Initial public offerings (IPOs) are becoming less attractive for both private business owners who are looking to exit their investments and companies looking to raise additional capital, according to recent findings from a report published by Dealogic, a mergers and acquisitions (M&A) research firm. (See also, How Dollar Shave Club Grew to a 630M Valuation.)
This year has had the lowest volume of U.S. IPOs since the financial crisis of 2009. The first two quarters of 2016 have seen little more than 50 companies go public on American stock exchanges, far below the 121 and 180 public offerings that took place during the same period in 2015 and 2014 respectively. The amount of money collectively raised by IPOs so far in 2016 has also dropped by 51% to $11.6 billion, according to the Wall Street Journal. (See also, What are the advantages and disadvantages for a company going public?)
Here are four possible reasons for why companies are opting for an acquisition instead of an IPO:
With interest rates in the United States at record low levels, leveraged buyout (LBO) firms and large corporations are in a unique position to finance acquisitions, using debt, very inexpensively. Easier and cheaper access to capital have naturally led to an increase in the volume of merger and acquisitions. It has also allowed companies to be bought at valuations that may not have been seen in a public offering.
The process of listing a company on the stock market is arduous. It can take several months, and sometimes several years, to complete the regulatory requirements to have an IPO. Here is where a potential merger or acquisition might become attractive, especially if investors would like to liquidate their stake in a company as soon as possible.
Operating as a publicly traded company can be just as, or even more, overwhelming as preparing to go public. Public companies are accountable to thousands of investors and are put under major scrutiny.
Unlike a public offering, mergers and acquisitions do not solely inject money into a company. When a company is acquired they usually get access to their buyer's valuable connections, expertise and client base.