Exit

Question 1

Why do companies seek an exit?
Which types of exit are there?
When to exit?

Answer 1

1. obtain liquidity
2. To raise capital (IPO)
3. To access key resources (Acquisition)

Types of exit:

1. IPO
2. Acquisition
3. Sale to financial buyer
4. Failure

Depends on:

1. Liquidity needs.
2. Stage of development, ownership changes may bring additional resources.
3. Opportunistic market timing.

Determinants of the Exit decision:

1. Market Forces
2. Economic fundamentals and development stage
3. Company level dynamics

Question 2

What are IPOs and what are their costs and benefits?

Answer 2

Initial Public Offerings, listing the company on the stock exchange and selling new shares in the process.

Pros:

• Visibility
• Stock price is valuable feedback
• Transparency
• Can use company shares to make acquistions

Cons:

• Costly (direct costs)
• Indirect costs: disclosure of information, costs of regulatory compliance, distracts from business, pressure to meet performance targets (killing innovation)
• Underpricing costs

Question 3

How does a company prepare for an IPO and what is the process?

Answer 3

Company must:

• Comply with regulation
• Have a well organised management team and complete corporate structure.

Process:

1. Select investment bankers
2. Investment bankers perform due diligence
3. Road Show
4. Pricing of IPO
5. Sale of securities

Pricing can happen through:

1. Auctions
2. Fixed-price
3. Book-building

Question 4

What are terms related to the shares sold in an IPO?

Answer 4

IPO can consist of primary + secondary shares.
“direct listing” no issue of new shares, just becomes public, no road show etc… cheaper.

Voting rights of shares:
dual share structure (Alibaba IPO)
"sunset" provisions 
Over-allotment options 
Lock-up agreements

Question 5

Why do companies often choose Aquisition?

Answer 5

More profitable to integrate.
“Build or Sell”: established company might already have complementary assets in place: sales, operations, organisation.
Fewer public information disclosure.

Cons: loss of independence and control.

Acquirer motives:

• Start-up lead time
• Hard to replicate technology
• Acqui-hire
• Influencing competitive landscape

Question 6

What is Nash Bargaining simple approach?

Answer 6

Lower bound of the value of the acquisition = Price for which the entrepreneur is willing to sell.
Upper bound = Price for which the Acquirer is willing to buy.
With competition amongst buyers, price will be closer to the upper bound.

Question 7

How do companies buy start-ups?

Answer 7

Cash or shares if the acquirer is publicly listed.

Earn-out-clause = mitigates the risk that they are overpaying. Fraction of price payed upfront and rest in given if the acquisition delivers certain performance targets.

Main challenges for the acquirer are to integrate the unit.

Question 8

What types of Sales to a Financial Buyer are there?

Answer 8

Secondary Sale: 
LBO - Leveraged Buy-Out.
MBO - Management Buy-Out.
MBI - Mgmt Buy-In
Simple transaction

Can happen through auction or negotiation. 
In three types of events: 
1. Funding Round
2. Stand-alone transaction
3. Specialised Market