Exit Environment and Valuations

Posted by | July 7, 2010

Exit Environment and ValuationsAccording to new research published in this month’s Journal of Business Venturing, privately held businesses that start the initial public offering (IPO) process at the same time that they put themselves on the block command a premium price — as much as 26 percent higher — over those that solely seek a single buyer. That’s according to an article from Lynn Cowan of Dow Jones Newswires.

Privately held businesses that start the IPO process at the same time that they put themselves on the block are taking what is known as a dual-track strategy.

The research is certainly interesting — ostensibly offering an objective analysis of what is essentially a new auction strategy. However, as we have observed over time, academic research can frequently diverge from reality.

We don’t mean to take umbrage with any specific research, but our experience has always found that value is in the eye of the buyer.

Valuation can be driven by many factors, and timing can be one of the most important. One only has to remember back to the halcyon days BEFORE the Internet bubble burst to understand that valuation is anything but an exact science.

At Safeguard Scientifics, our goal is to build value in the companies with which we partner. Over time, we expect to harvest that value with strategic exits that strengthen Safeguard’s brand and balance sheet, while providing attractive returns for our investors. We time our exits from ownership positions in our partner companies to achieve aggregate targeted, risk-adjusted returns on capital of 3x to 5x, at a minimum. Exit opportunities may arise at any time and in different forms, including privately negotiated sales of securities or assets; public offerings of partner company securities; or in the case of a publicly traded partner company, sale of securities on the open market. IF an opportunity clears our strategic growth and return hurdles, we will respond appropriately. In the meantime, we will continue to work every day to build value in our partner companies, drive their growth and keep their spending plans in line.

While we’ll always consider new academic research in our unending quest to better understand the relationship between value and a seemingly endless list of prospective independent variables, at the end of the day, we believe our best returns have always accrued whenever we support the efforts of visionary entrepreneurs developing new products and services for large and rapidly growing markets.

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