IPOs and M&A Rebound
Wednesday 12th August 2020
After a brief pause in significant market activity arising from the pandemic, M&A and initial public offerings (IPOs) have returned in a significant rebound.
It began with the IPO of ‘insuretech’ Lemonade, a business using artificial intelligence and behavioural economics to determine how much customers should pay for insurance – ideally more efficiently than its rivals. Shares in Lemonade were priced at $29 each in the IPO and reached $69 on the first day of trading, valuing the company at $3.8bn.
A new stock’s performance upon listing on the stock exchange often determines whether investors see its IPO as a success, especially in the US. Most of that benefit falls to existing investors (SoftBank, in Lemonade’s case). However, 60% of IPOs trade below their initial price in five years.
Lemonade’s IPO follows multiple technology listings that have received strong funding from public investors, such as business database provider ZoomInfo and car sales company Vroom. However, investors are perpetually sceptical of lossmaking consumer tech companies following numerous disappointing IPOs last year commencing with Uber, also SoftBank-backed.
Prospective disrupters face a myriad of challenges, from stringent regulation to acquiring the necessary capital to ensure that claims can be met. One of the largest hurdles is the need to find customers and convince them to put their faith in a new brand, as the big four insurance companies in the US spend over $2bn. Lemonade claims that, unlike established insurers, it does not profit higher if it rejects claims. Instead, it charges a fee on each sold policy, with reserves that are not used for claims donated to charity. Lemonade hopes that its strategy will resonate with younger customers whose insurance needs are likely to grow throughout their lifetimes, but who have never purchased insurance before.
Lemonade is the fifth US company to IPO as a B Corporation, a business certified for achieving high environmental and social standards. Over 3,400 private businesses are B Corps, but their standalone public counterparts are rare. However, on 9 July, B Corp Vital Farms, which produces eco-friendly eggs, filed to raise up to $100m. B-Lab, the non-profit organisation that certifies B Corps, said that this is the first time two US B Corps have gone public this closely together. Could this signal a new trend? Regardless of the answer, it is clear that the market remains hungry for IPOs.
This brings us to the subsequent merger between Analog Devices and its rival semiconductor manufacturer, Maxim Integrated Products. The deal aims to create a $68bn chipmaking titan to compete with larger rivals, particularly Texas Instruments. It will also allow Analog to build its presence in the automobile market where Maxim is highly experienced. This would rank as one of the year’s largest takeovers after subdued activity during the pandemic.
The merger is an all-stock transaction, where shareholders of the target company receive shares in the acquiring company as payment, rather than cash. As such, Analog (valued at $46 billion) will own 69% of the new entity, with shareholders of Maxim (valued at $17 billion) owning the remaining 31%. Maxim shareholders will receive 0.63 shares of Analog stock for each Maxim share.
A theoretical analysis based on the most recent 12-month earnings before interest, taxes, depreciation and amortisation (EBITDA) of both companies and their respective capital structures suggests Maxim should, in fact, own 29 per cent of the new entity. A premium to that is, however, understandable since Analog will be managing operations. Neither company carries large debt so leverage is not a barrier. The companies project $275m of cost synergies, a considerable figure reflecting most of Maxim’s overhead spending.
Regulatory approval, however, remains a requirement. Semiconductors are essentially the engines of technological devices, thus governments are naturally sensitive to national security concerns, especially if they are being produced elsewhere, such as China. Broadcom, in 2018, was forced to withdraw its $142bn offer to buy Qualcomm after the US President blocked the deal on national security grounds.
Analog was advised on the deal by Wachtell, Lipton, Rosen & Katz and Maxim was represented by longstanding adviser Weil, Gotshal & Manges. Latham & Watkins acted for JPMorgan Chase & Co, the financial adviser for Maxim.
Lemonade’s IPO and the Analog-Maxim merger, therefore, are portentous signals of market optimism as we emerge from the pandemic.
