Download Moving from private to public ownership: Selling out to

Moving from private to public ownership: Selling out to
public firms vs. initial public offerings*
Annette Poulsena, ** and Mike Stegemollerb
a
Terry College of Business, University of Georgia, Athens, GA 30602, USA
b
Rawls College of Business, Texas Tech University, Lubbock, TX 79409, USA
Abstract
We study the movement of assets from private to public ownership through two alternative
means: the acquisition of private companies by firms that are public (sell-outs) or by initial public
share offerings (IPOs). We use a matched sample to control for many of the industry- and
economy-wide variables that other researchers have found to be important in the decision to go
public. Our results suggest that firms will move to public ownership through an IPO when they
have greater growth opportunities. Sell-outs seem to be preferred when managers are liquidating
more of the firm and when they face financial constraints.
February, 2005
JEL Classification: G34, G32
Keywords: initial public offerings, sell-outs, going public, acquisitions
* We thank Jeff Coles, Laura Field, Kathleen Fuller, Randy Heron, Jim Linck, Sandy Klasa,
David Mustard, Lance Nail, Jeff Netter, and Bill Petty for their many helpful comments. In
addition, we appreciate seminar comments at the University of Georgia, Texas Tech University,
and Texas A&M University, and at the 2004 Corporate Governance Conference at the University
of Texas and the 2004 Financial Management Association Meetings.
** Corresponding author. Tel: (706) 542 3645; fax: (706) 542 9434.
E-mail address: [email protected] (Annette Poulsen)
Moving from private to public ownership: Selling out to public firms vs.
initial public offerings
Abstract
We study the movement of assets from private to public ownership through two alternative
means: the acquisition of private companies by firms that are public (sell-outs) or by initial public
share offerings (IPOs). We use a matched sample to control for many of the industry- and
economy-wide variables that other researchers have found to be important in the decision to go
public. Our results suggest that firms will move to public ownership through an IPO when they
have greater growth opportunities. Sell-outs seem to be preferred when managers are liquidating
more of the firm and when they face financial constraints.
1. Introduction
Takeovers of private firms by publicly traded firms (sell-outs) and initial public offerings
(IPOs) are two methods through which privately owned assets move to public ownership. These
transactions are comparable since they represent significant shifts in ownership structure, a
channel for raising capital, and a means of liquidation for owners. However, there are
fundamental differences between the transactions. While IPOs result in a significant change in
ownership dilution (see, e.g., Mikkelson, Partch and Shah, 1997), private takeovers represent an
even more dramatic change with prior owners frequently relinquishing their entire ownership
stake. We consider firm-specific characteristics that may help to determine why a firm may
choose to go public through an IPO when a sell-out to a public firm is a viable alternative for
accessing public equity markets. Our evidence suggests the importance of growth considerations,
financial constraints, and owner preferences for liquidity in the decision.
IPOs are subject to great interest because they represent a significant change in the capital
structure and governance of the firm. There is an extensive literature on why firms decide to go
public through an IPO. Using aggregate and industry-level data, Lowry (2003) suggests that IPO
volume is related to firms’ demands for capital and investor sentiment. Pagano, Panetta, and
Zingales (1998) look at firm-specific data such as firm size and market-to-book valuations and
report that Italian IPOs are more likely to be larger firms and to have higher valuations. Most
closely related to our study, Brau, Francis, and Kohers (2003) look specifically at the IPO versus
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takeover decision, relying on aggregate and industry-level data. They report that IPOs are more
likely under macroeconomic conditions such as high cost of debt and a “hotter” IPO market,
while takeovers are more likely in high market-to-book industries.
Our work adds to this previous research by considering firm-specific factors that help to
determine the choice of the method of moving to public ownership. We consider several factors
that might influence the choice between a sell-out and an IPO, including the owner’s desire for
liquidity, growth opportunities, financial constraints, and asymmetric information in firm
valuation. Overall, our results support the importance of growth opportunities in the firm’s
decision to undertake an IPO rather than a sell-out. We also find that sell-out firms are
characterized by lower insider ownership both prior to and after the transaction as compared to
IPO firms, suggesting that owners in sell-out firms prefer liquidity to control. Firms that are more
difficult to value are more likely to transition through sell-outs to public firms as are firms with
more liquidity constraints, perhaps due to difficulties in selling to diffuse shareholders when the
firm is in financial distress.
Our analysis uses a unique sample construction that allows us to consider specific firm
characteristics that might affect the choice of the transition method. We identify 366 sell-out
firms with sufficient data for analysis and then create a comparison IPO sample, matched by the
value of the firm, the industry and time. Thus, we explicitly control for several of the
macroeconomic and industry variables found to be important by previous researchers – the cost of
capital, industry market-to-book ratios and the hotness of the IPO market, for example.
Rather than relying on aggregate or industry data, we collect public filings from the
private firms and from the acquirers in the takeovers to gather firm-specific data for each firm in
our sample. These data allow us to directly compare similar firms and consider how each firm
determined its means of moving to public ownership. The two samples are very comparable in
average, median and aggregate size. The average, median and total size of sample sell-outs is
$196.2 million, $113.1 million and $72 billion, respectively. For IPOs, these measures are $211.4
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million, $122.6 million and $77.4 billion. Thus, our research is focused on larger-size sell-outs
compared to average-sized IPOs. This analysis is particularly interesting since it is in this area
that the managers have the clearest opportunities to decide between the two means of transition.
The remainder of the paper begins with a background discussion of the relevant literature
on IPOs, sell-outs and venture capital in section 2. We develop our testable hypotheses in section
3. Section 4 discusses sample selection and descriptive statistics of transitioning firms. The
results of our empirical tests are in section 5 and section 6 contains concluding remarks.
2. Background
Sell-outs are transactions where a public company buys all of the outstanding shares of a
privately held firm. The private firm sometimes retains the service of an investment banker in
facilitating the transaction. These transactions often result in target management selling a
significant portion, if not all, of their ownership of their firm. In IPOs, however, the private firm
generally sells off only a portion of the outstanding equity, with the previous owners retaining
significant ownership and control of the public corporation.
Sell-outs differ from IPOs in several other ways. From a takeover perspective, sell-outs
represent the possibility for synergy between the firm and the acquirer (e.g., see Bradley, Desai
and Kim (1988) and Mulherin and Boone (2000)). Sell-outs do not involve the lengthy public
disclosure, do not require the additional costs of regulation faced by IPOs, nor are they bound by
regulations on trading after the transaction such as the quiet period for issuing owners in IPOs. As
Chemmanur and Fulghieri (1999) show, information gathering is done by a large number of
investors in IPOs in contrast to a limited number of investors in a sell-out. In addition, any
underpricing effects are gained by the acquirer’s shareholders.
When private firms move to public ownership, they must choose between the alternative
methods to do so. A recent Wall Street Journal (Grimes, 2004) story begins:
IPO or sale? Sale or IPO? These days many young companies that seemingly are
ready to go public through stock offerings are instead surprising the market and
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agreeing to be bought by other companies, making the potential IPO moot. It’s a
“bird in hand” strategy that is spreading its wings.
When Viewstar Corporation’s decided to forego an IPO in lieu of a sell-out, the firm
issued the following statement by Kamran Kheirolomoom, the President and CEO of Viewstar,
illustrating a similar perspective:
Although Viewstar had planned an IPO of Viewstar Common Stock and
considered it an attractive opportunity for the Viewstar shareholders, the
Viewstar Board of Directors has concluded that the anticipated benefits of
the proposed merger with Digital will provide a better opportunity for the
shareholders to realize the full value of their investment.
Although both of these transaction types provide many similar benefits to the firm and its
managers, academic literature and the popular press focus primarily on IPOs. It is generally stated
by entrepreneurs that an IPO is the most desired form of “harvest” (see, e.g., Kensinger, Martin
and Petty (2000)). However, Sahlman (1990) documents that more venture-backed firms resulted
in sell-outs than IPOs in the 1980s (709 sell-outs versus 555 IPOs). Our research helps to
determine the characteristics of firms that lead to a preference for one mode of transition versus
another.
Beneficial characteristics of a sell-out that are shared with an IPO include access to
public debt and equity markets (through the parent in the case of the sell-out), liquidity of
ownership previously tied up in an illiquid firm, and the possibility of linking management and
employee compensation to traded securities. Firms that sell their assets to public firms are also
able to access public markets with significantly lower regulator costs. Sell-outs may be less
beneficial than IPOs in other ways, though. Management loses its ability to set firm policy due to
dilution of ownership. In addition, it may be more difficult to raise capital for the firm’s projects
since it would be competing with other projects of the acquiring firm in internal capital markets.
Previous research suggests that both sell-out firms and IPO firms are profitable prior to
going public, outperforming similar firms. Matsusaka (1993) studies sell-outs in the late 1960s to
mid 1970s and finds that private firms undergoing a takeover are more profitable than comparison
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public firms. He suggests that the transactions result from synergy considerations, not corporate
control issues. Camerlynck and Ooghe (2000) examine a sample of private Belgium firm
takeovers from 1992-1994. They also find that private firms involved in sell-outs are, on average,
more profitable than their industry cohort and industry- and size-matched counterparts.
Additionally, they show that these firms are highly liquid, have low leverage, and are less likely
to experience financial distress than median firms within their industry.
Similar analysis of operating performance has been performed for IPOs. Mikkelson,
Partch and Shah (1997) and Jain and Kini (1994) report the operating performance of private
companies before and after the IPO. Both studies find that IPO firms outperform their industry
counterparts and that firms that go public are doing so when they are doing relatively well.
Pagano, Panetta, and Zingales (1998) suggest that the high valuation may reflect market timing
by firms when they go public and find that firm valuation drops quickly after the IPO.
Multiples are often used as the basis by which firm value is assessed in the sell-out and
IPO process. Koeplin, Sarin and Shapiro (2000) analyze a set of sell-outs and public takeovers
from 1984 to 1998. They find that sell-outs are valued at a 20-30% discount to similar public
takeover deals. However, the magnitude of the discount only holds for multiples of earnings and
disappears when multiples of revenues are used for evaluation. Kim and Ritter (1999) analyze
IPO multiples for 1992 and 1993. A comparison of the multiples from Koeplin et al. and Kim and
Ritter suggests that IPOs are valued somewhat higher than the sell-out firms: the mean (median)
market-to-book multiple for an IPO is 3.5 (3.0) vs. 2.4 (1.9) for a sell-out, and the IPO price-tosales multiple is 2.7 (2.1) vs. 1.4 (1.1) for a sell-out. Lerner (1993) finds that the return to
investments in private firms that go public via an IPO is more than four times that of sell-outs for
venture-backed private firms, seemingly justifying any higher valuation placed on IPOs and paid
by investors. Thus, although the difference in pre-transaction performance is small there is
evidence that firms that choose to go public via an IPO are valued more highly than firms in a
sell-out.
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For an IPO, the initial offering return is referred to as underpricing and represents a
transfer to the new public owners of the firm. In his analysis of IPO underpricing, Ritter (1987)
documents that the average stock-price return on the day of an IPO is 14.8% for firm commitment
offers and 47.8% for best efforts for 1028 firms taken public from 1977 to 1982. Fuller, Netter
and Stegemoller (2002) report the returns to bidding firms from acquisitions of private targets in
the 1990s. They find that private acquisitions result in a 2% average return to bidders for the five
days surrounding the announcement of the acquisition. When the sell-out dollar returns to the
bidder are viewed as a percentage of the target's value, the announcement day returns for the
bidder averages 49.7% of the value of the sellout firm. This return to the acquirer is similar to
Ritter's finding on underpricing in best effort IPOs. Thus, returns to purchasers of private firms
may consist of both synergy gains and underpricing effects. The market assessment of the value
transferred from the old owners to new owners seems to be similar in sell-out and IPO
transactions.
3. Determinants of Method of Transition from Private to Public Assets
We hypothesize that firm-level characteristics, such as the owner’s desire for liquidity,
the firm’s growth opportunities, the firm’s liquidity constraints, and difficulties in valuation of the
firm will influence private owners’ decision between undergoing an IPO versus a sell-out. While
earlier work by Brau, Francis and Kohers (2003) suggests the importance of macroeconomic and
industry factors in the sell-out vs. IPO decision, our matching procedure holds these economywide considerations constant. Instead, our inspection of the public filings of our sample firms
allows us to better understand the motivating, firm-specific factors for each firm’s choice. In this
section, we provide additional discussion on the influence of firm characteristics on the choice of
the method of transition made by the entrepreneur and other owners of the firm.
3.1. Liquidity and ownership considerations
Perhaps the most significant consequence of a going public transaction is the resulting
dilution of ownership. Pre-transaction owners must consider the amount of control they will lose
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and the resulting trade-offs. In an IPO, owners sell off a portion of their stake in the private firm.
The dilution effects of an IPO are relatively minimal since the average IPO in our sample leaves
the original owners with approximately half of the post-transaction ownership of the firm.
However, a sell-out entails selling the whole entity to a public company that is most often
comprised of diverse shareholders. Unless the acquiring firm pays with stock, the owners of the
private company retain no ownership of the newly merged company. In the event that stock is
used as a method of payment, the private company is typically small enough that the original
owners acquire a small block of the merged firm’s stock.
Ownership, or the level of control rights, is negotiated throughout the life of a private
firm. As the firm has need for capital infusions, insiders must decide among alternative types of
capital investment that have differing effects on control rights. In the years or months leading up
to the transition from private to public ownership, owners have had numerous opportunities to
relinquish ownership and control and perhaps even fully exit their initial investment altogether.
“Angel” investors, venture capitalists, banks, large corporations and other institutional investors
offer entrepreneurs capital in exchange for an ownership stake in the private firm. Many of these
entities invest in private firms simply to recognize a capital gain when the firm is sold to the
public, to another firm, or via management buyout. Those firms where insiders have a smaller
stake in the firm may value their control rights significantly less than those firms where insiders
have struggled to retain control over the decisions of the firm. This viewpoint suggests that firms
with low insider ownership will be more likely to sell out to a public corporation via a takeover,
whereas firms with a high percentage of insider ownership will be more likely to undertake an
IPO.
An alternative perspective suggests that private firms with low insider ownership have
convinced outside investors that the firm and its management team are of high enough quality
that the firm is worthy of an investment. When such a firm needs to raise additional capital, it
might prefer to use an IPO and to not force high quality management to relinquish control. It
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follows that low insider ownership might imply a higher value attached to management retention
and control and would thus be associated with a higher probability of choosing to move to public
ownership through an IPO. If venture capitalists are better at identifying higher quality
management, then this scenario might be especially true when they have made significant
investments in the firm.
3.2. Growth and the need for capital
We expect the growth characteristics of the private firm to influence the choice of
transition method for private-firm owners. A firm may range from being a capital-starved firm
with many growth opportunities, to a mature firm producing a great deal of cash flow but having
few positive net present value projects in which to invest. In an IPO, the private firm raises public
capital and allocates it to projects that management deems most important. The ability to raise
public capital is also relevant for sell-outs but in a constrained framework. After the sell-out is
completed, the investment opportunities of the sell-out firm must compete with other subsidiary
operations for scarce resources within the merged firm in the internal capital market. Stein (1997)
suggests that the internal capital market may enhance the value of the overall firm as managers
are able to allocate funding to winners, known as winner picking. However, Stein also shows that
these same firms may be likely to participate in “loser sticking” – allocating funds to poorly
performing projects on the basis of it being a “favorite” project. Since sell-out firms are
competing in the internal capital market for funds, high-growth firms might avoid a sell-out due
to the constraints imposed by that market. By undertaking an IPO, the firm may have greater
flexibility in accessing resources, especially through its new access to the equity markets. Thus,
we hypothesize that firms with greater growth potential will choose to go public through an IPO
rather than through a sell-out.
Myers (1984) suggests that there is a strong link between a firm’s growth options and its
capital structure. Smith and Watts (1992) and Gaver and Gaver (1993) find empirical support for
this premise. In particular, they find that public firms with more growth opportunities are more
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likely to use equity financing than those firms with fewer growth opportunities. In the case of
sell-outs and IPOs, capital structure may be the constraint that spurs a firm to seek public
financing. A firm with positive investment projects but constrained by a large amount of debt
may raise sufficient funds for its projects through an issuance of public equity. Similarly, a firm
with few investment opportunities may seek to be purchased by a firm with a larger capacity for
debt, thereby reducing free cash flows and agency costs. Using measures of overall growth in the
economy, Lowry (2003) finds a positive relation between the economy-wide demand for capital
and IPO volume. Pagano, Panetta, and Zingales (1998), however, consider growth measures for a
sample of Italian firms that choose to go public and find little support for the importance of the
firm’s recent growth.
In addition to considering the impact of potential growth, firms that are considering
moving to public status either though an IPO or a sell-out to a public company may do so because
they have moved beyond their optimal amount of debt financing or because their liquidity is
insufficient to fund the obligatory fixed payments accompanying debt. An IPO or sell-out
provides the opportunity for alternative sources of equity financing. Since IPO firms may be less
constrained in their ability to raise equity relative to sell-out firms, we expect that firms that are
more capital constrained would choose an IPO over a sell out. Looking at economy-wide factors,
Brau, Francis, and Kohers (2004) find some evidence that transitioning firms are more likely to
go public via an IPO when Treasury bill rates are higher though their results considering other
measures of the demand for funds are insignificantly different from zero. We look at leverage and
cash constraints of the firms in our sample to see if firms with greater cash constraints are more
likely to choose an IPO over a sell-out to a public firm.
3.3. Asymmetric information
The buyer’s ability to gather and properly assess information about the firm seeking
transition may play an important role in determining the method by which a firm moves to public
ownership. Ellingson and Rydquist (1997) argue that firms with assets that are not easily valued
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by diverse public shareholders are more likely to choose a direct sale to another firm or
individual. Subscribers to an IPO are, in general, institutional managers that do not have
particular expertise in the operational intricacies of the private firm. These managers then offer
the shares to a dispersed group of even more uninformed investors. While investment bankers and
money managers are more informed than the general investor, it is still difficult for them to value
a set of assets that have unique qualities. In contrast, another company operating in a similar
environment to the private firm would be better able to accurately value these firm-specific
assets. Additionally, firm-specific information may retain its value only when the information is
not accessible by outside competitors, as suggested by Chemmanur and Fulghieri (1999). By
keeping information undisclosed, the private firm is able to hold a competitive advantage over
other firms in the same industry, both public and private. Undertaking an IPO exposes firmspecific information much more than if the firm was acquired by another public company.
We expect that firms that are more difficult to value will be more likely to use a sell-out
to transition to public status.1 Firms with assets that are more easily valued by dispersed public
shareholders are more likely to choose an initial public offering. However, we note that this
hypothesis may be difficult to measure empirically. For example, high-growth firms are generally
considered to be firms where it is difficult to identify the future prospects of the firm. Since we
expect high-growth firms to be more likely to use equity markets to finance that growth, as noted
in the previous section, the two hypotheses suggest opposite empirical predictions. In addition to
growth, however, we offer several alternative measures of information availability including the
age and the profitability of the firm. We expect that there will be less information for more
profitable private firms and firms that invest less in R&D since individual investors and money
1
From a different perspective, Zingales (1995) argues that IPOs can give managers of private
firms a means to establish a market value of the company before liquidating their position. Field
and Mulherin (2003) show that IPOs are followed by a higher rate of takeover in the few years
following the transaction than other publicly traded firms. This pattern is not confirmed in our
data; by the end of 2003, 120 of the acquirers of the sell-out firms and 120 of the IPOs had been
acquired or merged into another firm.
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managers may use historical returns as an indicator of future profitability or investments in R&D
may be difficult to value.
4. Sample Information and Empirical Results
We select the sell-out and IPO samples from Securities Data Corporation (SDC)
databases on U.S. Mergers & Acquisitions and U.S. Global New Issues, respectively. Dates are
restricted to 1995 – 1999 for the announcement date of sell-outs and the issue date of IPOs. This
period has several advantages. These five years represent an especially active IPO and takeover
market. There were many transactions in many different industries, allowing us to examine the
breadth of the market in our analysis. In addition, the Securities and Exchange Commission’s
EDGAR database began keeping electronic filings in 1995 for sell-outs and in 1996 for IPO
prospectuses, increasing data availability.
Table 1 presents descriptive statistics of the frequency and size of IPOs and sell-outs on
SDC. We examine all listings on SDC, and require some basic information to be included in this
summary table. IPOs must be of US firms, must be listed on NYSE, AMEX or Nasdaq, must be
an original IPO, must not be a spinoff and must be an offering of common stock. Sell-outs must
have a disclosed dollar value, must be a private US firm, the acquirer must be traded on the
NYSE, AMEX, or Nasdaq, and the acquirer must acquire 100% of the target. In addition,
financial and utility firms are eliminated from both samples.
The number and value of sell-outs is understated since acquiring firms are not required to
report, nor publicly announce, insignificant acquisitions. The following statement from a
February 4, 2002 Wall Street Journal article (Maremont, 2002) illustrates this point:
Tyco International Ltd. said it spent about $8 billion in its past three fiscal
years on more than 700 acquisitions that were never announced to the public.
… [Tyco’s chief financial officer] said the company doesn’t disclose details
on its numerous smaller deals because they aren’t “material” given Tyco’s
huge size.
Panel A of Table 1 reports the number and value of sell-outs and IPOs as reported on
SDC, given the above restrictions. The median deal value for the 4,455 sell-outs reported on SDC
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is $14.5 million. In contrast, the median market value of the 1,677 IPOs is $109.8 million.
(Market value of IPOs is measured as the number of shares outstanding multiplied by the
midpoint of the share price on opening day. We do not use the number of shares sold in the IPO
since most IPO transactions are for less than 50% of firm ownership.) Average values vary
similarly – the average sell-out is valued at $51.3 million and the average market value of an IPO
firm is valued at $243.3 million. The total value of firms involved in IPOs dominates the total
value of firms undergoing a sell-out; from 1995 to 1999, $408 billion transitioned from private to
public ownership via IPO versus $228 billion via sell-out. The mean and median deal size
increases over the period analyzed, also. Sell-outs more than double in the amount paid per deal
from an average (median) deal value of $31.5 ($10.3) million in 1995 to $83.1 ($20.0) million in
1999. This trend is even more distinct for IPOs; the average (median) deal value in 1995 is
$120.4 ($72.8) million and is $464.9 ($250.6) million in 1999. The frequency of IPOs relative to
sell-outs also changes over the five-year period, reflecting the cyclical nature of “hot” IPO
markets. For IPOs, 1997 and 1998 were the two lowest years in terms of number of deals. The
same years were the highest two years for sell-outs.
We place several restrictions on our sample for the rest of our analysis. We first identify
all sell-out firms that match our criteria and then select matching IPO firms. We outline below
our sample selection criteria for sell-out firms. Starting with the U.S. Mergers & Acquisitions
database, we identify all targets with a disclosed dollar value and limit the sample further as
indicated below:
1. The deal value must be for at least $50 million. SDC defines deal value as the total
value of consideration paid by the acquirer, excluding fees and expenses. This step
leaves 22,485 firms.
2. The target must be a private firm based in the United States, leaving 7,471 firms.
3. The acquirer must be a publicly traded U.S. firm traded on the AMEX, NASDAQ or
NYSE, leaving 1,149.
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4. Financials and utilities are removed, leaving 813 firms.
5. The deal value must be at least 10% of the acquirer’s net assets. Ten percent is the
level of materiality as defined by the Securities and Exchange Commission.
Significantly more data are available from acquirer filings when the target crosses
this threshold. This step leaves 608 firms.
6. The firm is not a spin-off, roll-up, nor a subsidiary. This leaves 577 firms.
7. There must be financial data for the private target in the form of SEC filings such as
S4, 8K, S3, Proxy, or S1 filings. This leaves 549 private takeover transactions.
8. Of the 549 possible transactions, we are able to find 366 transactions with at least one
year of historical financial statements.
All of the data used in the analysis are collected using Disclosure Global Access and the
Securities and Exchange Commission’s EDGAR database. Data for the sell-out sample are
generally available through filings made by the acquiring firm. Securities regulation S-X states
that “if securities are being registered to be offered to the security holders of the business to be
acquired, the financial statements…shall be furnished for the business to be acquired....”
Acquisitions that are less than 10% of the acquirer’s total assets are exempt from this regulation.
Firms that issue equity in conjunction with a business combination file S4s, while significant
transactions are also detailed 8K, S1, S3 and proxy filings. The S4 filings provide historical
financial statements, and other information such as records of fees paid by the acquired firm to
the investment banker employed, a timeline of events leading to the purchase, reasons for the
transaction, and the ownership structure of the firm prior to and after the acquisition or IPO.
Matsusaka (1993) only studied sell-outs that were fully or partly financed with an equity
issuance, while approximately 30% of sell-outs in our sample are cash deals that have no partial
equity financing.
Our data are also limited in that many sell-out firms do not have a full 3 years of
historical financials. This is due, in part, to the large number of development stage corporations
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that are acquired. In addition, there are requirements found in regulation S-X that relate the
number of years of historical statement reporting required to the relative size of the target to the
acquirer.2
From the sample of private takeovers, a matched set of IPO firms is created, matching by
time of transaction, industry and size. Industry classifications are based on Fama and French
(1997). We could not identify Fama-French matches for 22 firms, so they are matched by 2-digit
(8 firms) or 1-digit (14 firms) SIC codes. For IPOs, size is defined as the market value of all
shares following initial trading (not just those sold in the offering); for sell-outs it is defined as
the deal value as reported by SDC. The full IPO sample is collected from SDC given the
following constraints:
1. The IPO firm must be based in the United States and traded on the NYSE, AMEX, or
Nasdaq.
2. Financials and utilities are excluded.
3. The market value of the company performing the IPO is more than $50 million.
These restrictions result in 1,290 IPOs. From these firms, we choose a matched sample of
IPOs for the sell-out sample. The average (median) absolute difference in firm size is $59.8
million ($7.9 million) and the average (median) difference in time of the offering is .5 years (0
years).
Panel B of Table 1 provides the similar data as in Panel A, but the sample is limited to the
366 sell-outs in our sample and the 366 matching IPOs. Note that we match the 1995 sell-outs to
IPOs from 1996 since we were not able to identify IPO prospectuses on either EDGAR or
Compact Disclosure for 1995. The two samples are very comparable in average, median and
aggregate size. The average, median and total size of sample sell-outs is $196.2 million, $113.1
million and $72 billion, respectively. For IPOs, these measures are $211.4 million, $122.6 million
2
Additional reading on these requirements can be found in Regulation S-X, Rule 3-05 – Financial
Statements of Businesses Acquired or to Be Acquired, available at the SEC web site, http://www.sec.gov.
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and $77.4 billion. Relative to the full sample, our research is focused on larger-size sell-outs
compared to average-sized IPOs. Our focus is particularly interesting since it is in this firm size
range that the managers have the clearest opportunities to decide between the two means of
transition.
In Table 3, we report the reasons for transition from private to public ownership as stated
in SEC filings. We were able to collect reasons for transition from 78 sell-out documents,
concentrated in S4 statements, and in all 366 IPO prospectuses. The discrepancy in number of
filings is due to the uniform filing requirements for IPOs and the more scarce and non-mandatory
nature of the corresponding information for sell-outs. We group the rationale for transition into
several broad categories and then further categorize the reasons offered within those groups. Our
broad categories include reasons related to access to capital and growth, debt, payouts, marketing
and personnel, and other reasons.
For IPO firms, the reasons given for transition focus mainly on the capacity of the firm to
grow. More than 80% of the IPO firms mentioned the need for capital access or the desire for
funding to achieve growth through, for example, acquisitions, research and development, or
capital expenditures. IPO firms also specifically cite the ability to raise working capital (58%),
and the ability to fund future acquisitions (35%), capital expenditures (29%), research and
development (18%), and expansion (15%). In addition, 55% of the IPO firms specifically
mentioned the desire to reduce debt. All of these reasons suggest that the IPO firms are more
growth oriented than sell-out firms.
In contrast, sell-out firms place greater emphasis on liquidity and the ability of the
owners to “harvest” their initial investment. Only 68% of the sell-out firms mention access to
capital or growth in some way as compared to 80% of the IPO firms. However, 88.5% of the sellout firms mention future payouts of the firm as the key determinant for the transition, compared
to 18.9% of the IPO firms. More than 78% explicitly state they are looking for liquidity, another
5.2% say they plan to pay a distribution or repurchase stock and 35.9% indicate that a sell-out
16
would have favorable tax consequences with respect to payouts. Of the 18.9% of the IPO firms
mentioning payouts to shareholders, 7.4% of those cases reflect the repurchase of preferred stock,
which is probably held by venture capitalists. Sell-out firms are also more likely to mention
reasons that reflect strategic considerations, such as marketing abilities or other synergistic
benefits from merging into another firm.
Table 4 provides median values for accounting, ownership and other firm-specific
variables for our samples of sell-out and IPO firms. In general, we identified the balance sheet
and income statement items for almost all of the firms in both samples. However, ownership data
were more difficult to identify for the sell-out firms. As can be seen in these data, sell-out firms
are generally significantly larger than IPOs in terms of revenues, total assets, and several income
measures in terms of both medians and mean differences for each matched pair, even though the
samples were matched on the basis of the value of the transaction. Sell-out firms also tend to be
older than IPO firms, and have more employees. IPOs generally have greater insider ownership
prior to the transaction and maintain higher insider ownership after it. Thus, these data suggest
that sell-out firms tend to be larger, older and more established than the sell-out firms. We refer
back to these descriptive statistics in the following analysis of our empirical results.
5. Empirical results
We first report summary data and univariate tests on our variables of interest and follow
these results with our logit regression analysis of the choice between the methods of going public.
While the logit analysis provides a more comprehensive view of the impact of the explanatory
variables, it requires complete data for every observation. With the scarcity of data for the sell-out
sample, the univariate analysis allows us to provide summary information about differences
between the samples to the extent possible with available data.
5.1. Insider ownership
While sell-out and IPO transactions are both means to change the firm from private to
public ownership, a very basic difference between the two transactions is the post-transaction
17
ownership of insiders. In sell-out transactions, insiders maintain ownership only if they accept
payment in the form of the acquirer’s shares and, in that case, their control rights are diluted
substantially. In IPOs, however, the insiders can establish how much of the company they want to
keep and what fraction they wish to sell in the IPO.3 Thus, we expect IPOs to be more likely in
those cases where insiders wish to maintain control.
Table 4 provides evidence consistent with this hypothesis though we only have insider
ownership data for 73 of the sell-outs prior to the transaction and 155 of the sell-outs after the
transaction, including 105 of the sell-outs that were for all cash where we assume the posttransaction ownership stake is 0%. The median insider ownership prior to the transaction of firms
purchased by public companies is 62.7%, which is significantly different from the 71.8% insider
ownership of firms that chose to undertake an IPO. The disparity is also evident in the difference
in the first quartile ownership (35.9% for sell-outs vs. 51.0% for IPOs) and the third quartile
ownership (78.1% for sell-outs vs. 90.8% for IPOs). Thus, even prior to the transaction, insiders
in sell-out firms have significantly lower holdings than in IPO firms.
More distinct than the difference in pre-transaction ownership, however, is the difference
in post-transaction ownership of insiders. The median ownership of insiders after the transaction
for sell-outs is 0% vs. 50.8% for IPOs. For the 50 sell-outs where the selling managers maintain
an ownership position in the acquiring company, the median ownership is 19.5%.4 Pre-transaction
owners lose control of the firm in almost all sell-outs. In IPOs, at least 50% of the pre-transaction
owners keep control of the firm. The difference in the change in ownership is statistically
significant and is consistent with sell-outs being more of a liquidity event for the owners rather
than a means to raise capital for the firm.
3
Downes and Heinkel (1982) and Ritter (1984) provide evidence suggesting that prices in an IPO are
higher for those transactions in which insiders retain a larger proportion of shares.
4
The percentage change in insider ownership in each firm is also reported in Table 4. The median change
in insider ownership is 45.9% for sell-outs and only 17.3% for IPOs. The change in ownership at the lowest
quartile is 27% for sell-outs and 10.6% for IPOs and at the largest quartile it is 65.6% for sell-outs and
26.6% for IPOs.
18
5.2. Growth and capital needs
Table 5 presents univariate statistics on different growth measures for sell-out and IPO
firms to help assess the growth prospects of the firm. We find that prior to the “going public”
transaction, IPO median sales growth is 39.0% for the year prior to the transaction and 32.2% for
the year before that, as reported in Panel A. These growth rates are significantly greater than the
median growth in sales experienced by sell-out firms of 22.1% and 19.1% for the year prior and
the two years prior to the transaction, respectively. The median growth in sales over the full twoyear period is 89.4% for the IPO firms and 43.0% for the sell-out firms, with the difference again
significantly different from zero.
We also measure the aggregate growth of the firms by growth in total assets and growth
in capital expenditures. Median asset growth for IPOs in the year prior to the transaction is
27.0%, which is significantly higher than the median growth in assets for sell-outs of 14.1%.
(Balance sheet data are only available for two years prior to the transaction.) We find similar
results for capital expenditures. Growth in capital expenditures is significantly higher in the year
preceding the transaction in the IPO firms (median equals 56.5%) relative to the sell-out firms
(median equals 16.3%). This evidence is consistent with our hypothesis that private firms with
greater growth potential will prefer to transition to public status through an IPO as opposed to a
sell-out.
We differentiate the sample on the basis of whether the private firm had received venturecapitalist backing. Gompers (1995) suggests that venture capitalists are more likely to invest in
high growth firms and firms with more uncertainty about their future earnings. In our sample, 119
of the sell-out firms are backed by VCs, while 177 of the IPOs are backed by venture capitalists, a
significant difference. For those firms with VC backing, the involvement of the VCs is similar.
Given that a VC has backed the firm, the median number of years invested in the firm is 3 in both
samples, the median number of rounds of VC financing is 3 for sell-outs and 4 for IPOs, and the
19
median number of VC funds investing in the firm is 4 for sell-outs and 5 for IPOs, with the latter
two measures significantly higher for IPOs.
In Panel B of Table 5, we report support for Gompers’ suggestion that venture capitalists
are more likely to invest in higher growth firms, whether the firm eventually goes public through
a sell-out or an IPO. Growth in sales is significantly higher for VC-backed firms for both sell-outs
and IPOs, and the same relation is observed for growth in assets and capital expenditures, though
the difference is not always significant.
Valuation multiples provide an additional measure of the growth opportunities of the
firms in our sample. In general, higher valuation multiples of either assets or earnings is
suggestive of future growth. The dollar amount that investors pay for a private firm serves as the
only observable market value that is comparable across IPOs and sell-outs. In Table 6, we
document the dollar amount paid for the firm as a multiple of total assets and sales. We do not
consider multiples of earnings or cash flows due to problematic nature of negative values for
these accounting items. We measure the market value of sell-outs as the deal value reported by
SDC. For IPOs, we use the product of opening market price and total shares outstanding.
The median market value to book value of assets for IPOs is 6.1, significantly greater
than the 2.9 ratio for sell-outs, suggesting that IPOs have more growth opportunities and therefore
are valued more highly than a comparable sell-out firm. Confirming this observation, the market
value to sales ratio is also significantly higher for the IPO sample as compared to the sell-out
sample. In Panel B of Table 6, we consider the impact of VCs on the valuation multiples.
Whether backed by VCs or not, we find that both the market value to assets ratio and the market
value to sales ratio is higher for the IPO firms.
In addition to the relation between growth and capital structure and the choice of the
method of transitioning to public ownership, we consider the impact of leverage, liquidity and
financial distress on that choice. Panel A of Table 7 reports differences in the debt structure of the
firms. In general, the two samples are very similar in their debt. Total debt to assets for both sets
20
of firms is 71% in year -1 and close to 70% in year -2. There is no significant difference in
interest payments to total debt between the sell-out firms and IPOs.
We do find significant differences between the two samples in measures of liquidity and
financial distress. In Panel B, we report the cash to total asset ratio and the current asset to current
liability ratio as measures of the liquidity of the firms. Median scaled cash holdings for sell-out
firms for years -1 and -2 are 6.4% and 5.9%, respectively. Scaled cash holdings for IPOs are
significantly higher than that of sell-outs at 8.6% and 9.0% for years -1 and -2, respectively.
There is no significant difference between the current ratio for the firms. The greater cash
holdings of IPO firms contradict the hypothesis that these firms sell public equity because they
are unable to meet their short-term liquidity needs.
Panel C considers additional measures of potential financial distress. We report here the
percentage of firms with interest payments greater than free cash flow, as measured with
EBITDA and the percentage of firms with interest payments greater than cash holdings.
Surprisingly, these two measures are contradictory. We find that in the year prior to the
transaction 32.5% of IPOs have interest expenses that exceed their EBITDA, significantly greater
than the 20.3% of sell-outs where this is true. However, when we consider interest expenses
relative to cash holdings of the firm, significantly more (35.3% vs. 28.7%) of the sell-out firms
have interest expenses that exceed cash holdings. We combine these measures in an interactive
variable in the regression analysis to further consider their impact on choice of transition method.
Our results seem to suggest that IPO firms have lower cash flows but not lower cash holdings
relative to sell-out firms. The low and often negative cash flows of the IPO firms may reflect the
relatively early development stage of growing firms.
5.3 Asymmetric information
The ability of a firm to produce sustainable profits may have a significant impact on the
marketability of a firm to the general public. The earnings of a firm may serve as the single best
proxy for the probability of future positive performance. Conversely, poor profitability may result
21
from a firm being in the development stage, or it may be the result of poor management or
inefficiencies due to small scale. We measure pre-transaction performance with two accounting
measures: operating income scaled by sales and operating income scaled by total assets, as
reported in Table 8. Both return measures indicate that sell-out firms are more profitable than IPO
firms before the transaction occurs. Median returns on sales for sell-outs range from 8.7% in year
–1 to 6.1% in year –3; these numbers for IPO firms range from 3.2% in year –1 to 2.5% in year –
3. Similar results are found when operating income is scaled by total assets. Median return on
assets for sell-outs is 8.7% in year –1 and 8.0% in year –2. Again, the return measures are lower
for IPO firms; they are 3.2% in year –1 and 2.9% in year –2. The initial profitability results are
not consistent with our hypothesis that, if profitability is a proxy for less asymmetric information,
more profitable firms will undertake an IPO.
We also consider returns after adjusting for industry performance, as reported in Table 8.
We calculate the abnormal operating return by subtracting an industry return from the private
firms’ return measure. Our measure for the industry return is the return on an equal-weighted
portfolio of publicly traded firms in the same two-digit SIC code. Overall, we find the
performance of private firms significantly below that of publicly traded firms in the same
industry. The median industry-adjusted return on sales for sell-outs ranges from -2.8% in year -1
to -3.8% in year -2. For IPOs, the industry-adjusted measures range from -5.6% to -7.7%. Most of
the industry-adjusted measures for both sets of firms are significantly less than zero and the IPO
measures of return are significantly less than the comparable measures for the sell-out firms. The
industry-adjusted results confirm the findings from the non-industry-adjusted measures that sellout firms do not seem to be subject to more asymmetric information.
The age of the firm is an alternative proxy for possible asymmetric information.
Cumming and MacIntosh (2001), in a study on venture capital exits in Canada and the United
States, suggest that older firms tend to have a more established market and management team,
and a longer operating history. These characteristics reduce informational asymmetries between
22
the owners and potential investors. In Table 4, we provide results on differences in firm age. We
are able to determine 191 founding dates for sell-outs and 343 for IPOs. We find a significant
difference in the median age of IPOs versus sell-outs, though again the results are counter to the
asymmetric information hypothesis. At the 25th percentile, the firms are 4 years old for both sets
of firms. At the 50th and 75th percentile operating history is 8 years and 15 years for IPOs and 10
years and 23 years for sell-outs. Additionally, the average ages of IPOs and sell-outs are 14 and
19 years, respectively. These results suggest that the reduced profitability of IPOs versus sell-outs
may be the result of being in the early stages of development for IPO firms and not their overall
quality.
In Table 9, we report three additional measures of asymmetric information in the private
firms at the time of, and leading up to, the transition. The first is research and development
expense scaled by firm sales. The value of research and development is generally difficult to
value by the general market, but is perhaps more easily valued by acquiring firms with which
there are synergies to be gained. We find that the dollar amount invested in research and
development, whether scaled by sales or assets, is significantly greater for IPOs than sell-outs, as
measured by the Wilcoxon test statistic. However, the median level of research and development
is zero percent of either assets or sales for both sets of firms. We also measure information
asymmetries with intangible assets scaled by total assets, and find no significant differences in
these ratios. Thus, these alternative measures of asymmetric information issues again do not
support the importance of information asymmetry in determining the transition method for private
firms.
5.4. Logistic Regressions
We use logistic regression analysis to provide more comprehensive analysis of the
various univariate tests provided above. While univariate tests can offer insights into factors that
might be important in determining the choice of transition method, multivariate analysis allows
better understanding of the various interactions between the variables. We present results from
23
our logistic regression analysis of factors influencing transition method for private firms that
accessed public equity markets via a sell out to a public firm or an IPO in Tables 11 and 12. Table
11 presents results based on the largest sample possible. Table 12 provides additional results
where the sample size is allowed to fall as we introduce additional explanatory variables that are
not available for all firms. Table 10 reports the correlation matrix for the variables used in Table
11.
The explanatory variables represent the broad categories of hypotheses investigated. In
the initial regression presented, we proxy for growth of the private firms through scaled capital
expenditures and whether the private firm was backed by venture capitalists. Scaled capital
expenditures indicate whether the firm is actively expanding its asset base. This measure is
available for all but one firm since it relies on only one year of data. Backing by venture
capitalists is generally associated positively with growth in the firms, as reported in Tables 5 and
6. The venture backing variable is available for all firms in the sample while we lose a significant
number of observations when we use the change in assets or sales directly in the regressions. We
include the alternative measures of growth in robustness testing reported in Table 12.
We measure the importance of capital constraints with the leverage of the firm (total debt
scaled by total assets) and also a variable indicating whether interest expense is greater than the
cash holdings reported on the balance sheet. In the last three regressions in Table 11, we add an
indicator variable for whether interest expense is greater than EBITDA and also an interactive
variable that measures whether EBITDA and cash are both less than interest expense. We
consider the latter a measure of financial distress since the firm does not have sufficient resources
to pay interest expenses from either source.
The third hypothesis we investigate is whether firms that are more difficult to value are
more likely to transition via a sell out rather than an IPO. It may be easier to market and sell a
difficult-to-value firm to a closely related entity or to a small group of buyers. We use several
measures to proxy for valuation uncertainty. First, since firms that have greater accounting profits
24
may be easier to value, we use industry-adjusted return on assets as a measure of the profitability
of the firms. R&D (scaled by assets) is an alternative measure of difficulty in valuation, with
firms having more R&D being more difficult to value. We use the log of sales in the year
preceding the transaction as a third measure of difficulty in valuation, which proxies for the size
of the firm with the expectation that larger firms should be easier to value.
We find support for our hypothesis concerning growth of the firm. Those firms that have
higher capital expenditures are significantly more likely to perform an IPO as are firms that
receive VC backing. In both our univariate analysis and the regression analysis, our results
suggest that those firms that are growing rapidly have a greater need to access equity markets
through an IPO rather than through the more constrained environment of being part of another
firm.
We also find support for the importance of other capital structure considerations. While
there was not a significant difference in leverage between our two samples in the univariate tests,
in the regression analysis we find that firms with higher leverage, as measured by total debt
scaled by total assets are more likely to choose an IPO. Since an IPO results in a lower debt to
asset ratio and since evidence suggests that higher growth firms choose to be less dependent on
debt, this result is consistent with our evidence that higher growth firms choose to go public
through an IPO.
The coefficient on the indicator variable showing whether interest expenses are greater
than the firms’ cash holdings is insignificantly different from zero (as is the coefficient on
whether interest expenses are greater than EBITDA in unreported regressions), downplaying the
importance of liquidity constraints in the transition decision. However, when we include the two
indicator variables as an interaction term – i.e., a value of one indicates that the firm has
insufficient cash holdings or EBITDA to cover interest expenses – we find that the firm is more
likely to choose a sell-out. This result suggests that those firms that are most liquidity-constrained
(or in financial distress) find accessing the equity market through an IPO less attractive or are less
25
able to access those markets directly. Thus, this result combined with our earlier growth results
emphasize the importance of growth, rather than liquidity constraints, in leading firms to enter
into an IPO.
We also consider whether asymmetric information and difficulty in valuing the firm has
an impact in the choice of transition method. We use several measures to proxy for difficulty in
firm valuation. The industry-adjusted return on assets, a measure of profitability, and R&D
expenses have a significant correlation coefficient of -.75 and when they are entered in the
regression together, both are insignificantly different from zero suggesting a multicollinearity
issue. When entered separately, they are each significantly different from zero. Firms that are
more profitable are significantly more likely to go public via an IPO, as are firms with less R&D.
These results confirm the expectation that firms that are more difficult to value are more likely to
access public markets by marketing and selling the firm to a small set of buyers that can more
readily value the firm. Our univariate results suggested that more profitable firms would choose a
sell out. Here, once factors such as growth and capital constraints are controlled for, we confirm
our expectation that more profitable firms choose to go public via an IPO.
Our third measure for difficulty in valuation is the log of sales in the year preceding the
transaction, with the expectation that firms with more sales would be less difficult to value and
therefore be more likely to choose an IPO, analogous to our finding with respect to profitability.
However, we find the opposite – firms with more sales are significantly less likely to access the
public markets through an IPO. This finding is consistent, however, with the stylized fact that
many firms that went public through an IPO, especially in the late 1990s, were in the initial early
stage of development and expecting to grow rapidly. In many cases, these relatively young firms
had very low sales. Fourteen of the firms in our IPO sample had sales less than $50 million; none
of the sell-out firms had sales below $50 million. In general, it seems that the expectation of rapid
growth dominated the information asymmetry effect in our sample.
26
In Table 12, we present several alternative specifications of the regressions in Table 11.
In the first three regressions, we add alternative measures of growth for the firm – sales growth in
regression one, asset growth in regression two, and capital expenditure growth in regression three.
Because these variables require two years of data, they are not available for the full sample.
However, even with the reduced sample size, we find that the latter two measures of growth are
associated with significantly higher probability of accessing public equity markets through an
IPO.
In the fourth regression of Table 12, we include insider ownership after the transaction.
We lose more than half of the asset sale sample when we include this variable but we do confirm
the univariate tests showing that insiders are likely to keep higher control when they undergo an
IPO. Most of the other variables, however, become insignificantly different from zero,
presumably because of the reduced sample size.
6. Conclusions
There are two primary means through which privately held stock is transferred to public
owners – acquisitions of private firms by public corporations and initial public stock offerings.
These transactions are similar since they are both channels for accessing the public equity market,
reflect significant shifts in ownership, and are a means of liquidation for owners. However, they
have many differences in terms of the dilution of ownership, access to public equity markets,
liquidity of owner investment and structure of post-transaction management.
We compare these transactions for insights into the decision-making process of
entrepreneurs and institutional owners with respect to the one of the largest transactions a firm
may undergo. We use a unique sample of 366 sell-outs and 366 IPOs that are matched by market
value of the firm, industry and year that allows us to directly compare similar firms that could
choose either method of transition. We gather firm-specific information from public filings of the
firms themselves or of the acquiring firms, while most previous research in this area has relied on
industry- or economy-wide data. In addition, by focusing on firms that have an average market
27
value of about $200 million ($120 million in median value), we are directly comparing firms that
could viably choose either transition method.
The evidence suggests that firm characteristics contribute significantly to the decision of
whether a firm accesses public equity markets through an IPO or a sell-out. Most importantly,
firms that are characterized by high pre-transaction growth and higher valuations are more likely
to transition with an IPO. In addition, we find that insiders of sell-out firms dramatically reduce
their control of the firm while insiders of IPOs maintain significant stock ownership and that
firms that are more difficult to value are more likely to transition through sell outs to public firms.
Our results also suggest that firms with more liquidity constraints may be more likely to choose a
sell-out, perhaps due to difficulties in selling to diffuse shareholders when the firm is in financial
distress.
Our results add to our understanding of this very important decision made by firms
looking to move to public ownership. In addition, we contribute to the general understanding of
why firms choose to do an IPO. Through our matched sample, we control for many of the
industry considerations and macroeconomic factors such as cost of capital and periods of market
overvaluation that have been suggested by previous authors as explanations for the decision to
undertake an IPO. By contrasting the IPO and sell-out decisions with extensive firm-specific
information from the various filings related to the transaction, we are able to confirm the
importance of ownership preferences, growth opportunities, liquidity constraints, and difficulties
in firm valuation in determining the appropriate firm organization.
28
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30
Table 1
Values of Sell-outs and IPOs from 1995 through 1999
The following table describes the size and number of deals in a given year. The total row provides the average deal
value and also sums the deal values and number of sell-outs and IPOs. Deal value is defined as the total value of
consideration paid by the acquirer, excluding fees and expenses. Market value is defined as the midpoint of the price on
the opening day multiplied by the number of shares outstanding. The average, median and total columns are reported in
millions of dollars.
Sell-out Deal Values
IPO Market Values
Average Median
Total
N
Average Median
Total
Panel A: All transactions
1995
1996
1997
1998
1999
Total
31.5
41.2
48.9
46.7
83.1
51.3
10.3
13.7
13.0
16.0
20.0
14.5
1995
1996
1997
1998
1999
Total
163.4
193.1
169.7
183.1
244.3
196.2
112.0
114.5
94.0
116.9
130.7
113.1
19,029
34,027
54,574
48,601
72,210
228,442
603
826
1,116
1,040
869
4,455
120.4
172.2
206.4
289.9
464.9
243.3
N
72.8
94.7
93.6
127.1
250.6
109.8
39,616
83,696
66,677
53,928
164,094
408,010
329
486
323
186
353
1,677
111.1
93.8
134.1
167.3
122.6
20,163
17,459
14,370
25,373
77,365
105
113
64
84
366
Panel B: Sample transactions
4,084
16,411
12,898
16,659
21,744
71,798
25
85
76
91
89
366
192.0
154.5
224.5
302.1
211.4
Table 2
The Goodness-of-fit for the Matching Procedure of IPOs and Sell-outs
Descriptive statistics for the matched sample of IPOs and sell-outs is reported in this table. The first column represents
the difference in size, as measured by the deal value of sell-outs and the initial market value of IPOs, between the two
samples. Column two shows the number of firms that we are able to match using Fama and French (1997) industries. It
also reports firms that are matched by two-digit SIC and the remainder of firms that are either matched by one digit SIC
or matched without using industry as criteria. The last column displays the difference in the transaction year between
IPOs and sell-outs.
Difference in size
Industry differences
Difference in years
Mean = $59.8
Median = $7.9
Standard deviation = $174.9
Exact matches (Fama-French) = 344
Mismatched but same 2-digit SIC = 8
Mismatched in different 2-digit SIC = 14
Mean = 0.5
Median = 0
Standard deviation = 0.87
Table 3
Reasons Given for the Transition from Private to Public Ownership
The following table represents reasons found in S.E.C. filings for private firms either being acquired by a public
company or undertaking an initial public offering. Sell-outs are represented in columns two and three and IPOs are
represented in the last two columns. There are more observations for IPOs since the information gathered from
prospectuses for IPOs is uniform, while the corresponding information for sell-outs is scarcer and not always
mandatory. In addition to the reason reported by the private firm, the frequency with which the reason is reported is
recorded in both absolute and percentage terms.
Reason
Sell-outs
(N=78)
#
%
Access to Capital and Growth
Acquisitions
3
3.9%
Capital Expenditures
0
0.0%
General Access to Capital
34 43.6%
Growth
33 42.3%
R&D
20 25.6%
Working Capital
2
2.6%
Total
53 68.0%
Debt
Debt Reduction
5
6.4%
Payouts
Favorable Tax Consequences
28 35.9%
Liquidity
61 78.2%
Pay a Distribution
2
2.6%
Repurchase Stock
2
2.6%
Repurchase Preferred Stock
0
0.0%
Total
69 88.5%
Marketing and Personnel
Issues Related to Personnel
16 20.5%
Marketing Activities
32 41.0%
Total
39 50.0%
Other
Create Value
11 14.1%
Efficiencies / Scale / Synergies
43 55.1%
Industry Conditions / Competition
18 23.1%
Reorganization & Alliances
0
0.0%
Risk Reduction
27 34.6%
Timing
3
3.9%
IPOs
(N=366)
#
%
130
107
204
54
67
217
294
35.5%
29.2%
55.7%
14.8%
18.3%
59.3%
80.3%
202
55.2%
0
0
35
7
27
69
0.0%
0.0%
9.6%
1.9%
7.4%
18.9%
5
17
17
1.4%
4.6%
4.6%
0
0
0
4
0
0
0.0%
0.0%
0.0%
1.1%
0.0%
0.0%
Table 4
Descriptive Statistics for Sell-out and IPO Firms for Transactions from 1995 to 1999
The following table provides the median observation for sell-outs and IPOs from the sample. Wilcoxon test statistics
for differences in distribution are reported in the description rows and are represented by asterisks. The p value for the
mean difference in variables equal to zero is in the last column. Dollars are recorded in millions.
Sell-out
IPO
p value
Revenues prior to transaction***
$47.7
366
$26.9
366
.0066
Total assets prior to transaction***
$35.0
366
$23.0
366
.0381
Retained earnings***
$1.3
337
-$2.7
364
.0061
Operating income prior to transaction***
$3.9
366
$0.8
366
.0180
Undistributed free cash flow***
$6.1
365
$1.7
366
.0109
Net income***
$1.6
366
$0.1
366
.0579
Capital expenditures
$2.0
365
$1.7
366
.9544
$113.1
366
$122.6
366
.1155
Years of operating history***
10
268
8
355
.0006
Number of employees***
345
112
218
366
.1055
47
36
47
364
.6113
Insider ownership prior to transaction***
62.7%
73
71.8%
364
.1014
Insider ownership after the transaction***
0.0%
155
50.8%
364
.0001
51.7%
47
17.3%
364
.0001
2.1%
186
2.7%
366
.1353
Dollar value of transaction
Age of CEO
Change in insider ownership***
Transaction expenses as % of deal value***
***
**
*
significantly different at 1% level
significantly different at 5% level
significantly different at 10% level
Table 5
Growth variables using Accounting Numbers in Sell-outs and IPOs from 1995 to 1999
This table presents the median growth rates for sales, total assets, and capital expenditures. Three years of pretransaction data is available for income and cash flow statement variables. Balance sheet data is available for the two
years prior to the transaction. Year 0 represents the year in which the transaction occurred. Panel A shows growth rates
in the year before, the year prior to the year before, and the two years prior to the transaction. Wilcoxon test statistics
for differences in distribution are reported in the sell-out rows, and are represented by asterisks. Panel B partitions the
growth rates by whether the firm received venture backing or not. Growth rates in this panel are represented by the
change in sales, assets and capital expenditures from year -2 to year -1. The last column represents the Wilcoxon twosample test probabilities. The number of observations appears below the median growth rate for both panels.
Years
-2 to -1
Panel A
Years
-3 to -2
Sales
Years
-3 to -1
Sell-outs
22.1%***
294
19.9%**
202
43.0%***
202
IPOs
39.0%
331
32.2%
279
89.4%
279
Sell-outs
14.1%***
300
-
-
IPOs
27.0%
337
-
-
Sell-outs
16.3%***
294
29.6%
187
43.6%***
187
IPOs
56.5%
342
56.8%
288
156%
288
Total assets
Capital expenditures
Panel B
Non-VC
VC backed
backed
Sales
Pr > [Z]
Sell-outs
28.5%
106
19.4%
188
.087*
IPOs
66.7%
165
28.2%
166
.000***
Sell-outs
17.5%
111
16.1%
189
.862
IPOs
53.5%
169
30.6%
168
.078*
Sell-outs
23.4%
107
16.1%
187
.654
IPOs
90.6%
171
42.3%
171
.011**
Total assets
Capital expenditures
***
**
*
significantly different at 1% level
significantly different at 5% level
significantly different at 10% level
Table 6
Valuation Multiples of IPOs and Sell-outs from 1995 to 1999
This table presents valuation multiples for IPO and sell-out firms. For every multiple the numerator is market value for
an IPO and deal value for a sell-out. The market value / book value of assets uses the value of assets from the balance
sheet. The sales multiple is value scaled by total revenues. In Panel B, we distinguish by whether the transitioning firm
was backed by venture capitalists or not. Wilcoxon test statistics for differences in distribution are reported in the sellout rows, and are represented by asterisks. Panel B reports the differences in the multiples of VC and non-VC firms in
the second set of asterisks for sell-outs and also in the IPO column.
Sell-outs
Panel A: All firms
MV / book value of assets
MV / sales
2.9***
2.4***
IPOs
6.1
4.2
Panel B: By venture backing
VC backed
MV / book value of assets
MV / sales
5.1***
4.7***,b
9.2a
6.6a
Non-VC backed
MV / book value of assets
MV / sales
***
**
*
a
b
c
Sell-out/IPO different at 1% level
Sell-out/IPO different at 5% level
Sell-out/IPO different at 10% level
VC/non-VC different at 1% level
VC/non-VC different at 5% level
VC/non-VC different at 10% level
2.7***
1.8***
4.1
2.8
Table 7
Accounting Ratios Measuring the Capital Structure of IPOs and Sell-outs from 1995 to 1999
The following table presents median accounting ratios for sell-outs and IPOs. Panel A presents ratios measuring the
debt structure of the firm. Firm liquidity is measured in panel B. Panel C shows the degree to which cash flows are used
to pay off debt. EBITDA is measured as earnings before taxes plus amortization and depreciation; interest is interest
expense reported in the income statement; cash is cash on the balance sheet. These ratios are measured for the two
years prior to IPO or sell-out. Wilcoxon test statistics for differences in distribution are reported in the sell-out rows,
and are represented by asterisks.
Year –1
Panel A: Debt structure
Sell-outs
Year -2
Long-term debt / total debt
24.0%
366
32.7%*
300
Total debt / total assets
71.0%
366
70.5%
300
Interest / total debt
3.3%
366
2.7%
296
Long-term debt / total debt
24.2%
365
23.3%
336
Total debt / total assets
71.1%
366
69.6%
337
Interest / total debt
2.5%
366
2.8%
335
IPOs
Panel B: Liquidity
Sell-outs
Cash / total assets
6.4%**
366
5.9%**
300
Current assets / current liabilities
1.35
366
1.55
300
Cash / total assets
8.6%
366
9.0%
337
Current assets / current liabilities
1.39
366
1.44
337
IPOs
Panel C: Financial distress
Sell-outs
% of firms where interest > EBITDA
20.3%***
365
17.8%***
297
% of firms where interest > cash
35.3%*
365
34.3%
297
% of firms where interest > EBITDA
32.5%
366
33.0%
342
% of firms where interest > cash
28.7%
366
30.4%
342
IPOs
***
**
*
significantly different at 1% level
significantly different at 5% level
significantly different at 10% level
Table 8
Median Operating Performance Prior to IPO or Sell-out
The following table reports the median income of sell-outs and IPOs scaled by sales and total assets. Year 0 represents
the year in which the transaction occurred. Raw returns are simply the median operating return. Industry adjusted
returns are calculated by subtracting the median operating return of the industry (two digit SIC), taken from public
companies, from the median return of the sample firm. Wilcoxon test statistics for differences in distribution are
reported in the sell-out rows, and are represented by asterisks.
Year -1
Year -2
Sell-outs
Operating income / sales
ROS
Industry-adjusted ROS
N
5.5%
-2.8%***,a
366
Year -3
4.9%
-3.4%***,a
294
6.1%
-3.5%***,c
202
Operating income / total assets
ROA
Industry-adjusted ROA
N
8.5%
-1.4%***,b
366
7.7%
-1.3%***,a
296
IPOs
Operating income / sales
ROS
Industry-adjusted ROS
N
2.9%
-5.7%a
352
1.9%
-7.7%a
331
2.5%
-7.1%b
279
Operating income / total assets
ROA
Industry-adjusted ROA
N
***
**
*
2.9%
-7.0%a
366
significantly different at 1% level
significantly different at 5% level
significantly different at 10% level
2.8%
-7.5%a
336
a
significant at 1% level
significant at 5% level
significant at 10% level
b
c
Table 9
Asymmetric Information and Agency Costs using Accounting Ratios in Sell-outs and IPOs from 1995 to 1999
This table presents research and development scaled by sales and assets and intangible asset scaled by total assets.
Medians are reported with the 75th percentile in brackets. Year 0 represents the year in which the transaction occurred.
Wilcoxon test statistics for differences in distribution are reported in the sell-out rows and are represented by asterisks.
Year –1
Year -2
Sell-outs
Year -3
R&D / sales
0% [6.3%]***
366
0% [8.4%]***
294
0% [2.4%]
202
R&D / total assets
0% [9.5%]***
366
0% [12.8%]***
296
-
Intangibles / total assets
0% [5.0%]
366
0% [5.5%]
299
-
R&D / sales
0% [16.5%]
352
0% [19.0%]
331
0% [13.6%]
279
R&D / total assets
0% [23.1%]
366
0% [22.2%]
337
-
Intangibles / total assets
0% [7.7%]
365
0% [1.9%]
337
-
IPOs
***
**
*
significantly different at 1% level
significantly different at 5% level
significantly different at 10% level
Table 10
Correlations Across Regressors
This table displays the correlation coefficient matrix for regressors included in Table 11. All of the variables are measured in year -1. Scaled capital expenditures is capital
expenditures scaled by total assets. Venture backed is a dummy variable where 1 denotes the presence of venture financing. Leverage is total debt scaled by total assets. Interest
expense > EBITDA is a dummy variable equal to one if the level of interest payments exceeds that of operating income plus depreciation and amortization. Interest expense > Cash
expense is a dummy variable equal to one if the level of interest payments exceeds that of cash reported on the balance sheet. Financial distress is an interaction term of the dummy
variables Interest expense > EBITDA and Interest expense > Cash. Abnormal return on assets is earnings before interest and taxes (EBIT) divided by total assets net of the same
return for the median publicly traded firm in the same two-digit SIC. Scaled research and development is research and development scaled by total assets. Log of sales is the
natural log of revenues.
Scaled
capex
Venture
backed
Leverage
Interest
expense >
EBITDA
Interest
expense >
Cash
Financial
distress
Abnormal
return on
assets
Scaled
R&D
Scaled capital expenditures
1.00
Venture backed
0.11
1.00
Leverage
0.14
-0.02
1.00
Interest expense > EBITDA
0.16
0.29
0.17
1.00
Interest expense > Cash
0.03
-0.09
0.21
-0.12
1.00
Financial distress
0.02
0.05
0.29
0.42
0.37
1.00
Abnormal return on assets
-0.17
-0.29
-0.37
-0.46
0.11
-0.23
1.00
Scaled R&D
0.10
0.29
0.26
0.32
-0.16
0.12
-0.75
1.00
Log of sales
-0.14
-0.24
-0.06
-0.38
0.28
-0.06
0.57
-0.54
Log of
sales
1.00
Table 11
Logistic Regression Analysis of Factors Influencing Transition Choice for Private Firms Being Acquired or
Going Public from 1995 to 1999
The dependent variable is a dummy variable taking the value 0 if the private firm was acquired by a publicly traded
company and 1 if the company conducted an IPO. All of the independent variables are measured in year -1. Scaled
capital expenditures is capital expenditures scaled by total assets. Venture backed is a dummy variable where 1 denotes
the presence of venture financing. Leverage is total debt scaled by total assets. Interest expense > EBITDA is a dummy
variable equal to one if the level of interest payments exceeds that of operating income plus depreciation and
amortization. Interest expense > Cash expense is a dummy variable equal to one if the level of interest payments
exceeds that of cash reported on the balance sheet. Financial distress is an interaction term of the dummy variables
Interest expense > EBITDA and Interest expense > Cash. Abnormal return on assets is earnings before interest and
taxes (EBIT) divided by total assets net of the same return for the median publicly traded firm in the same two-digit
SIC. Scaled research and development is research and development scaled by total assets. Log of sales is the natural log
of revenues. P-values are reported in brackets next to the parameter estimates.
Variables
(1)
(2)
(3)
(4)
Intercept
1.10 [.030]
0.90 [.084]
0.80 [.110]
0.80 [.116]
Scaled capital expenditures
1.50 [.008]
1.36 [.017]
1.37 [.015]
1.32 [.020]
Venture backed
0.59 [.001]
0.53 [.002]
0.52 [.002]
0.52 [.002]
Leverage
0.26 [.075]
0.29 [.047]
0.28 [.050]
0.24 [.080]
-
0.50 [.030]
0.52 [.025]
0.45 [.047]
-0.20 [.250]
-0.02 [.930]
-0.01 [.970]
-0.02 [.925]
-
-0.89 [.032]
-0.89 [.033]
-0.91 [.028]
0.15 [.386]
0.20 [.269]
0.28 [.061]
-
Scaled R&D
-0.34 [.387]
-0.30 [.452]
-
-0.55 [.089]
Log of sales
-0.16 [.008]
-0.15 [.002]
-0.14 [.003]
-0.13 [.003]
47.6 [.000]
53.7 [.000]
53.6 [.000]
52.9 [.000]
365/366
365/366
365/366
365/366
Interest expense > EBITDA
Interest expense > Cash
Financial distress
Abnormal return on assets
Likelihood ratio test statistic
Number of observations
Table 12
Logistic Regression Analysis of Factors Influencing Transition Choice for Private Firms Being Acquired or
Going Public from 1995 to 1999
The dependent variable is a dummy variable taking the value 0 if the private firm was acquired by a publicly traded
company and 1 if the company conducted an IPO. All of the independent variables are measured in year -1. Scaled
capital expenditures is capital expenditures scaled by total assets. Venture backed is a dummy variable where 1 denotes
the presence of venture financing. Leverage is total debt scaled by total assets. Interest expense > EBITDA is a dummy
variable equal to one if the level of interest payments exceeds that of operating income plus depreciation and
amortization. Interest expense > Cash expense is a dummy variable equal to one if the level of interest payments
exceeds that of cash reported on the balance sheet. Financial distress is an interaction term of the dummy variables
Interest expense > EBITDA and Interest expense > Cash. Abnormal return on assets is earnings before interest and
taxes (EBIT) divided by total assets net of the same return for the median publicly traded firm in the same two-digit
SIC. Scaled research and development is research and development scaled by total assets. Log of sales is the natural log
of revenues. Sales growth is the difference in year -1 sales and year -2 sales scaled by year -2 sales. Asset growth is the
difference in year -1 total assets and year -2 total assets scaled by year -2 total assets. Capital expenditures growth is the
difference in year -1 capital expenditures and year -2 capital expenditures scaled by year -2 capital expenditures.
Insider ownership after is the amount of ownership firm insiders have in the new firm after the sell-out or IPO. P-values
are reported in brackets next to the parameter estimates.
Variables
Intercept
(1)
(2)
(3)
(4)
0.79 [.162]
0.42 [.477]
0.98 [.092]
-3.30 [.002]
-
-
-
2.31 [.104]
Venture backed
0.41 [.020]
0.38 [.035]
0.43 [.018]
-0.13 [.746]
Leverage
0.43 [.009]
0.45 [.007]
0.41 [.012]
0.42 [.335]
Interest expense > EBITDA
0.34 [.171]
0.34 [.181]
0.29 [.250]
1.10 [.061]
Interest expense > Cash
0.02 [.935]
0.01 [.949]
0.04 [.865]
0.68 [.142]
-0.94 [.031]
-0.98 [.028]
-0.92 [.036]
-1.68 [.126]
0.16 [.313]
0.16 [.345]
0.16 [.325]
-0.24 [.569]
Log of sales
-0.12 [.024]
-0.09 [.083]
-0.14 [.011]
0.02 [.851]
Sales growth
0.03 [.593]
-
-
-
Asset growth
-
0.18 [.014]
-
-
Capital expenditures growth
-
-
0.04 [.073]
-
Inside ownership after
-
-
-
14.77 [.000]
31.6 [.000]
39.3 [.000]
37.3 [.000]
426.7 [.000]
298/342
299/337
294/342
154/364
Scaled capital expenditures
Financial distress
Abnormal return on assets
Likelihood ratio test statistic
Number of observations