Civic leaders breathed a sigh of relief on July 24 when Eli Lilly and Co. announced it planned to spin off its Greenfield-based animal-health unit, Elanco, in an initial public offering rather than selling it outright.
Indianapolis-based Lilly had announced last October that it was exploring strategic options for the business. It’s a phrase that almost reflexively brings shudders in corporate Indianapolis because it too often has meant another one of our marquee companies is about to be acquired.
Company sales often mean the loss of C-suite jobs, a reduction in employment overall, and scaled-back community involvement by the new owners. Historically, communities would counter the loss of major corporate players by minting new public companies by IPO. The offerings gave firms higher visibility and far greater access to capital than they had as a private company.
But that replenishment process has begun to sputter, thanks in part to a boom in alternative financing options, from venture capital to private equity. Hoosier tech firms that in yesteryear might have gone public now are routinely scarfed up by private-equity players or existing public companies seeking to bulk up their product offerings.
It’s little consolation that the scarcity of IPOs in central Indiana in recent years mirrors a national trend. In 1996, there were more than 7,400 publicly listed U.S. companies, more than twice the number today, according to the Center for Research in Security Prices at the University of Chicago.
Of course, Lilly CEO David Ricks and his board didn’t opt for the IPO route to be charitable to central Indiana. As Ricks said in a press release, “We concluded that after-tax value for Lilly shareholders would be maximized by pursuing an initial public offering.”
And while Bloomberg News reported that private-equity firms were interested in Elanco, competing animal-health players—the type of buyer most likely to wield a big cleaver—might have stayed on the sidelines because of antitrust concerns.
Elanco is the No. 3 animal-health player in a field of giants, with the top four firms garnering more than $14 billion in sales. A rival’s purchase of Elanco, which analysts value at $14 billion to $16 billion, was sure to sound antitrust alarm bells.
Lilly plans to gradually release its grip on Elanco, selling up to 20 percent in an IPO this year and the remainder as early as 2019.
Elanco already is a formidable business, with $3.09 billion in annual sales and 6,500 employees, including 800 in Greenfield. But its sales represent just 13 percent of Lilly’s overall sales.
There’s a long history of U.S. companies unlocking value by taking potentially rich business units public that were largely ignored by investors when they were a small part of the whole.
One of the big successes, in fact, was Lilly’s medical-device unit, Guidant, which had a market value of $1.2 billion when it went public in 1994. Twelve years later, it sold to a rival for $27 billion.
The fact that Guidant sold reflects the reality that, once a company goes public, all bets are off on how the story will end. But for now, as Lilly prepares to unleash Elanco, we’re imbued with optimism.
The company will come out of the gate ranking among central Indiana’s 10 biggest public companies. And who knows? Maybe it will climb toward the top.•
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