers to compete with each other and raise the valuation of the firm being sold. Let’s have a closer look at the strategy in the rest of the article.

What is a Dual Track Process?

Generally, when investors choose to exit a company, they choose to either make the initial public offer, i.e., sell to retail investors, or they chose to make private sales and sell to institutional investors via a merger and acquisition deal. Each of them can be called a single track. Under the dual-track strategy, both these paths are followed simultaneously. This means that the selling company continues to pursue both kinds of investors in parallel. Depending on how the negotiations go, the firm may choose one of two methods for selling their sale. In some rare cases, a combination of both methods will actually be used until the end to make the sale.

How Dual Track Processes Work?

The dual-track process is used as a simulation tool to understand the possible valuation that a company can get if it takes the mergers and acquisitions route vis-a-vis the public offer route. The exact working of a dual-track process is largely unstructured. This means that it depends upon the intentions of the selling company.

Selling companies often have a preferred mode of exit. This means that some companies will prefer to do a merger and acquisition-based exit, whereas others will want to make a public offer. The preferred method is often the first choice, with the other option being used as a fall-back in case the first option fails. This is the reason that there are many variations within the dual-track process. It is important for the investment bankers to bring the clients on the same page regarding the process that is likely to be followed.

In most cases, the process begins with the selling company forming two different teams. On one team, underwriters are appointed along with other team members required to launch a full-scale IPO. On the other team, legal and financial advisors are appointed to scout for possible mergers and acquisitions acquirers and to start preparing the paperwork. Both teams work in tandem, and the process for IPO begins with the filing of documents with the regulators.

The regulatory processes take some time in an IPO process. This time is utilized by the other team to fast track the M&A process. This means that meetings and due diligence conferences are held during this period. The company often wants to expedite the process. Hence, they do not deal with each investor one by one. Instead, they often deal with multiple investors within the same meetings. This sometimes helps them to start a bidding war and raise the prices.

The process of regulatory filings takes about 90 days in most countries. During this time, the company would have conducted several meetings and hence would be in a position to ascertain which process will provide the maximum valuation to the selling firm. Also, at this stage, other factors, companies have more certainty about other factors such as regulatory approval.

By the end of the regulatory approval, companies decide whether or not they want to do an IPO. If they want to continue with an IPO, they make announcements to the general public. It is rare for a company to announce an IPO to the general public and then take it back.

Advantages and Disadvantages of Dual Track Process

  • The most obvious advantage is that it allows firms to get the maximum valuation. It puts the maximum pressure on mergers and acquisition buyers. This is because they are not only competing with each other but also with retail investors. It is a known fact that companies following dual-track processes are more likely to receive a higher valuation.

  • It also helps protect the company against the vagaries of the market. If the market is in a recession when the IPO is being launched, the company can always look at other alternatives, which will help it increase its own valuation.

  • The disadvantage is that the dual-track process takes up a lot of the management’s bandwidth. The management team has to oversee both the IPO process as well as the M&A process at the same time. This is in addition to their day-to-day duties, which include managing the firm being sold.

  • The dual-track process is also quite expensive as compared to the standard process. This is because two sets of experts have to be engaged. This often means that double the fees have to be paid. This increased transaction cost often offsets the higher valuation that is received as a result of following this process. This is also the reason that investment bankers love this process. They stand to make much higher revenues per deal as compared to the standard IPO process.

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Investment Banking