Study co-authored by BYU professor shows benefits of 'dual-track' strategy

PROVO — Companies that are hoping to be acquired by bigger ones should heed a heads-up in a new study co-authored by a BYU finance professor: Premium prices are paid to companies that go public before putting themselves up for sale.

Despite the seesawing of the stock market, initial public offerings are proving to be not only popular for companies in search of capital to expand, but also a reliable way for a company going on the market to get the best possible price, BYU professor James C. Brau reports in a study published in this month's Journal of Business Venturing.

Filing for an IPO is still a hassle, but it's what the smart-money companies know and what they are doing, Brau said, noting that in the current climate, the more bidders a company has and the more public information it provides, the more attractive an acquisition becomes.

He suggests that the highest price is obtained if an acquisition occurs before an IPO is actually completed.

The combination of starting the initial public offering process as the company goes up for sale — what's known as a "dual-track" strategy — can increase the asking price by as much 26 percent over just seeking out a single buyer, Brau said. For example, Birds Eye Foods received a better price when it was purchased for $1.3 billion by Pinnacle Foods a month after Birds Eye filed to go public this past October.

The combination of a disoriented stock market and thinner flow of credit the past 18 months have put mergers and acquisitions 3 percent below prerecession levels, according to the study. The number of deals compared to just a year ago is up about 11 percent, however, according to the website Dealogic.

Brau and investment bankers say that, while dual tracking can provide a higher takeover price than just mergers and acquisitions marketing alone, companies that want to pick one exit strategy should just do an IPO instead of a direct takeover.

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