The Dual-Track Process For IPOs & Exits

When thinking about an exit strategy from their business, most owners have a clear idea of their desired exit. However, there are cases when owners take what is known as a dual-track exit, pursuing not one but two types of exit strategies. Usually, they move forward with a merger or acquisition (M&A) and initial public offering (IPO) until deciding which option meets their needs. 

Discover how a dual-track transition works, when it can be advantageous, and how owners can stay organized throughout the dual process.

What Is a Dual-Track IPO Listing?

As briefly mentioned above, the dual-track listing means that companies explore an IPO while also moving forward with another common exit strategy, the M&A.

Dual-track listings are not a new concept, though they may be increasing in popularity. Dual-track listings were originally a favored option among private equity firms. With the rise in SPAC and de-SPAC transactions among the venture capital sector, dual-track IPOs gained popularity among technology startups. They continue to be popular with venture-backed startups today.

As you might expect, the dual-track process is more complex to execute than pursuing either strategy independently. Companies not only have to line up potential buyers and prepare for M&A due diligence, they also have to gear up for an IPO.

While a dual-track IPO adds complexity and may strain the resources of a smaller company, the approach may help companies secure higher valuations and move forward with a successful exit strategy. The concept is particularly enticing in times of high market volatility, when putting all their eggs in one basket, so to speak, may feel risky.

The Dual-Track Process

Often, companies favor one option over the other in the early stages. If they prefer the dual-track M&A and consider the IPO to be a backup option, they will typically focus on seeking buyers and lining up everything in advance of an M&A deal. In the early stages, the companies will build their M&A team, bringing on legal and financial partners. Internally, they will gather all the due diligence materials that a potential buyer will want to see.

If they favor the idea of using an IPO as an exit strategy, they will devote their time to the IPO process while pursuing discussions with a select group of previously identified partners. In this instance, they may see whether there is enough interest in an acquisition to cut short the IPO process in favor of an M&A.

With IPOs, underwriters manage many aspects of the process. Underwriters do their own due diligence to set the share price for the IPO. They also come up with a number of shares to sell, a timeframe and other variables. Once the company has reviewed proposals and selected an underwriter, the IPO can come together. While all the supporting documentation is gathered, companies will complete an S-1 IPO filing and compose marketing materials to promote shares to potential investors.

With a dual track listing, any M&A activity will proceed concurrently with the steps to a successful IPO. If a potential buyer doesn't agree to those terms, the company's owners know they have an IPO as a backup.

Dual-Track Exit Considerations

Market volatility plays a huge role in shaping exit strategy, but it is not the only element to consider. 

Founders mulling over their exit strategy should also give thought to these considerations:

• What is the desired timeframe to exit? Within an IPO, founders typically retain a stake for some time after the deal. Those wanting a fast exit would prefer an M&A.
• What is their risk tolerance? Founders with a low risk tolerance may prefer to offload their stakes via M&A. By retaining ownership, as in an IPO, they also face elevated risk.
• How important is the business valuation? IPOs tend to deliver more precise control over the valuation at exit than M&As, due to the competitive pressure of the IPO process. Owners prioritizing value may prefer the IPO for this reason.

Advantages and Disadvantages of the Dual-Track Process

While it is more complex, the dual-track approach can be beneficial. Key advantages include:

• Reducing market risk: The IPO market may be soft at the time a founder is ready to exit. Rather than force an IPO in a soft market, when the business valuation is not what a founder would otherwise want, the dual-track strategy keeps both options open in hopes of reducing risk and increasing valuation.
• Maintains flexibility: If a company pursues one option, it gives up bargaining power compared to the dual approach. A company that has committed to an M&A exit strategy may need to settle for a lower offer to conclude the deal, whereas a company pursuing a joint IPO and sale exit can switch from one strategy to the other if external circumstances change.
• Higher valuation: Perhaps the main reason companies choose the dual approach is the prospect for higher valuations as a result of having multiple paths to exit.

As alluded to, the dual process is extremely resource-intensive. Companies considering whether to pursue an IPO and an M&A should consider whether they have the personnel and internal resources to manage both exit strategies while successfully running the business. A drop in revenue or market share during this time could lower valuations. Thus, if companies do not have the bandwidth to devote to both options, they should pick one and concentrate their resources.

Companies should understand how each of these processes work concurrently and what it will take in terms of time and resources to successfully push for the joint exit strategy. They should understand which partners they'll need to identify and work to strengthen their team. 

At DFIN, we offer IPO software and virtual data rooms, which support companies in all stages of deal-making — from due diligence through to the successful conclusion of a deal.