The Art of Capital Restructuring: Creating Shareholder Value through Mergers and Acquisitions

CHAPTER 27

How Initial Public Offerings Affect M&A Markets: The Dual Tracking Phenomenon

ROBERTO RAGOZZINO

Assistant Professor of Strategic Management, University of Texas at Dallas

JEFFREY J. REUER

Blake Family Endowed Chair in Strategic Management and Governance, Purdue University

INTRODUCTION

In June 2004, AOL placed a $435 million bid to acquire Advertising.com, a major buyer of online pop-up advertising. While interesting in its own right, that announcement might not have stood out from the more than a hundred other statements describing merger and acquisition (M&A) activity in the high-technology sector in the first six months of the year. However, the fact that Advertising.com had recently filed to go public made this deal noteworthy and suggestive of a broader phenomenon connecting initial public offerings (IPOs) and M&As. As another illustration, in mid-2002, eBay bid $1.5 billion to purchase PayPal, a privately held company with cutting-edge technology in antifraud online payments. In this transaction, the two companies had been discussing an acquisition before September 28, 2001, the date on which PayPal announced that it had filed to go public. Interestingly, since its IPO on February 14, 2002, the company had experienced gains of about 77 percent, and eBay eventually put in a bid to acquire PayPal at a price that was roughly 20 percent higher than the highest amount sought by the company during the previous negotiations.

Defining Dual Tracking

Dual tracking occurs ...