Shoot for the Stars and Skip an IPO – Why Companies Prefer Acquisitions over IPO’s

Acquisitions over IPO’s

 Not that long ago, the startup dream ended with a flashy IPO and a reintroduction to the world as a multinational enterprise. Today the dream has shifted, with many startups knowing little other than the fact that they do not want to go down the exhausting path of  going public.

A quick glance at the past 40 years shows a drastic decline in the sheer number of startups traded on the U.S stock market. Today, there are about 1000 fewer companies listed than in 1975.  If the startup industry has only gone up since 1975, and industries have increased in size and market valuation, it leaves one to wonder where all the companies went?

New Companies Shy Away from IPO’s

Part of the decline in the number of companies listed in the U.S Stock Market is due to the simple fact that going public just isn’t as appealing as it once was.  

The poster-startups such as Facebook and Etsy showcased the downside of a wrong and over estimated valuation, and the costs associated with an IPO can tip the $1M mark. Take that figure and add the financial burden of complying with Sarbanes-Oxley and the many other regulations needed be taken into account and it’s no wonder any startup founder would think twice about going public.

Why are new companies and #startups shying away from IPO’s? Click To Tweet

Even companies that do not blink at the costs reconsider IPO’s once they realize that going public means disclosing decision making criteria and financial information to competitors – a clear deal breaker for companies looking to guard their intellectual property.

The Rise of De-listings

As seen by the numbers, the Stock Market isn’t just suffering from a lack of new players, but companies already trading in the public sphere have de-listed with increasing ferocity since 1975.  The 2002 Sarbanes-Oxley act brought the sharpest decline in publicly listed companies, followed by the economic turmoil of 2008, however the true culprit is the new
startup mentality that leans towards mergers and acquisitions over public interference in a company.  In fact, a 2015
Harvard University research found that, “from 1997 to 2012, the U.S. had 8,327 de-lists [from the Stock Market], of which 4,957 were due to mergers.”  

From 1997 to 2012, the U.S. Stock Market had 8,327 de-lists, 4,957 of which due to mergers - Harvard Research Click To Tweet

Working Towards Acquisition

The Harvard research only confirms that which we already know – it’s too hard, expensive and time consuming to go public.  As Jeff Stark, an audit partner at Sensiba San Filippo said, “most companies that are started and founded will believe in their minds now that they’re going to get acquired.”

If looking solely to increase valuation, there is no better way to do that than by joining forces, either by way of merger or full acquisition, with a larger company.  At the end of the day, finding a complementary product with which your company can join forces is bound to be easier than being accountable to the public and the regulatory agencies that govern the Stock Market.

In line with this, millennials looking to capitalize on their product find that their business model, talent structure and business story just don’t fit in with the traditional IPO model.

As we know, the driving force behind all startups is passion –  if an IPO was an exit strategy, a merger or acquisition is now perceived as a longevity strategy.  Today, instead of striving to take the company and give it to the public, founders focus on creating something with ongoing added value.

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