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Activist Shareholders Complicate Buyout Math

The efforts of an increasingly vocal group of activist shareholders, including Carl Icahn, Matrix Asset Advisors, Third Point, ValueAct, and Baker Brothers Advisors, to flush out the interest of strategic buyers has become compelling and increasingly commonplace.

It’s no secret: biotech stocks are often worth more – a lot more – to strategic buyers than to financial ones. Perhaps the clearest test of this hypothesis: since 2005, on average, private companies have been acquired for $79 million more—or 49% more—than the pre-money values of IPOs. (See Exhibit 1.) No wonder that virtually all IPOs today, notes Goldman Sachs investment banker Geoff Parker, are dual-track processes: they may not be publicly soliciting buyout offers, but their boards are all prepared for them.

But for companies not controlled by venture capitalists—whose only goal is to maximize returns as fast as they can—the gap...

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