Guide to the Dual-Track Process for IPOs

By Samuel Becker · January 28, 2022 · 5 minute read

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Guide to the Dual-Track Process for IPOs

A dual-track initial public offering (IPO) allows companies to explore both going public and a private sale simultaneously. For the company’s early and initial investors — those who acquired equity during seed funding rounds, for instance — both an IPO and a private sale could present an opportunity to cash out on their investment. Or, to find an exit.

Often the process used by private equity firms ready to exit a portfolio company, the dual-track process may allow investors to get a higher return on their capital, since they can choose to move forward with the method that provides a higher valuation.

Dual-Track IPO Process Explained

For many early-stage investors, be they private equity or venture capital firms, or individuals, the time to execute an exit strategy is often when a company goes public, as an IPO opens up an opportunity for early investors to make an exit.

In a dual-track process, a company works toward both an initial public offering and a private sale through an auction — or an M&A (mergers and acquisitions) process – at the same time. The dual-track process gives investors looking for an exit the potential to fetch a higher valuation for their investment, particularly when market conditions make an IPO less-than-ideal.

How the Dual-Track Works For IPOs

Investors have an endpoint in mind: An exit and liquidation of their stake in an investment (a company). It only makes sense, then, that they’d want to get the highest possible profit back from their investment. That’s the aim of the dual path IPO.

As such, the process, in action, varies — a lot depends on the goals of the investors. But by exploring both an IPO and a potential M&A deal, companies have options. The process isn’t all that structured, as each company’s circumstances will differ.

But in broad strokes, the process utilizes two teams: One staffed with underwriters to prepare for an IPO, and another with lawyers and advisors who are feeling out potential M&A partners.

While the IPO process proceeds slowly, the M&A team is meeting with investors. When the regulatory approval has been granted for an IPO — a company can look at its options and decide if it wants to go public, or otherwise find a buyer through an M&A deal.

What Is The Purpose of the Dual-Track IPO Process?

The goal of the dual-track process is simple: To increase the value of a company before its investors execute their exit. In other words, investors use the dual-track IPO process to squeeze as much money as possible out of their investment before it’s sold.

But the process also provides companies a certain level of flexibility to either go public, or pursue an M&A deal or a private placement. Having options can help investors ultimately reap more gains if one avenue provides a higher valuation.

Recommended: Why Do Companies Go Public?

Benefits of the Dual-Track Process

Though the dual-track process is more resource-intensive than a traditional IPO, there are some clear benefits to engaging in it, including:

•   Flexibility: Utilizing the dual-track process gives companies the chance to either go public or execute a private deal, rather than being bound to one or the other. It gives companies additional options.

•   Maximizes odds of a higher valuation: Additional options means that there can be multiple valuations on the table. For instance, a private deal may value a company more than if it were to IPO. For investors, getting an idea of a company’s ultimate value from more than one source can be illuminating, and they may learn of exit opportunities that they did not previously recognize.

•   Mitigates risks of the market: The market isn’t always going to cooperate when a company plans to IPO. There are a lot of factors that can hurt an IPO, and by having another option (an M&A deal), the dual-track process can help reduce the risks of going public at the wrong time.

Using Dual-Track for an IPO Exit

For investors who want to exit their investment, the dual track IPO provides several options. If the firm IPOs, they can sell their investments (after the lockup period) to the public. If the company goes the M&A route, early investors can sell some or all of their stake in the company to the acquirers.

Is Dual-Track Suitable for Every Company?

No. Given the resources required, not every company should pursue a dual-track IPO. Whether it makes sense for a specific company will depend on the company’s and the investors’ goals.

Some companies might want to go for the private sale route, for example, because they want to avoid the disclosure process in an IPO. On the other hand, some organizations will want to focus on an IPO because there aren’t any appealing potential buyers on the market.

M&A Exit Explained

An M&A exit is a private deal between the company and another company (or companies). Often the two companies have some sort of aligned interest or operate in the same market, and one acquiring the other serves to increase market share or create a more diversified, multi-dimensional company.

And naturally, there are some pros and cons to an M&A, just as there are for an IPO.

Pros of M&A Exit

The biggest benefit of an M&A exit is the prospect of a higher valuation. That can come for a few reasons: A buyer may have an immediate need for the service a company provides, and needs to onboard as soon as possible, for instance, or multiple potential buyers can bid up a company’s value.

Also, the prospect of less disclosure (as opposed to the IPO process) can also be very attractive for some companies — like those in tech.

Cons of M&A Exit

Conversely, there are some potential drawbacks to an M&A exit, particularly for entrepreneurs with an emotional attachment to their business. A buyer may “clean house,” so to speak, and replace employees or company leadership, for one. It may also drastically restructure the business itself.

The Takeaway

A dual-track IPO is a way for companies to explore multiple liquidity events to choose the one that makes the most sense for their organization and their investors. If those companies do choose to go public, retail investors will have an opportunity to purchase shares in them for the first time.

A great way to get started investing in IPOs is by opening an account on the SoFi Invest® investment app. You can use SoFi’s app to not only invest in IPOs, but also to broaden your portfolio with stocks, exchange-traded funds, and even cryptocurrency.

FAQ

Here are a few quick answers to some lingering questions you may still have:

What is an M&A exit?

An M&A (mergers & acquisitions) exit is when one company purchases, or merges with, another company. For investors, a company being acquired by another offers the chance to liquidate their position, as they’re selling their equity to the purchaser.

Is an IPO part of M&A?

No. A company typically either executes an IPO or goes though an M&A deal — investors are looking to exit through one or the other. However, companies that plan on going public or that have gone public can still engage in M&A deals. And an M&A deal may still result in a company staying private, too.

What are M&A deals?

M&A deals can take several forms: Mergers, acquisitions, consolidations, outright purchases, etc. The essence of an M&A deal is that one company, or its assets, is absorbed by another. Two become one.

Photo credit: iStock/kate_sept2004


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