Exploring a Dual-Track Process

Kevin Costantino: Welcome back to M&A Corner, which is a special edition today because we'll be speaking about more than just M&A. I'm joined by two of my colleagues, Josh Weismer, who heads our Equity Capital Markets franchise, and Jessica Goldstein, who's a partner within our M&A practice. Nice to have you both join us today.

Josh Weismer: Thanks for having us.

Jessica Goldstein: Thanks for having us.

Kevin Costantino: I thought it'd be a nice way to start to talk a little bit about how each of your businesses has performed over the course of 2026.

Josh, Equity Capital Markets appear to have been on fire over the last several months. Could you talk a little bit about what the current dynamic is within the Equity Capital Markets?

Josh Weismer: Yeah, sure, Kevin. Thanks. Year to date, things have been phenomenal if you look at the year as a whole.

Right now, we're up significantly year-over-year across all products, IPOs, follow-ons, converts. The IPO market is close to where we were in the all-time high of 2021 in terms of deal volume with very large transactions getting done.

The convert market, with volatility being where it has been and rates being where they are headed and have come over the course of the year, have been very strong.

Over the last four to six weeks, we've definitely seen a little bit of a hiccup just in terms of investor sentiment and pushback on valuation. I think we're seeing a little bit of a pause right now and a consolidation of gains, kind of like you're seeing in the secondary market.

Over the last couple of weeks, we've seen a number of IPOs actually pull their transaction after marketing on the road and not necessarily getting the valuation or the investor makeup they wanted in terms of who was buying the transaction.

We've seen a couple of those deals put themselves on the shelf and decide to come back for a better day. On the convert side, we're also starting to see a little bit of pushback from the market because the terms that were being achieved by corporate issuers were incredibly attractive relative to what we've seen historically. Investors were willing to pay incredible levels of volatility for these convertibles.

Because in the secondary market, we've seen not only equities consolidate their gains, but also we've seen convertibles in the secondary market trade back in. A lot of the buyers on the convert side have now started to push back a little bit and demand a higher value at issue than they had been even four to six weeks ago.

All that being said, volatility is still low. Markets are still near all-time highs.  I think what you're going to see is we have a couple of very large transactions that investors are waiting to see. Much like we saw in June when people were waiting for SpaceX, I think you're going to see a number of issuers line up and wait.

Once one of the very large deals comes, if it does end up coming this year, I think that might clear the path for people to come to market, as well as a little change in expectations around valuation.

We're still very optimistic about the rest of the year. We just need a little less volatility in the broader markets over the next couple of weeks.

Kevin Costantino: It's been extraordinarily active. Some of these IPOs are just incredible in terms of their size. It is an exciting time from an Equity Capital Markets perspective.

Similar with M&A, all the headlines would suggest it's also a banner year in terms of M&A activity, Jessica.

Jessica Goldstein: Yeah, and that's exactly where I was going to start. We've seen a very strong M&A market, not dissimilar to what we're seeing in the equity market, particularly over, yes, the last year-to-date, but also the last 12 and 18 months. We're seeing all-time highs.

I think the difference is where is the deal volume being driven from? We've seen a disproportionate number of transactions coming from large strategic. We're seeing a lot of really big deals get done.

That's driving record numbers in the M&A market broadly, but we are seeing less happening in the middle and lower market. That has started to come around, and that's where you really see a large volume on number of transactions within the M&A market. We are seeing that pick up, but by and large, this year and last year were predominantly banner years because we are seeing those massive deals get done and a lot of strategic seeking growth and seeking that growth through acquiring companies that they feel are in their industry or parallel industries where there's a lot of synergies and they can extract growth in that way.

Kevin Costantino: We have a very active Equity Capital Market. From an M&A perspective, we have a very active strategic top-end large transaction activity market, but in that middle to lower end of the market, the activity isn't quite there. What I thought would be interesting to talk about today is what kind of solutions are available to someone who is in that ballpark in terms of size, perhaps a private equity sponsor who has an asset that would be capable of being listed, but also could potentially be sold.

How do we think about potentially wrapping the two together as a solution to be a dual-track process to maximize the value outcome for the ultimate owner of the asset? Maybe we could talk a little bit more about how we might think about a dual-track process. The first question really is, how do you think about the right size for an asset?

Obviously, it's a very small asset. It's not right for your markets, Josh. If it's a very, very large asset, it may be more constraining to find the right buyer for that asset.

When we think about what might be right for an asset size, for instance, or a particular industry or dynamics in terms of growth or margin, how would you think about the right candidate to pursue simultaneously both an IPO and an M&A solution and being able to pick the right one at the end of the day?

Josh Weismer: Sure. From my perspective, in order to be a good candidate from an ECM perspective for dual-track, if it's a smaller asset, it's got to have growth and a lot of runway ahead of it. What you don't want to have is a $2 billion market cap company with very little growth because investors just aren't going to be that interested in doing the work to look at something that might grow mid to low, single digits.

It's just not that exciting. If you're going to have moderate growth, it has to be a very big business from a cash flow perspective, a lot of scale, and the ability to make acquisitions over time and grow inorganically. I think if you are a growth company, and we're looking at a situation right now with a low to mid-single-digit billion-dollar company that is private equity-backed, as you mentioned, and they're thinking about a sell-side process, but they're also growing EBITDA on a compound basis, probably 30 to 40 percent over the next several years, and in 12 to 18 months, it will quickly grow to the size where the IPO market might be a much more attractive exit for the sponsor if they're willing to be patient with their liquidity and have the time horizon to wait for that liquidity.

Kevin Costantino: Jessica, if we're thinking about using this as a potential tool for an owner of an asset to achieve the best valuation possible by having an M&A process paired with the potential to go public, how do you think of structuring that dual track? What's the process that a company would run in order to be able to maximize both potential outcomes in the most efficient way possible?

Jessica Goldstein: Yeah, so the most important thing to drive value in an M&A process is competitive tension. And as you've said, having a really viable, incredible alternative to go to the public markets can create another form of tension in addition to different buyers competing against each other. As we think about how do we structure that process, I think the key thing to create that tension is that it needs to be credible.

So you need to be actively pursuing both of those paths in earnest. And as a result, right, you need to think through, you know, what are the steps you need to go to to get through those processes?

I think the good, the nice answer is that the start of both of those processes is preparation and preparing an asset to be ready for sale is very similar to preparing an asset to be ready to go public. You need to get your marketing materials, you need to get your audits in place, and you need to make sure that you have your governance structure really sound. All of those things will help you in both processes and I think can be done in parallel.

Outside of that, I think then you can start to think about how do we kick off these processes?

Maybe I'll talk a little bit about the M&A and you can get into the public markets. But in M&A, we're creating those marketing materials. We're determining who could be the potential buyers of this asset. Are there any natural strategic buyers? In an ideal process, you would have one to a handful of strategic counterparties who would be interested in owning this asset for one reason or another. You know, if that is not the case or if that is the case, there may also be private equity sponsors that you'd want to reach out to.

Once you've determined who the potential buyers of this asset are, you can use those marketing materials to start outreach and start providing confidential information for the potential buyers to come up to speed on the asset and eventually get to a point where you would seek a bid. All of this could be done in parallel to starting to prepare for a public offering, which I'll let Josh talk about those steps. But essentially, you want to get bids in hand to be able to start seeing price discovery.

So you have something to compare it to against what might be achievable in a public market.

Josh Weismer: In terms of preparation from an ECM perspective, what really is important is to start the S-1 process and the diligence process, which you're already doing on the M&A side. I think the JOBS Act changed how people use the dual-track process in the past, which was you used to file an S-1, it was always public, and people would be able to look at the S-1 and decide, do I want to buy this company? Is it actually going to go public instead of going down the sale route?

And now with a confidential filing, that information isn't necessarily readily available for most companies. But I do think that filing an S-1, even if it's confidential, and showing the market that you are willing to go down that path and you've announced to the world, because even though the filing itself is confidential, everybody puts out a press release saying that we filed confidentially, they just don't release the contents of the filing. But that being said, you've announced that you're willing to go down the IPO route.

And I think that that provides that competitive tension on the M&A side that if a company doesn't necessarily get the bids they want, whether it's a corporate that's founder backed or sponsor backed, they have the ability to turn around and go down the IPO route if they don't get the bids on the M&A side. And we saw that a couple of years ago for a company called Standard Arrow in the industrial space, which was getting bids from other private equity funds. It was owned by a big private equity fund.

It was attracting bids from private equity funds. But it was of the size where there weren't a ton of natural buyers, kind of like what you alluded to earlier, Kevin. And ultimately, what ended up happening is the public markets paid more than four turns of EBITDA, more for that business, at least from what we understand, than the bids they were getting on the M&A side.

And that was a case where the sponsor was patient and was able to, in subsequent follow-on offerings, sell down over time and achieve a much better liquidity outcome, despite the fact that they had to wait a bit to get full liquidity in that asset.

Kevin Costantino: And has it accelerated the ability for a sponsor or any owner to sell down post-IPO with some recent regulatory changes?

Josh Weismer: Yeah, the SEC announced that it has put up for consideration rules that would effectively make every company immediately S-3 eligible post the IPO.

So historically, the rules stated that you had to wait a year after being public in order to be able to file an S-3 registration statement. And what that did from an execution standpoint was in your first year, when you do a follow-on, you're doing it off a Form S-1, which means you have to take 48 hours to market the transaction for effectiveness reasons.

And that subjects you to market risk, right? Even if your shares are trading, your stock has been performing well, if you go on a couple of days where the market is not performing or your comps are down, that can have a very negative impact on where you sell relative to where you launch the transaction. And this new rule change, it won't necessarily change how people approach lockups, but it will allow people to sell either on an overnight basis or on a one-day marketed basis and remove some of that market risk and hopefully make the IPO path and subsequent follow-on path for sponsors a bit less risky than the sale process.

Kevin Costantino: That's an impactful change.

Josh Weismer: Yeah, absolutely.

Kevin Costantino: So what I'm hearing is that a lot of the information that's put together for a sale process or for an IPO prospectus is largely the same, obviously a different format. Can you talk about what additional time or expense is associated with pursuing a dual-track process versus picking one over the other?

Josh Weismer: Either way, you're incurring legal costs, you're incurring accounting costs, you're doing all the material prep. I'd say you're probably layering in the incremental prep of the S-1 alongside the offering documents on an M&A transaction. I think, though, at this point, attorneys have got the IPO process and the S-1 process down to a science.

And I don't know that the incremental cost is really, when you think about the incremental value you create by creating that competitive tension, I don't know that the incremental costs come anywhere close to hopefully what kind of value you create during the entire process.

Kevin Costantino: Can we talk a little bit about the decision point that ultimately a company might have before then if they do prosecute a dual-track process? Obviously, there's some degree of price discovery that happens during an IPO process, pre-pricing, and clearly there's different stages of bidding in an M&A process, particularly a traditional two-step process. How do these things all come together for someone to actually decide, I'm going to go left or I'm going to go right?

Josh Weismer: From my standpoint, it's really up until you launch the roadshow. I think that there's always a negotiation back and forth in a dual-track situation where a buyer is trying to convince the seller to come to terms with them with that IPO still as the competitive tension threat. I think the reality is once you launch the IPO, you've basically made the decision, I'm not going to get what I want in the M&A market.

But I think right up until that point, there is a back and forth between buyer and seller to try to get to a point of agreement in terms of valuation that really, it's up until the last week and a half of what really is the roadshow between launch of the roadshow and pricing, and that's really not a large chunk of time that's taken away from the negotiation process. So it's really up until that last minute where you put a prospectus out with a price range and share count on the cover and start creating meetings with institutional investors. That's sort of the point of no return, although legally it doesn't have to be.

But practically, that's usually when people have made that decision that they're going to pursue the IPO path.

Jessica Goldstein: And if we think a little bit anecdotally about, you know, as you're going through the M&A process, at what stage would you maybe say, I have enough in the M&A, I have enough demand for the M&A that maybe I won't actually take it that far in the IPO?

And I think all of that is exactly as we talked about at the beginning, really reliant on whether or not you have buyers that are willing and able to pay what we call a control premium. So looking at what companies in these sectors trade at in the public markets, generally speaking, a control premium would be, you know, higher than that.

So if you have buyers that say, I really want to own this asset, I believe that the IPO is a viable option. It's likely to trade in this range based on public comparables. If I offer above that in a control premium, can I make the sellers determine that we should, you know, stop with the IPO and go down the path of M&A?

And even beyond that, can I offer even maybe a little more to get them to go into exclusivity with me to see if we can run to the finish line to get the sale done?

Kevin Costantino: To preempt the sale. Absolutely. What I like about this process is the level of optionality it gives our clients to be able to make a decision at the furthest possible point along so they have full information before they actually make a call.

Josh, Jessica, thank you for the great discussion and for joining us today on M&A Corner. Josh, I know this is unique for you, but you're welcome back anytime as an ECM banker. Thanks for joining us and look forward to the next edition of M&A Corner.