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Bryan E. Kuhn
Counselor at Law, P.C.
Business & Employment Law Attorney

Startup businesses choosing mergers over IPOs

On Behalf of | Feb 7, 2017 | Blog

Investors in Colorado and elsewhere in the country are getting fewer chances to put their money into innovative startup businesses as more and more of them are eschewing initial public offerings and instead choosing to be acquired by larger companies. Fewer IPOs were available to investors on American exchanges in 2016 than during any year since the financial crisis, but the number of mergers soared to levels not witnessed in almost a decade.

CNBC reports that $143 was spent on mergers and acquisitions in 2016 for every dollar generated by IPOs. This is the highest ratio of merger-to-IPO spending in about 30 years, according to the network. Both IPOs and acquisitions allow the original investors of successful startups to cash out by either selling their holdings or exchanging them for stock in a larger venture. IPOs accounted for about 70 percent of the money going back to venture capitalists in the early 1990s, but the tide turned abruptly in favor of mergers and acquisitions following the 2000 stock market correction.

Stock market volatility has impacted IPO revenue in the past. The last time that IPOs fell as sharply as they have since 2000 was following the 1987 market crash, but mergers are generally resilient to plunging stock prices. During the 1980s and 1990s, there were about 350 IPOs each year, but the number of companies choosing to take this path has fallen to an average of just 108 per year since the turn of the century.

Attorneys with a background in these types of corporate finance transactions may be able to help entrepreneurs decide if their best interests lie in pursuing an IPO or a merger opportunity. While IPOs can generate significant returns when investors believe in a company, mergers or acquisitions may be the preferable option when an emerging technology is involved or the business operates in a highly competitive market sector.

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