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M&A Uses of Going Public with

an IPO or Reverse Merger

Disclaimer

This is not legal or investment advice of any kind

Seek competent advice from qualified attorneys and investment bankers

Your situation may vary

The more you know about finance and business, the more you can profit

Using an IPO as an M&A Tool

In mergers and acquisitions (M&A), going public through an IPO or reverse

merger is a valuable and flexible tool that can increase profits and

lower the cost of capital

Sellers: Increase Your Valuation

Being public may increase your valuation in a transaction where you are being acquired

File a Confidential S-1 to Test Waters

File a confidential S-1 under the JOBS Act may put pressure on a buyer

You can “test the waters” for an IPO

Buyers have to compete with IPO price

Letter of Intent with an Underwriter

Signing a letter of intent with an underwriter can force a

buyer to make an offer

Naturally, the price will be increased as you always have the option of the

higher priced IPO

Selling to Public Company

A public company that wants to buy you will be more comfortable if your financial reporting is already up to SEC standards

Accounting

Many companies want sellers to have audited financial statements.

As that expense is a big part of the cost of being public, why not do an IPO as you have already incurred a large part of the total cost?

Establish Value for Taxes

You may want to establish a value for the company for estate tax or other purposes, such as dressing up your personal financial statements

Estate Taxes

You may want a public market to sell securities to pay estate taxes, or have the option of selling stock to pay estate taxes instead of facing a fire sale of the company

Key Employees

You may want to keep the loyalty of key employees in a company you are buying – offer them stock options in your public company

Reduced Overall Financing Costs

You may want to reduce your overall financing costs and find that equity is a cheap part of the mix.

Increase Your Equity Base

You may want to increase your equity base after incurring a large amount of debt in an LBO

Reduce Debt

You may want to raise money to reduce or pay off debt incurred during a leveraged buyout

Giving Liquid Stock to Sellers

You may want to offer the sellers some securities, (common, preferred or debt) to reduce the cash used in buying the company

Sellers naturally want these securities to be liquid

Buy Out Dissident Shareholders

You may want to buy out dissident or troublesome shareholders

Sell into Hot Market

If your company is in an industry that is being overvalued by Wall Street, you may want to take advantage of this bubble pricing

IPO Instead of Vulture Capital

If venture capital companies are offering you inadequate terms or trying to impose agreements that put you at a disadvantage, you may want to seek an IPO instead of venture capital

Break VC Covenants

Use an IPO to break out of venture capital covenants, such as right of first refusal on sales

Typically, these end after an IPO

Attractive Valuations

You may believe that the public market will offer you more attractive valuations than venture capitalists

Liquidity

Your venture capitalists or other investors may demand liquidity

You yourself may want liquidity or the ability to create liquidity when you want it

Reduce Control of Outside Investors

You may want to reduce control of outside investors and VCs

Avoid Crushing Leverage

If leverage is crushing the company, you may want equity from an IPO

More Financing Options

You might do an IPO if you want more options for future financing

Lender Wants Reduced Risk

If your lender insists, you may go public

A bank lender may want to decrease its loan risk

Keep Control

You may want to do an IPO if the current control shareholders want to keep control

Spin Off Assets

An IPO can be used to spin off assets, or if the company wants to spin off or split up

Earn Outs

An IPO can facilitate the use of earn out provisions to make both the buyer and seller happy with the terms of a deal

Future Acquisitions

If you want to acquire other companies later on for stock or cash, you will want to be public

Popular Industry

In considering an IPO, you need to look at the popularity of your industry, and how the IPO market is likely to be doing by the time you are trading

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