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IPOs and Spin-Offs

An IPO is a special kind of divestiture that involves floating the new business on the stock market, much as the founders of a start-up do. What are investors looking for in an IPO? And what makes the difference between success and failure?

When it comes to IPOs, investors are looking for clear strategies based on competitive advantage in the market, along with growing profitability that can be achieved through quantifiable targets for sales growth and efficiency improvements. Investors value a transparent organizational structure that has clear accountability and comprehensive reporting metrics. And they want consistency—sudden changes in the story arouse suspicion. 

It takes time to build a compelling strategy and prepare the organization to exist independently. The process should begin well before the IPO announcement. The right conversations must happen among management, the board, and other relevant parties.

Anatomy of a Successful IPO

Some IPOs are wildly successful, and some fail spectacularly. What makes the difference between winning and losing on the market? A study of European IPOs over the course of a decade revealed several strategies that lead to success.

  • Stay committed. On average, companies listed just 35% of their equity in an IPO, meaning that the original investors remained as anchor investors. Also, 68% of companies used an IPO to raise capital to repay debt or invest in growth—a sign of long-term commitment.
  • Price to attract investors. The objective is to set an offer price that is low enough to attract buyers but high enough to maximize the value of the IPO to the company in the long run. Finding the right balance is important.
  • Build in long-term success. A successful IPO is all about timing—both in terms of the new entity’s growth prospects and market sentiment. Well-prepared companies that pick optimal times to launch their IPOs can improve their mid- and long-term performance prospects significantly.
  • Go for growth with SPOs. Almost half of the companies that launched an IPO subsequently sold additional shares. This secondary public offering (SPO) took place 18 to 21 months after the IPO. Companies returned to the market an average of 2.4 times in the decade after their IPOs.

Unlocking Value Through Spin-Offs

Unlike trade sales and IPOs, spin-offs distribute shares in the new entity directly to a company’s existing shareholders. 

A company’s existing investors often find spin-offs highly attractive. In some jurisdictions, spin-offs have attractive tax advantages because they don’t generate any cash. Investors also benefit from the value created by the spin-off entity, and from the value the parent company creates by streamlining its business. But like any divestiture, it can be difficult to get a spin-off right. They are complex transactions that require seamless work involving dozens of senior executives.

How can a company ensure that its proposed spin-off will end up a success? There are four key steps:

M&A and Divestitures
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