Mastering lean M&A, IPO markets

More than 90% of U.S business leaders in a recent survey said their organizations are either pursuing a merger this year or are interested in doing so.

Sixty-five percent of respondents — mostly finance leaders — said their companies will acquire or consider purchasing another organization in 2023. About 30% said their organization will be acquired or consider being bought. Only 5% of companies had no plans for deal-making this year.

The survey, conducted by Wakefield on behalf of CFO.com, may point to a rebound in merger and acquisition activity as the year unfolds, following a slump in 2022, according to a report on the findings. “Despite slower M&A activity in 2022, organizations once again look to build through strategic acquisitions, and most will target small or midsize deals,” the report said.

The total value of M&A in the U.S. and Canada dropped to about $1.5 trillion in 2022, down 41.4% from record levels in 2021, as rising interest rates and a slowing economy dissuaded companies from expanding, according to S&P Global Market Intelligence.

The downward trend continued in the first few months of 2023 amid persistent economic headwinds and turmoil in the banking system, according to data from PitchBook. Deal value during the first quarter of the year fell to $993 billion, lagging by 32.2% the record total during the fourth quarter of 2021.

Still, CFO.com’s research shows that a large number of business leaders from a variety of industries are bullish about the economy. More than half said they expect the economy to expand. Only 8% of respondents anticipated a significant recession.

Earlier this month, New York Federal Reserve President John Williams, who is also a vice chair of the central bank, said he expected inflation to ease to 3.25% this year and subside to the Fed’s 2% goal during the next two years. He also predicted the economy will avoid recession in 2023, differing from a forecast in March by Federal Reserve economists.

The Fed’s March meeting minutes include predictions for a mild recession starting later in 2023, followed by a two-year recovery period.

A total of 500 U.S.-based business leaders completed the CFO.com survey, which was conducted in partnership with Oracle NetSuite from March 17 to March 30. Respondents included 300 CFOs, 100 non-finance executives, and 100 directors or managers representing various sectors including manufacturing, professional services, advertising, retail, financial services, and software.

CFO.com is owned by Industry Dive and a sister publication of CFO Dive. 

Euphoric. One of many words used to describe the memorable and historic year of 2021 in the United States public markets. After a record-breaking year for the Nasdaq and NYSE exchanges with 1,053 total initial public offerings, market conditions turned volatile due to the uncertainty from macroeconomic conditions, geopolitical tensions, inflation, and rising interest rates.

As valuation multiples subsequently fell off a cliff, companies contemplating IPOs pressed the pause button or ultimately canceled their IPO plans entirely. The Nasdaq and NYSE exchanges saw only 191 total IPOs in 2022, according to data from Audit Analytics. Headlines are still ruled by inflation, a potential recession, and now banking turmoil, which has many companies and investors wondering when the next IPO window will open. 

While achieving an IPO is a monumental milestone, it is imperative for management to understand going public is more than a singular transactional event. This process is a transformation of the business, which typically includes enhancing the current business processes, controls, and infrastructure in place to support the additional financial reporting requirements and operational needs of a successful public company. For a successful transition, proper planning and IPO readiness is crucial.

The CFO’s IPO to-do list

CFOs play a critical role in preparing for an IPO and will have many responsibilities during the process, including development of the organization’s future strategic roadmap, preparing the company for accurate forecasting of financial performance, and creating an investment thesis to pitch to potential investors on roadshows.

Often organizations underestimate the time and effort the IPO readiness initiative requires. The readiness process requires additional attention and time-consuming tasks.

For example, in addition to carrying out the process of transforming the organization into a public company along with their operational responsibilities, executives must also make sure all registration statements include audited financial statements and the frequency for financial reporting increases from an annual to a quarterly basis. 

Further, all financial statements in registration statements must comply with the form, content, and updating requirements of Regulation S-X and be audited in accordance with Public Company Accounting Oversight Board standards, which include additional independence requirements.

In the event the current auditor is not a PCAOB-registered firm or performed any services that may have impaired independence, the company may need to be re-audited by an independent PCAOB registered firm. For companies that have not been audited under PCAOB standards or performed full quarterly financial reporting closes, this adds more complexities and burdens.

Additionally, CFOs are responsible for determining whether the organization has the necessary human capital and infrastructure to support the IPO readiness initiative. Given the recent scarcity of labor resources and a highly competitive labor market, finding qualified resources at a reasonable price to build talent in a timely manner can be challenging.

Buying IPO experience 

“Buying talent” through hiring an external advisor might be more efficient and one of the options that CFOs can consider as they navigate the road to going public. Although external advisors may come at a higher monetary cost to the organization, there are benefits that CFOs should strongly consider in their decision.

Nothing compares to prior experiences of being in the trenches. External advisors can act as subject matter experts with extensive IPO and capital markets experience that can help CFOs and internal accounting teams navigate the added technical requirements and expectations for public companies. 

While no one can be certain when the tides will turn, companies considering a public listing should start the planning process now. There are no assurances when the IPO window will open and when it does, how long the market will be receptive to public listings. Although an external advisor may come at a higher monetary cost, bringing on a team with a proven track record will provide much needed support to the CFO and may ultimately be key in solidifying a successful IPO readiness process.

U.S. initial public offerings during the first half of 2023 raised $8.8 billion, an 87% jump compared with the same period last year but only about one-tenth the $84.2 billion surge in IPO proceeds during the first six months of 2021, EY said. During the first half of last year, U.S. IPOs raised a paltry $4.7 billion.

Nearly half of the U.S. proceeds from January through June stemmed from the $4.4 billion IPO in May by Kenvue, a divestment by Johnson & Johnson of its consumer health care business. Still, an improving investor mood and increase in the number of start-ups seeking another round of funding suggest that the U.S. IPO market may quicken in the months ahead, according to Mark Schwartz, the Americas IPO and SPAC advisory leader at EY. “Despite the continued slow pace of IPOs, recent improvements in market sentiment and the uptick in follow-on activity could be a harbinger for brighter days in the IPO market later this year or next year,” Schwartz said in a statement.

Declining inflation, a fall in the price of oil and other commodities, comparatively low equity price volatility and gains for growth stocks may set the stage for recovery in IPOs, EY said. Renewed stability in the banking system following the March collapse of Silicon Valley Bank and two other financial institutions may also encourage companies to sell shares publicly.

EY tracks other factors to forecast the future for the IPO market, including equity valuations and the Federal Reserve’s stance on interest rates, according to Schwartz. It also monitors geopolitical turbulence and trends in earnings estimates.

CFOs and their C-suite colleagues considering an IPO should start preparations, EY Americas IPO Leader Rachel Gerring said.

“Now is the time to activate your IPO plans and build muscle around operating as a public company,” she said in a statement. “Preparation is key to capitalize on potentially fleeting market windows with confidence.”

The number of IPOs will likely rise worldwide during the next six to 12 months given the prospect that Beijing will further stimulate China’s economy and central bankers this year will end rate hikes, EY said.

So far this year, IPOs worldwide have lagged the total for the first six months of 2022. Amid weak economic growth, tight monetary policy and geopolitical tensions, 615 IPOs raised just $60.9 billion, registering declines of 5% and 36%, respectively, compared with the first half of last year.

“High interest rates and poor post-IPO share price performance have also pushed investors to look for other investment asset classes,” EY said.

Companies this year have listed on global markets at lower, “more sustainable valuations” compared with the first six months of 2022, EY said. As of June 19, 32% of IPOs listed in 2023 traded below their offering price compared with 45% for those that went public last year.

Investors in coming months will probably focus on technology companies, stocks that leverage a focus on environmental, social and governance best practices, and businesses that show successful adoption of artificial intelligence, EY said.

Referring to big share offerings such as the Kenvue IPO, EY said, “we expect more large corporate spin-offs and carve-out listings will take place in other major markets as companies seek to increase shareholders’ value.”

During the second quarter, two of the five largest U.S. IPOs were carve outs from large companies, EY said, adding that several similar transactions are “in the pipeline.”

Fresh from closing a $20 million series A financing in December, biotech firm Ratio Therapeutics’ new CFO is focused on helping his young company build a sophisticated finance department. 

Before Reed Malleck, the company’s finance chief, arrived in October there was a part-time contract CFO, a part-time contract controller and four or five people in the company who did some of the finance and accounting work, including the CEO, Jack Hoppin. 

“There was really no structure, no cadence,” Malleck said in an interview this week. “When I came in the door I said, ‘there’s no such thing as a soft close, we either close the books or we don’t.’” 

A U.S. army veteran who spent the first 22 years of his career in various finance roles at Hewlett Packard before taking multiple CFO positions in a range of companies, Malleck has quickly taken steps to build a strong financial structure for Ratio, which was founded in 2021. 

One of his main goals: to set up the people and systems needed to be due-diligence ready every day, meaning that the Boston-based firm is capable of answering any questions potential investors may have at all times.

To achieve that, Malleck is establishing departments in the company, with each department having what he termed an owner or individual who is responsible for employment and the management of the department’s resources. He’s also applying a system which he invented about 20 years ago, that he calls a “framework for everything.”

Most companies have some elements of it, he said. It is roughly composed of vision and mission statements and strategic objectives for the company. Objectives, he said, can last for about a year. 

“We’re setting up the cadence for the monthly close and monthly published financial statements,” Malleck said. “That’s where we’re going and that all supports many other things, it supports command and control of the business and it also supports the communication with potential and existing investors.” 

Hoppin, the firm’s CEO, said in an interview that he tapped Malleck knowing his vision was exactly what his growing company needed. Reed has set up a plan that syncs what he called the budget burn down with the company’s plans for growth this year. Hoppin said he’s also adopted Reed’s framework for everything. 

In another measure of the company’s growth, the firm moved out of WeWork space and into new 19,000-square foot space this week in Boston’s Seaport District. The space contains offices and a research facility. 

Founded in 2021, the firm now has about 30 employees and expects to continue to expand its hiring this year. The work that Malleck is doing will support that growth.  

“This all speaks to maturing Ratio in the financial management dimension,” Malleck said.

The volume of deals worldwide valued at more than $100 million plunged 37% to just 280 during the first half of this year, undercut by rising interest rates and a gloomier outlook for the global economy, Willis Towers Watson said Thursday.

“A perfect storm of higher inflation, interest rates, capital costs and greater regulatory scrutiny, combined with major geopolitical headwinds and a banking crisis, have triggered a steeper drop-off in M&A activity than anticipated by the market,” David Dean, a North America managing director at WTW, said in a statement.

The volume of deals in North America from April through June fell for the sixth straight quarter to 61 compared with 173 during the third quarter of 2021, WTW said in a joint report with the Bayes Business School. North American deal-makers did not prosper from M&A, with company share prices lagging regional equity markets by 5.9 percentage points during the first half of the year.

The slump in M&A is one of many challenges bedeviling CFOs this year. Stock price volatility, the most aggressive monetary policy tightening in four decades and a persistent barrage of recession warnings have disrupted CFO financing strategies in 2023, including plans for deal-making.

During the first half of 2023 the volume and value of global deals across a full range of sizes slumped 14% and 40%, respectively, compared with the same period last year, according to PwC.

The downturn has created a “buyers market,” PwC Global Deals Industries Leader Brian Levy said in a statement, noting clout “for cash-rich corporate acquirers.”

“It’s essential for sellers to work harder to prepare for upcoming sales — or risk losing out,” Levy said.

Deal-making has slumped worldwide partly because of the murky outlook for the global economy, WTW said. World output growth will likely fall to 2.8% this year from 3.4% in 2022, the International Monetary Fund forecast in April.

“Buyers have had to shift gears to adapt to a more cautious M&A environment,” Dean said.

“With these disruptive trends expected to continue into the second half of 2023, potential buyers will be kicking the tires a bit harder as they seek deals to address strategic priorities, expand into new markets and fill capability gaps,” he said.

When inflation slows and credit markets ease up, pent-up demand, digital transformation and a focus on environmental, social and governance best practices will probably fuel a resurgence in deal-making, Dean said.

“After a lull, deal volumes pick up very quickly and we would expect something similar,” he said in an email response to questions.

Antitrust enforcement and regulatory headwinds will likely discourage large M&A in coming months, pushing deal-making into middle- and small-size transactions, he said.

“While cash-rich corporates remain well positioned to make larger moves, we see mid-market transactions dominating the market in coming months as CEOs use a program of both strategic acquisitions and select divestitures to transform their portfolios,” according to PwC.

Companies through acquisitions will acquire expertise in artificial intelligence and other high-skill, high-demand technologies, PwC predicted, noting that AI talent is “one of the scarcest resources to find.”

The energy transition is also prompting deals, with automotive and other manufacturers buying mining companies to ensure the supply of minerals essential for producing batteries and storing energy, PwC said.

During the current buyer’s market, “sellers cannot prepare enough,” PwC said. “Today, to complete a deal and avoid price reductions, sellers should anticipate a greater level of scrutiny from buyers and their funding sources, and they will need to be ‘deal ready.’”

The current downturn is, to a degree, a correction after robust M&A in 2021, Dean said in an email response to questions.

“What is unusual about the current slump is that it represents six straight quarters where deal volumes have declined,” he said. “However, this can be explained by the huge number of transactions that occurred in 2021 following” the pandemic-triggered tailspin in deal-making in 2020.

CFOs of early-stage biotechnology firms get a lot of practice in the art of raising money.  

No matter the market cycle, they must find capital to fund costly research that will ideally lead to new drugs or treatments that generate revenue — and turn them cash-flow positive.

Finance chiefs at pre-revenue companies must tamp down cash-burn as much as possible, get employees paid and keep labs operating while continually building a funding runway. “The minute we close one financing, you have to start thinking about the next one,” Scott Praill, CFO of San Diego, Calif.-based Kintara Therapeutics, said in an interview. “That’s always on your mind.” 

In San Francisco last week many biotech executives got a chance to pitch their firms either at or on the sidelines of the annual JPMorgan Healthcare Conference and the Biotech Showcase Conference. But biotech is a harder sell than it was early in the pandemic. Overall healthcare venture capital funding dropped down to $21.8 billion last year compared with the record $28.3 billion record hit in 2021, according to Silicon Valley Bank’s 2022 Healthcare Industry Trends report.  

CFO Dive talked with three biotech CFOs about the current financing cycle and the strategies they’ve developed over the years for keeping the funds rolling in.

Escaping warrant overhangs

San Diego, Calif.-based Kintara is focused on developing new solid tumor cancer therapies to treat brain cancer. Because it’s publicly traded it has an extra financing lever: stock offerings.

But while it’s usually possible to raise money through various cycles, in challenging times the capital doesn’t always come at terms you can live with, Kintara’s CFO, Praill said. 

Currently most stock offerings come with warrants which give the holders the chance to buy shares of the company at a certain price in the future. That exposes the company and existing shareholders to a so-called warrant overhang, a term that refers to the prospect of a potential dilution event on the horizon.

“There were tons of no-warrant deals done during COVID. Then things got tighter and investors now want more upside,” Praill said. In the wake of that shift, the company is looking to raise money through other non-dilutive sources, he said. 

For example, they are looking to partner with other companies, considering pursuing convertible debt and making a more focused effort to obtain federal grant funding. “That’s our point of emphasis, the non-dilutives,” he said. 

Despite the advantage of being able to tap public markets, Praill advises companies to weigh the cost of going public. It’s expensive to meet all of the requirements of being a public company, he said. Separtely, once you’re at the funding trough, Praill advises companies to secure more than they think they need. “Raise as much as you can when you can,” he said. 

Shifting to a rolling close 

Salt Lake City, Utah-based Halia Therapeutics is a clinical stage biopharmaceutical company which is developing medicines that treat diseases characterized by chronic inflammation. 

Halia CFO Jeff Burton is currently in the process of raising a $50 million series C round — the biggest preferred round the company’s ever done. That effort has been complicated by two factors. 

One is that the firm has sought to focus on raising money from high networth individuals and family offices rather than going the venture capital financing route. The company prefers to averting the loss of control that sometimes comes with venture capital money, he said. 

The second is the volatile market itself. Burton had originally planned to have two closings for the series, one in December and one in January or February. But as last year progressed, some investors had deals of their own delayed that they needed to close in order to free up cash. Others had tweaked their own investment strategies as market brightened.

For example, one of the firm’s big investors, comprising about 10% of the round, asked to contibute their funding in January rather than December as planned. Burton agreed and then made the decision to switch from two fixed closes to a rolling close to accommodate the shifting market. 

A decision like that can make it harder to show the kind of momentum that is key to building confidence with other investors, he said. But Burton said he’s still on track to close the round in the next few weeks which would gain him enough runway to fund operations and clinical trials to the end of 2025. 

It helps, he said, to have started the prospecting with a time cushion built in. Even without the latest funding completed, Burton said he would have had enough capital to finance the company through this year and into 2024. “We didn’t wait until the last minute,” he said. “We were mindful of our cash and mindful of the runway.”

Reopening a round

Teresa McRoberts has worked through numerous cycles over the course of her career in the biotech and pharmaceutical sector, including in the 1980s and 1990s as a vice president at JPMorgan when she was on the other side of the financing table.  

When McRoberts joined the Austin, Tex.-based cell-therapy company Triumvira Immunological about two years ago, she had a front row seat to the latest biotech downturn that has delayed the private company’s plans to go public.

“I joined basically at peak of the biotech market in 2021,” McRoberts recalled. “We had a term sheet and were midway through syndicating a series B and then everything just stopped and the biotech markets started going down.

She says the company will ultimately go public when both it and the market are ready. But these days, a good idea is not enough and companies need to show they can execute and deliver on a concept. McRoberts is hoping the company will have some key data in hand in the first part of this year to help draw more interest from investors.

Still, McRoberts didn’t let the chilled appetite for biotechs stop the company from moving forward. Instead McRoberts found an alternative route. Triumvira extended its financing runway by reopening its existing Series A round. “With existing investors, the easiest way for them is to simply reopen a vehicle they’ve already used,” McRoberts said. 

Two of its longer-term investors, Leaps by Bayer and Northpond Ventures, took part in an initial Series A that closed in 2020 and were part of a second financing in 2021, according to a spokesperson for Triumvira. In late 2021 and 2022 there were two additional tranches that also included another new investor. By March Triumvira announced it had completed the extension of its Series A financing, valuing the funding at roughly $100 million.  

As for advice for other biotechs, she says the fundraising process requires patience. “It’s a lot of work and it’s somewhat repetitive talking to people and sending out slidedecks and telling your story over and over again,” McRoberts said. “You’re going to have to talk to a lot of people to find a few key investors.”