Corporate Transactions 101

Corporate transactions involve a range of stakeholders. While the types of corporate transactions and transaction structure vary, all parties to the deal have a vested interest in the deal's success and portraying the business accurately leading up to the transaction.

Read on for an in-depth explanation of the various paths to take a company public, different types of corporate finance deals, and important deal structure models to know.

Key Transactional Players

When you understand all the key transactional players in these deals and their roles, it becomes easier to understand the deal making process and what to expect.

These are the key players involved in most deals:

• VC (Venture Capital) Firms: VC firms provide capital to private companies in exchange for equity in the form of company shares or ownership stakes. Venture capitalists typically fund established businesses that are ready to grow or commercialize their business model, rather than getting in on the ground floor of a newly established startup.
• Private Corporations: Private corporations refer to businesses that are privately owned, versus publicly owned businesses that are traded on the stock exchange. Private corporations can be sold or experience a merger and acquisition (M&A). Private companies can also be taken public, as we'll explore in detail.
• Public Corporations: Public corporations are publicly owned with shares available on the stock market. While public companies may be taken private and de-listed from the stock exchange, the most familiar transactions involve taking them public through vehicles such as an IPO.
• Law Firms: Given the complexity of a corporate transaction, it should not be surprising that all parties to the deal will have attorneys. The role of law firms is to ensure the business's legal records are accurate and to offer legal and tax advice as needed.
• Investment Banks: Investment banks take on various roles in corporate deals. They might help a business owner understand the types of business deals, coordinate the paperwork necessary to finalize financing associated with the deal, or help manage the successful execution of the deal within the appropriate time frame.
• Private Equity Firms: Private equity firms provide valuable investment to companies, most often to late-stage growth corporations that are preparing to go public. They may also help a public company go private again.
• Bankruptcy Advisors: If a business deal is taking place in response to financial hardship, a bankruptcy advisor can negotiate a corporate restructuring plan or identify a corporate takeover partner.
• Deal Advisors: Deal advisors include expert consultants who can navigate the business through the uncertainty of the deal. These advisors are typically retained on an as-needed basis to identify and resolve a specific issue, so the transaction can remain on time.

Other Crucial Players

Entities that are involved in corporate transactions in a different capacity include:

• The SEC: The Securities & Exchange Commission (SEC) regulates business deals including IPOs, mergers, and acquisitions. Businesses are required to file certain documents with the SEC during the deal and annually.
• Stock markets: To be considered a public company, the business must be listed on a stock market, such as the NYSE, NASDAQ, FTSE, or TSE.

Transaction Lifecycle

Since IPOs grab headlines in the financial news section, many people think that transactions start and end with the initial public offering. That is not the case!

Business deals have a lifecycle, and an IPO is just one stage in that cycle. There are other equally important steps that businesses can take as they grow and have a larger stake in the marketplace.

The first stage in the transaction lifecycle is the private company. It's worth stating that many businesses have no desire to go public, as many can function successfully as private businesses.

When a company decides that it wants to go public, the IPO is one option among several (more on this later).

An IPO itself can be divided into pre- and post- phases. In the pre-IPO phase, companies set the groundwork for the IPO with the help of attorneys, financial advisors, and other players. Unless the business owners have taken a company public before, there is often a learning curve associated with the pre-IPO phase.

Also during the pre-IPO phase, the business will want to develop a strong growth strategy and pitch to investors to fund the business. Companies may want to bring on management that is experienced with running public companies, who can help transform the company's operations to impress stakeholders.

Then there is the IPO itself, which officially takes the company public. If all goes well, stakeholders will be so hyped by positive news about the business going public that the launch will be a success. If this phase is not navigated successfully, the deal can fall apart.

After the IPO comes the long process of proving to the public that the business vision is indeed valid. Here, stakeholders are interested in information such as business financials and earnings estimates. Companies that do well should see their share prices rise, while those that suffer setbacks will likely see share prices decline.

The now-public company should continue to grow and thrive, potentially undergoing a merger and acquisition if it is highly successful.

Fundraising to Become a Public Company

For businesses in the startup phase, conventional lending is not usually an option. Either these businesses need more capital than a loan can provide, or they don't meet traditional loan qualification requirements.

Startups typically raise funding through series rounds, in which those who invest at earlier growth stages get perks and preferential treatment. The rounds often include:

• Pre-Seed Funding: Pre-seed funding tends to come from business founders and their close supporters, including friends and family. It covers earlier growth stages, such as the initial startup.
• Series A: Businesses usually approach venture capital firms for Series A funding. To raise Series A funding, be prepared to demonstrate a great idea and back it up with stellar business strategy.
• Series B: Series B rounds of funding are designed to expand the potential audience. In preparation for Series B, companies must demonstrate user popularity and show how they're ready to grow.
• Series C: Series C funding is all about scaling. Businesses may be household names by the time they seek Series C funding, with a large market share from coast to coast. New funding can extend the reach, potentially overseas.
• Series D: The less-common D series is for special situations, such as mergers and acquisitions or a last infusion of cash pre-IPO.

Becoming a Public Company

Once a company has enough funding, it can choose a route to go public.

There are two main types of corporate transactions for taking a company public: the traditional IPO and the SPAC/de-SPAC process, which has gained traction in recent years.

Taking a Company Public Via IPO

Once a business is ready to go public, it will typically advertise the prospective IPO and look for an underwriter with which to work. Underwriters will conduct due diligence and suggest everything from share price to a time to market.

Once the company chooses an underwriter, they execute an underwriting agreement. Underwriting experts will get everything ready, including the required SEC filings. There's typically a big marketing promotion to generate investor interest, and shares are usually issued on a pre-determined date.

Companies will need to get their financial information together for the required documentation, which includes the S-1 Registration Statement mandated by the SEC and the prospectus (essentially a stock brief). Companies will also need to form a board of directors and meet other requirements for exchange listings.

Key IPO Filing Forms

• Form S-1
• File 16

Taking a Company Public Via SPAC/de-SPAC

In the SPAC process, a company looks to be acquired by an existing SPAC that seeks a target. They negotiate. Investors and shareholders of the SPAC get to vote. Assuming an agreement is reached, the deal proceeds. The SPAC closes by merging with the target company in the de-SPAC part of the process. There is a tight time frame for these deals, and if a SPAC doesn't successfully acquire a company within 24 months, typically, it dissolves.

SPACs have financial reporting requirements similar to an IPO in a compressed timeline.

Financial reporting is a key component of the public offering process. Not only are there reporting requirements that companies must meet to go public, but there are also specific documents that must be filed.

Taking a Company Public Via Direct Listing

An alternative to an IPO is taking your company public through a direct listing, also known as direct placement or direct public offerings. The key difference between this process and an IPO is that there are no underwriters involved. This may be necessary if you can’t afford an underwriter or don’t want to dilute the value of your existing shares by creating new ones.

A direct listing means you sell shares in your business directly to the public, without any intermediaries involved in the sale. There also is no lockup period to worry about if you choose this method. Although this is generally a less expensive route than an IPO, it also involves some risks, such as no guarantee for share sales and no promotions. These risks may filter their way down to the investors, which could make them wary about taking the chance.

Key Direct Listing Forms

• Form S-1

Life as a Public Company

After going public, companies can return to a focus on operations, right? In truth, it's complicated. Yes, growth is still important, but there are also crucial compliance issues to monitor.

On top of trying to grow the business, companies will need to dedicate resources to tasks such as:

• Creating a proxy statement: Proxy statements are required by the SEC in advance of the annual meeting.
• Financial reporting: Likewise, public companies need to keep up with their financial reporting requirements.
• ESG reporting: Environmental, social and governance reporting is a growing area of interest for investors and stakeholders alike.

Key Forms for Public Companies

• Form 10-K
• Form 10-Q
• Form 8-K
• Proxy/Annual Reporting & Meeting Services (Form DEF 14A)
• SOX Compliance
• File 16 SEC Forms 3, 4, and 5

Business Deals After Going Public

After going public, there are different types of transactions to consider. While some tend to occur when a business reaches a new growth, others take place if things aren't going well.

Mergers & Acquisitions (M&A)

In an M&A, companies merge or combine, as when one acquires another. Public companies might merge when entering a new market or as a strategy to boost shareholder value. As part of their oversight work, the SEC regulates M&As.

Before entering this type of transaction, it’s best to consider what your business may be trying to accomplish through it. Gaining market share, creating synergies and diversifying into new markets are just a few of the reasons companies have for pursuing an M&A.

There are many types of M&As, and the deals are structured differently depending on what makes the most sense for you and the other firm. For example, an asset acquisition is when one company acquires the assets of the other directly, which is typically the case for bankruptcy proceedings. A stock purchase involves one company purchasing outstanding stock from the other firm at a predetermined price instead of the market price. A direct merger, however, means both firms form a single entity that behaves as one company from that point forward.

Key M&A Filing Forms

• Form S-4

Business Diversification Strategies

Diversification expands the potential revenue base through new lines of business, such as a new product or service. If the spinoff does well, it could eventually become a separate company.

Divesture

From a business standpoint, divesture refers to scaling down the business through one of five main strategies:

1. Selling a business asset
2. Spinning off and de-merging
3. Splitting the business into separate entities
4. Trading assets to another business for something desirable
5. Liquidation

Companies might choose divesture to improve their cash flow or become more competitive, among other reasons. Companies are required to make financial disclosures to the SEC when acquiring or disposing of certain assets.

Forms Required During Divesture

• Form N-CSR
• Form N-SAR

Going Private

If the shareholders decide there is no longer a benefit to operating as a public company, the business may consider reverting to a private company. Companies may choose this when their core business model changes and operating publicly no longer makes sense; when they have too much debt to be profitable; or for other reasons.

The shareholders might sell most shares to a private equity company, or they might decide to take it over themselves in a majority buyout. Accordingly, the next steps vary by deal structure.