Question regarding an IPO exit from an LBO.
Assuming the sponsor plans to list 50% of the company in year 5, what should happen to the debt of the company? Other threads on this forum says the cash will be used to pay down debt in the company - how does the sponsor realise gains by selling the 50% if it is used to pay down debt (will their gains be any cash remaining taken out? If this is the case, isn't it in the sponsor's interest to just take out all the cash and not pay down any debt?)
As a follow up to the above, if the sponsor then decides to do a secondary offering and list the rest of the company two years later, how is this remaining stake valued? Is it the pure equity value that's remaining? If so, what happens if the share price increases over the two years - how is this factored into the secondary offering?
Thanks for any help
Secondary offering - sponsor will get the cash.
The value of the 50% stake held by the sponsor will be dictated by the stock's price.
Can an IPO be combined with leveraged buyout? (Originally Posted: 03/14/2013)
I am working on a business plan for this startup competition. For my exit strategy I listed that I the company would buyback the stocks from the venture capitalists that are investing and then go public.
Can this be done?
Technically yes they could but that's a terrible idea and extremely unlikely to happen. It is highly likely the company will not have enough cash on hand to buy out VC/investor shares. In fact, that's why most companies do an IPO, so that way VC's can exit their investments...
Also, how the hell do you plan on your start-up performing an LBO to buy back VC shares...doesn't even make sense. PE investors use LBO's to buy a company...what your talking about is a leveraged recap (or at least I think that's what you were referring to)
By the end of three years we have enough cash to buyback the shares; however, after the buyout we would have depleted our cash reserve. In such case, we would go for an IPO. This would not only provide us sufficient cash for expansion/operating expense but it would also provide other investors another exit opportunity.
That's very unrealistic, for (at least) two reasons. First, this cash will be reflected in the price of the shares you want to buy back. Second, there's no way the VCs are going to let you put that cash in a piggy-bank in the first place.
The point of doing an IPO is to raise capital for the business. You wouldn't IPO if you had many millions of dollars in cash reserves on the balance sheet. I don't think that your business model is very realistic. No VC is going to let you accumulate a huge cash stockpile.
Don't really agree with this. Lots of mature and/or free cash flowing, privately held businesses will IPO with the primary purpose to provide shareholders liquidity. A lot of private placement memos will explicitly state management intentions for getting the stock listed. I realize that going public doesn't always coincide with an equity offering, but in many cases it does.
If there's enough cash on the B/S to buyout all of your non-management owners, they are already perfectly liquid.
EDIT: Just to clarify, I agree with you that IPOs are pursued to provide liquidity to current investors. My comment was intended to be read in the context of this discussion and shouldn't be applied as broadly as the wording implies.
It happens in some industries where some of the use of proceeds is to buy out some convertible debs, prefs or other. If the VCs have straight equity stake, why would you buy from them, let them sell to the market post IPO, unless you're worried about a dump of stock depressing the price, then you could arrange a block trade either pre or post IPO, but your bankers should be doing this for you.
Exactly.
No this wouldn't happen for three reasons:
Thank you guys so much for saving me from a truly disastrous scenario. I definitely need to reconsider the financials & exit strategy.
Glad to help, let us know how it goes.
There's some neat tax implications associated with IPOs as well. One company, Athebasca Oilsands I think, that issued a dividend to its shareholders as a precurser to its IPO. They emptied most of the cash from the company with the dividend, because the tazes on the dividend were virtually nill, so the investors got a huge shot in the arm, it just looked silly that they paid out all their cash right before raising cash via the IPO.
Agreed that this is an odd situation, but paying a dividend makes a whole lot more sense than buying out someone's stake immediately before an IPO.
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