The Extended Merger and Acquisition Process:: Understanding the Rôle of IPOs in Corporate Strategy

Corporate strategy research has largely ignored initial public offerings. We discuss possible reasons why this is the case and then present evidence suggesting why this may be problematic. In contrast to prior M&A research, we take the perspective of the sell-side and investigate a private firm's decision to sell itself outright versus engage in alliances or undertake an IPO beforehand. We develop the argument that sequential divestiture via IPOs can serve to mitigate ex ante transaction costs in the M&A market under two general conditions: (1) when search costs are non-trivial because potential acquirers' understanding of the identity and availability of exchange partners is incomplete, and (2) when information asymmetries pose valuation challenges. Consistent with these arguments, the empirical results of our research suggest that sequential divestiture via IPOs is more likely in industries with spatially-dispersed firms and for firms with significant intangible resources. Investments in strategic alliances are shown to be alternative signaling mechanisms that lessen the effects of asymmetric information accompanying intangible assets. The evidence indicates a place for IPOs on the corporate strategy research agenda as well as a need to understand sell-side processes in M&A. We suggest that IPOs can be seen as part of a more extended M&A process.