InsightaaS: Most entrepreneurs launch businesses because they are passionate about a particular area, or because they see an opportunity to meet a market need. Most are experts in their chosen fields; few are experts in the many related aspects of business management, including financing. As a result, entrepreneurs who are extremely capable at building businesses often struggle to scale their operations when they look for new capital and/or investigate exits.
Veracap M&A International is "a leading mid-market investment bank specializing in acquisitions, divestitures, financing and shareholder value advisory services." While Veracap works with firms in many industries, it is a recognized leader within the Canadian IT industry - which makes today's featured post by managing director Derek van der Plaat especially interesting. In it, he spells out the pros and cons of going public vs. staying tight-lipped about having "hired an investment bank to explore strategic alternatives." van der Plaat focuses his analysis on firms listed in the TSX Venture Exchange (TSX-V), an exchange catering to small-cap firms that typically have low trading volumes.
van der Plaat considers this issue from several directions: he looks how/whether disclosure has a positive impact on share price, its impact on the M&A process, and on the legal considerations that need to be included in evaluating the announce/don't announce question. He concludes that "If there is uncertainty about whether acceptable offers will be found, then proceed in stealth mode. Ultimately, an announcement will have to made, but only when there is enough information available to allow a reasonable investor to assess the impact on the value of the company’s shares" - but I'd urge you not to merely skip to the end, as the analysis itself will provide important food for thought for entrepreneurs and other executives who are looking to crystallize the value of their businesses.
From time to time, public companies announce they have hired an investment bank to explore strategic alternatives. This is generally a euphemism to say they feel they are under-valued and are open to selling parts of the company or the company as a whole. Is an announcement required, or even in a company’s best interest, when a TSX-V public company makes the decision to seek or encourage buyer interest?
A number of factors should be considered when the board of directors is making the decision regarding when to announce, including:
- Will the M&A process benefit from awareness?
- How likely is a transaction (i.e. are there buyers and is management committed to the decision)?
- How liquid/illiquid are the shares?
- Will the information allow investors to assess the impact of the anticipated transaction?
The following addresses some of the M&A and legal issues for a TSX-V company to consider when contemplating an M&A strategy.
Share Price Considerations
For larger established entities, announcing the hiring of an investment bank to explore strategic alternatives generally results in an upward move in a company’s share price...