Mergers and Acquisitions—The New IPO

In the past, repeated rounds of fundraising were the norm for emerging biotech companies to finance drug development. In today’s challenging economy, however, it’s no secret that few will be able to access the capital markets. Even fewer will be able to do it at terms that are anything less than onerous. Additionally, it should probably go without saying—but we’ll say it just to be clear—that only the most elite (not to be confused with the delusional) private companies would consider attempting an IPO in these markets.

So what are the options to fund developing companies when cash is running out and big pharma fails to knock on the door with attractive partnering offers or shareholders demand a liquidity event?

Mergers and acquisitions (M&A) is certainly one answer that is heard with increasing frequency. At last activity in the sector is beginning to support the long-held thesis that the biotechnology industry is ripe for consolidation. While finding the right fit and negotiating favorable transaction terms are difficult tasks, the importance of selling the deal to the shareholders and the overall marketplace cannot be overlooked or underestimated.

One significant factor in the long-term progress of any M&A event is communicating the value and likelihood of success for the combined company. This involves careful preparation and execution of certain tactics to not only ensure a successful shareholder vote but to also best position the new firm for its future.

Nail Down the Story

Successful combined companies have a well-thought-out, interesting story that is lasting and easy to understand. The goal is to excite current shareholders and to attract new investors. Take the time to do a positioning exercise for the new firm, where all key stakeholders map out what the company is trying to build and identify the related key milestones to achieve over the next 18–24 months.

Most importantly, be diligent in focusing the story. Too often as companies seek to convey the rationale for the merger, everything but the kitchen sink gets thrown into the mix as currency. Let the real milestones guide you. If it is not going to bring potential value to your shareholders in the next 12 to 18 months and if it does not relate directly to the strategy, then table it for now.

Invest the Time to Fully Prepare the Team

An exhaustive set of SEC and corporate communication documents needs to be professionally created to support these transactions: regulatory filings, message maps, press releases, slide decks, call scripts, Q&As, a media plan, etc. Do not wait until the deal is signed to begin work on these documents, because they require extensive negotiations between parties and comprehensive legal review.

In the end none of these documents will truly help you sell the deal unless both parties stick to the core message, which requires in-depth practice sessions. Even though it can be awkward, the new team must rehearse as a group, repeatedly reviewing the tough questions. Not only does this leave you better prepared but also helps ensure that everyone delivers a consistent message. Shareholders and reporters will go to spokespeople from both teams; if your messages do not agree, you’ve severely handicapped yourself right out of the gate. 

Rebrand if Necessary

Whatever the past history and failures, the new direction of the merged firm may provide a valuable opportunity to reinvent yourself by rebranding, changing your name, or modifying major leadership. While this process can be even more daunting than executing an M&A transaction, it can be a productive way out, particularly for those stuck in the past.

Hire an objective third party to conduct an investor audit and determine what issues need to be addressed and optimal timing. Then as a team determine the best path forward to creating a fresh, positive identity.

Proactively Reach Out To Shareholders

Selling a deal often requires a proactive proxy solicitation strategy. You need to convince your current shareholders of the transaction’s merits before you present them with your selection, or they may present you with their own. Signal clearly that you are seeking to add to your pipeline or that you are exploring all strategic alternatives as a result of your dwindling cash position.

After you’ve announced the potential transaction, realize that you will likely spend the next few months on the road meeting with shareholders, key sell-side analysts, and potential new investors. Be sure to leverage the banks—to whom you presumably just paid a significant fee—to put you in front of their sales team and to take you on the road.

Talk to everyone who will listen. Regardless of whether the transaction is a merger or an acquisition, the best team for these meetings may include leadership from both parties. They should be able to address why the transaction is the right one for their respective company and shareholders as well as answer more detailed scientific questions about their individual pipeline contributions. Hire a proxy company and proactively monitor progress.

Get Ready to Rumble

If you didn’t pay attention to the previous guideline, this one becomes particularly important. If either company has an activist hedge fund in their stock, you need to be well prepared for any fallout before it bubbles to the surface. Nothing draws attention away from the story you need to tell like a well-written press release issued by a major holder on why the transaction isn’t in the best interest of the shareholders.

This requires a “what if” crisis communication strategy session well before the deal becomes public. Think about potential scenarios and discuss appropriate responses with your IR counsel and with your legal advisors. Do not ignore these shareholders. If you wait until events unfold to prepare your communication strategy for this audience, you will find yourself in a potentially crippling scenario when you should be out selling the new and beneficial transaction.

Obtain Third-Party Validation

Third-party endorsement from well-respected sources can play a critical role in corroborating the merits of a transaction and the new company’s prospects moving forward. If possible, get a blue chip investor (current or new) to put fresh money in at the time of the merger. Preferably, implement this before undertaking any contemplated reverse stock split.

Spend ample time with sell-side analysts. If they see the merits of the transaction, they can provide invaluable assistance in communicating the value of the transaction. They could issue favorable reports, provide positive comments to the media as well as their institutional clients, and take you on the road.

Acknowledge Any Warts and Clean Up What You Can

A transaction can be a chance to start over. Use the opportunity to clean up your capital structure. Recap your preferred stock. Do a reverse stock split if you have too many shares outstanding or if your stock price is placing you in jeopardy of losing a listing. Clean up your warrants and try to reduce liabilities that might scare away new investors, like convertible debt and long-term leases.

Above all, reduce your burn rate. Nothing scares away investors in a constrained-capital-market environment like a new entity that appears to be the sum of two companies with twice as many cash-burning assets under one new roof. 

Today M&A provides more life science companies with the opportunity to realize their potential. The probability of long-term success, though, is greatly increased by investing time and effort in preparing your communication strategy keeping these tactics in mind.