Two stage exit vs. direct sellout: is it worth going public before being acquired?

Once a firm’s shareholders decide to sell the company, they may consider the possibility of taking it public before being acquired. Since IPOs ease acquisitions in a number of ways, we hypothesize that firms choosing a two-stage exit strategy (IPO and subsequent M&A) benefit from a valuation premium, net of IPO costs, with respect to firms opting for a direct sellout when still private. We identify three main theoretical motivations: (1) the increased visibility brought by the status of public firm, (2) the stronger bargaining power vis-à-vis the acquirer, and (3) the possibility to optimally exercise the exit option. Using a sample of 314 firms that go public in Europe during 1995-2011 and are acquired within three years after the IPO, we perform a propensity score matching methodology on a control sample of 4,633 European private firms acquired in the same period. We find that a firm that decides to go public before being targeted is acquired at an average 57% higher valuation than a comparable firm selling out when still private. This two-stage valuation premium is driven by the characteristics of the firm at the IPO. Consistent with the increased visibility motivation, it is larger for smaller firms going public. The valuation premium is also influenced by the reputation of the IPO underwriter, the level of underpricing and the fraction of the firm’s intangible assets, as predicted by the bargaining power hypothesis. We find instead no support for the optimal stage motivation.