US Corporate Law 20 Episodes (16)

Mergers and acquisitions and listing, which way should founders choose to exit? What is the difference between IPO and M&A

Instagram was acquired for $1 billion, and WeWork failed miserably in its impact on the IPO | Three squirrels finally succeeded in its three-time impact on the entrepreneurial version | M&A and listing, which way should founders choose to exit? Is mergers and acquisitions the legendary sale of sons and daughters? |What is the difference between IPO and M&A, and the exit mechanism of startup companies

Before, we spent 15 periods sorting out the company's process from establishment to financing. When the company grows up, it is time to consider the way to exit. The most common exit mechanisms are mergers and acquisitions and listings. We say IPO is the equivalent of a child going to college. Some people will compare company mergers and acquisitions to selling children and daughters. Is this really the case? Today, let's talk about the advantages and disadvantages of mergers and acquisitions and listings.

1. Time

You may see some claims that you can go public in 6-9 months. But this is all about approval time. The real waste of time is the preparation. If you start from the day you start planning to do an IPO and the company actually completes the IPO, the whole process often takes a year or two, or even two or three years. No matter whether the US stock market, Hong Kong stock market or A-share market is going anywhere soon.

In the M&A business, it usually takes 4-6 weeks to complete all transactions. Of course, there are also 7-day delivery, 5-day delivery and even 3-day delivery that are particularly fast. There are also particularly procrastination to three or five months. However, in general, the time is relatively short.

2. Charges

Legal fees for an IPO are basically 2-3 million RMB, and the United States is basically 300,000 to 600,000 US dollars. And it should be emphasized that this is only legal fees. In addition to lawyers, you also need accountants, underwriters, appraisal agencies, and a bunch of fees. In contrast, the cost of mergers and acquisitions can be said to be less than a fraction.

3. Risk

Going public is a high-risk project, and success or failure depends on it. It is impossible for you to trade in A-shares after the failure of the US stock market, and then go to the Hong Kong stock market after the failure of the A-share trade. It's like the concept that I must be admitted to Peking University and Tsinghua University in the college entrance examination. If you don't pass the test, you will not be able to repeat it in the second year. For example, the three squirrels hit three times in 2017, 2018 and 2019. Once they failed, they would hit the company’s GEM, and finally successfully listed in June 2019. In contrast, WeWork failed to go public in 2019. Not only did it fail, but it was also recognized by the industry as the end of the "money-burning era".

Therefore, it is said that listing is a very high-risk thing, only success, not failure. Once it fails, the vitality will be greatly damaged, and it may be better not to try the listing process before.

Looking at mergers and acquisitions, this is basically similar to finding a job. Not everyone is a talented student, no matter who they are, they can eventually find a job. Moreover, if you are looking for a job, you can apply for many companies. Of course, there is often an exclusive period for mergers and acquisitions. During the period when you are talking with an acquirer, you cannot talk to others. However, this period is often very short. Once you have not negotiated with one company, you can immediately go to another company. It will not be like a listing, everything is calculated on an annual basis.

4. Effects

Just now we said that IPO is equivalent to a child's college entrance examination. Some people will compare company mergers and acquisitions to selling children and daughters.

This is actually a bit extreme. I just said that IPO is a standardized process, while mergers and acquisitions are very personalized. There are many kinds of mergers and acquisitions. The so-called acquisitions that are like selling children and selling daughters are asset acquisitions, and they are often shabby and low-priced acquisitions in asset acquisitions. Such acquisitions as Facebook's acquisition of instagram, I believe no one will think that this is a sale.

On the other hand, although the result of the IPO is that the child is admitted to the university. But many times, when your child goes to college, you can't control it. The child was admitted to a school in a big city from a small county, and he did not recognize his parents for one year, two years and three years. Often after the IPO, the original entrepreneur who can only drive a small team will be replaced by a more experienced professional manager.

5. Stability

Going public doesn't mean everything is fine. Just like if you study in the world's top universities, you will not get a diploma after you enroll. If you don't work hard, you will be eliminated under the fierce competition. Public companies have a "one dollar delisting" mandate, and you'll find that more companies are delisted each year than are listed.

And mergers and acquisitions do not have this problem, after the mergers and acquisitions that is their own people. Of course, after some large companies acquire small companies, they still regard small companies as a separate operating department, and they will observe their performance within a few years. If not, they will be stripped off again. But this probability is quite low. Because there is no mandatory provision for divestiture after M&A. After working together for several years, they often still talk about affection.

Summarize

Having said so much, everyone should have heard it. In fact, I still recommend that startups try to take the acquisition of the company as a more feasible target. We Chinese entrepreneurs are often more superstitious about going public, and often go to Nasdaq. And many times when taking domestic investment, it is often standard to sign a gambling agreement, and a bet is a five-year listing. But you have to know that going public is high-yield, but also high-risk and high-cost. I still recommend that even if you have the dream of going public, don't give up on M&A as a practical alternative.

Thank you for watching today's 20 lectures on US corporate law, focusing on essential legal knowledge for startups. Thanks for watching, see you next time.