Benefits and Pitfalls of a Rollup IPO Oct 17, 2004 22:19:25 GMT -5
Post by fastwalker on Oct 17, 2004 22:19:25 GMT -5
Benefits and Pitfalls of a Rollup IPO
This makes a heck of a lot of sense with how CMKX is structuring themselves right now.
The Benefits & Pitfalls of a Roll-Up IPO
Industry consolidation is a rampant theme in the press today. At the highest level of industry, mega-mergers similar to the ones recently announced by Daimler-Chrysler and Travelers-Citibank are filling the headlines.
Among smaller private companies, there has also has been a trend to merge and become part of a larger entity in order to remain competitive. Companies in many industries with a historically local customer base are feeling pressure from larger regional and national competitors. Owners of local businesses often believe that they would be better able to compete if they had the advantages of their national competitors, such as access to capital, diverse product offerings, larger purchasing power, access to technology and larger advertising budgets. Some local companies believe that they do not have the luxury of time to grow on a gradual basis internally in order to meet current competitive pressures.
One technique for rapid growth that is gaining popularity is known as the roll-up initial public offering ("IPO"). In a typical roll-up IPO transaction, a holding company will simultaneously acquire five to ten (or more) privately-held companies in the same industry. These companies are known as the "founding companies." By joining forces, they immediately become a major player in their industry. Shareholders of the founding companies receive cash and shares of the holding company in payment of the purchase price. The newly-formed holding company lacks capital of its own. To raise capital, it engages in an initial public offering of its shares of common stock, which is consummated simultaneously with its intended acquisitions. Through the IPO, the holding company acquires enough cash to pay the cash portion of the purchase price to be paid to the founding company shareholders. Since the holding company stock is now publicly traded, the founding company shareholders are willing to accept holding company stock for the balance of the purchase price.
The roll-up IPO is a relatively recent form of transaction. As the roll-up phenomena expands, many companies will be approached about the possibility of becoming participants in such a transaction. Whether you are considering participating as a founding company, or are an owner of a privately-held company that may want to lead a roll-up of its own, the following Q&A will highlight some of the benefits and pitfalls of a roll-up IPO.
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