Growing a micro-cap public company can be very difficult. Many approach growing a micro-cap public company the same way they would a start-up. While organic business growth is important, it is usually too slow and expensive for a micro-cap public company.
In my experience, the best way to grow a micro-cap public company is through acquisitions. Micro-caps are basically designed for growth through M&A. In a previous post, I compared a micro-cap public company to a Ferrari and M&A to the open highway.
Some of you reading this might be thinking; “how could anyone compare a micro-cap to some of the finest luxury sports cars in the world?” If you are one of those readers, your question is probably a result of watching directionless drivers attempt to drive their Ferraris through the mud. By driving through the mud I mean, trying to grow a micro-cap public company like a private business.
There are numerous examples of micro-caps succeeding by growing through acquisitions (if you don’t want to take my word for it, check out the companies that “uplisted” from the OTC to a senior exchange last year). In this post I will explain why, in my opinion, M&A Is The Best Way To Grow A Micro-Cap Public Company.
M&A Is The Best Way To Grow A Micro-Cap Public Company for 5 reasons; transparency, equity currency, accretion, capital markets, and net operating losses.
Transparency – Whether SEC reporting or meeting an alternative reporting standard, public companies are required to maintain a relatively high level of transparency. From PCAOB audited financials to timely disclosure requirements, public companies (big and small) are held to a higher standard than private companies. While complying with these requirements can be burdensome (as many of you know), compliance also provides sellers and investors with a certain level of comfort. Sellers (receiving notes and/or stock as part of the purchase price), equity investors, and lenders can be confident in publicly available information regarding the acquirer and know that the acquirer will continue to meet important transparency standards in the future. Transparency encourages sellers to require less cash up front and lenders/investors to provide greater funding under better terms.
Equity Currency – Because public companies (should) have stock that is liquid with a third party (market) valuation, stock can be used to pay for part or all of an acquisition. In theory, stock in a public company can easily be sold for cash affording sellers the opportunity to take stock for future upside while maintaining the option to liquidate at any time. In fact, nearly 20% of M&A transactions in 2015 were all stock transactions. It’s much more difficult for private companies (especially smaller private companies) to use stock for acquisitions because sellers will need to wait for a liquidity event (IPO or acquisition) to turn their stock into cash and the valuation of a private acquirer’s stock is much more abstract.
Accretion – Micro-cap public companies, with exciting growth stories, often have stronger valuations than comparable private companies. Stronger multiples mean companies can acquire private companies at lower valuation multiples and receive a higher valuation on the newly acquired business in the public market (a/k/a: accretive acquisition).
Capital Markets – Access to the capital markets (and the liquidity and valuations they provide) let public companies raise more equity capital faster, and at higher valuations, than comparable private companies. Combining equity capital with stock consideration, seller notes, and traditional acquisition financing; micro-cap acquirers can complete larger acquisitions faster and for a smaller percentage of equity.
Net Operating Loss – While a net operating loss (“NOL“) may be considered a bad thing because they are a result of a business losing money, in many cases NOL’s can be used to offset taxes on future profits (including the profits of acquired businesses). Micro-caps with long operating histories, high legal/accounting/compliance expenses, and little revenue can often offset the tax bills of profitable targets. By levering past losses a micro-cap acquirer can increase the bottom line of a profitable target once acquired thus increasing its own bottom line.
Those are the 5 reasons why (I believe) M&A is the best way to grow a micro-cap public company. Next time you see a someone lost in the woods with their micro-cap Ferrari, do them a favor and direct them to the M&A highway.
Do you think M&A is the best way to grow a micro-cap public company? Do you have a better strategy? Please comment and share!
Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.
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