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A reverse takeover or reverse merger takeover (reverse IPO) is the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public.[1] The transaction typically requires reorganization of capitalization of the acquiring company.

Process[edit]

In a reverse takeover, shareholders of the private company purchase control of the public shell company and then merge it with the private company. The publicly traded corporation is called a "shell" since all that exists of the original company is its organizational structure. The private company shareholders receive a substantial majority of the shares of the public company and control of its board of directors. The transaction can be accomplished within weeks.

The transaction involves the private and shell company exchanging information on each other, negotiating the merger terms, and signing a share exchange agreement. At the closing, the shell company issues a substantial majority of its shares and board control to the shareholders of the private company. The private company's shareholders pay for the shell company by contributing their shares in the private company to the shell company that they now control. This share exchange and change of control completes the reverse takeover, transforming the formerly privately held company into a publicly held company.

In the U.S., if the shell is a SEC-registered company, the private company does not go through an expensive and time-consuming review with state and federal regulators because this process was completed beforehand with the public company. However, a comprehensive disclosure document containing audited financial statements and significant legal disclosures is required by the Securities and Exchange Commission for reporting issuers. The disclosure is filed on Form 8-K and is filed immediately upon completion of the reverse merger transaction.

Benefits[edit]

The advantages of public trading status include the possibility of commanding a higher price for a later offering of the company's securities. Going public through a reverse takeover allows a privately held company to become publicly held at a lesser cost, and with less stock dilution than through an initial public offering (IPO). While the process of going public and raising capital is combined in an IPO, in a reverse takeover, these two functions are separate. A company can go public without raising additional capital. Separating these two functions greatly simplifies the process.

In addition, a reverse takeover is less susceptible to market conditions. Conventional IPOs are risky for companies to undertake because the deal relies on market conditions, over which senior management has little control. If the market is off, the underwriter may pull the offering. The market also does not need to plunge wholesale. If a company in registration participates in an industry that's making unfavorable headlines, investors may shy away from the deal. In a reverse takeover, since the deal rests solely between those controlling the public and private companies, market conditions have little bearing on the situation.

The process for a conventional IPO can last for a year or more. When a company transitions from an entrepreneurial venture to a public company fit for outside ownership, how time is spent by strategic managers can be beneficial or detrimental. Time spent in meetings and drafting sessions related to an IPO can have a disastrous effect on the growth upon which the offering is predicated, and may even nullify it. In addition, during the many months it takes to put an IPO together, market conditions can deteriorate, making the completion of an IPO unfavorable. By contrast, a reverse takeover can be completed in as little as thirty days.

Drawbacks[edit]

Reverse takeovers always come with some history and some shareholders. Sometimes this history can be bad and manifest itself in the form of currently sloppy records, pending lawsuits and other unforeseen liabilities. Additionally, these shells may sometimes come with angry or deceitful shareholders who are anxious to "dump" their stock at the first chance they get.

One way the acquiring or surviving company can safeguard against the "dump" after the takeover is consummated is by requiring a lockup on the shares owned by the group from which they are purchasing the public shell. Other shareholders that have held stock as investors in the company being acquired pose no threat in a dump scenario because the number of shares they hold is not significant.

On June 9, 2011, the United States Securities and Exchange Commission issued an investor bulletin cautioning investors about investing in reverse mergers, stating that they may be prone to fraud and other abuses.[1][2]

Reverse mergers may have other drawbacks. Private-company CEOs may be naive and inexperienced in the world of publicly traded companies unless they have past experience as an officer or director of a public company. In addition, reverse merger transactions only introduce liquidity to a previously private stock if there is bona fide public interest in the company. A comprehensive investor relations and investor marketing program may be an indirect cost of a reverse merger.[citation needed]

Future financing[edit]

The greater number of financing options available to publicly held companies is a primary reason to undergo a reverse takeover. These financing options include:

  • The issuance of additional stock in a secondary offering
  • An exercise of warrants, where stockholders have the right to purchase additional shares in a company at predetermined prices. When many shareholders with warrants exercise their option to purchase additional shares, the company receives an infusion of capital.
  • Other investors are more likely to invest in a company via a private offering of stock when a mechanism to sell their stock is in place should the company be successful.

In addition, the now-publicly held company obtains the benefits of public trading of its securities:

  • Increased liquidity of company stock
  • Possible higher company valuation
  • Greater access to capital markets
  • Ability to acquire other companies through stock transactions
  • Ability to use stock incentive plans to attract and retain employees

Examples[edit]

In all of these cases—except for that of US Airways and America West Airlines—shareholders of the acquiree controlled the resulting entity. With US Airways and America West Airlines, US Airways creditors (not shareholders) were left with control.

See also[edit]

References[edit]

  1. ^ a b "Investor Bulletin: Reverse Mergers" (PDF). U.S. SEC Office of Investor Education and Advocacy. June 2011. 
  2. ^ Gallu, Joshua (June 9, 2011). "‘Reverse-Merger' Stocks May Be Prone to Fraud, Abuse, SEC Says in Warning". Bloomberg. 
  3. ^ Bloomberg Business NEws (February 14, 1996), "Atari Agrees To Merge With Disk-Drive Maker", New York Times: 1 
  4. ^ "Frederick's of Hollywood goes public with merger." Reuters. December 19, 2006.

External links[edit]


Original courtesy of Wikipedia: http://en.wikipedia.org/wiki/Reverse_takeover — Please support Wikipedia.
This page uses Creative Commons Licensed content from Wikipedia. A portion of the proceeds from advertising on Digplanet goes to supporting Wikipedia.

5256 news items

 
London South East
Wed, 29 Jul 2015 09:52:30 -0700

The acquisition, through the issue of 92.9 million new Verdes shares, constitutes a reverse takeover under AIM rules. Verdes has a market capitalisation of GBP1.44 million. It originally joined AIM in 2005 as an independent record label but sold its ...

Financial Times

Financial Times
Mon, 20 Jul 2015 00:24:00 -0700

Aveva says it will remain independent after it agreed to a £1.3bn reverse takeover by Schneider Electric, in a complex deal that will lead to another large British technology company falling into foreign hands. The engineering software business, which ...

GeekWire

GeekWire
Tue, 21 Jul 2015 10:57:09 -0700

In one of the more unique acquisition deals we've come across, the Internet-of-Things (IoT) data platform is set to be acquired by a publicly-listed Australian mining and resources company called Potash Minerals in what's described as a “reverse ...

Recharge (subscription)

Recharge (subscription)
Mon, 20 Jul 2015 11:45:00 -0700

As part of the reverse takeover, Opera says it will raise at least $40m in equity finance to fund “certain future investment- and working capital requirements of SoloPower”. The acquisition is expected to close during the third quarter of 2015. The ...

Independent Online

Independent Online
Fri, 10 Jul 2015 04:48:45 -0700

It told shareholders this morning all the necessary conditions for the reverse takeover had been met, barring approval from shareholders, the JSE and the Competition Commission. Given the size of the transaction, the deal is also likely to have to meet ...
 
The Lawyer
Mon, 20 Jul 2015 02:48:57 -0700

It takes just 5 minutes to register. Answer a few simple questions and once completed you'll have instant access. Register now. Why register to The Lawyer. Industry insight. In-depth, expert analysis into the stories behind the headlines from our ...

AsiaOne

THE BUSINESS TIMES
Thu, 16 Jul 2015 06:43:15 -0700

Beleaguered lifestyle group LifeBrandz on Thursday said it has signed a deal with Healthtrends Medical Investments to acquire shares in four target companies in what is essentially a reverse takeover deal. This is subject to the approval of the ...

Greentech Media

Greentech Media
Fri, 24 Jul 2015 05:06:46 -0700

But instead, Opera has selected SoloPower, the idled CIGS thin-film, roll-to-roll solar panel manufacturer, as the target of its reverse takeover. SoloPower raised more than $200 million from Hudson Clean Energy Partners, Crosslink Capital, Convexa ...
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