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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.[2]

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][3]

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]

Reverse Mergers and Other Alternatives to a Traditional IPO, 2d Edition (Bloomberg Press, 2009), by David N. Feldman

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

External links[edit]


Original courtesy of Wikipedia: http://en.wikipedia.org/wiki/Reverse_takeover — Please support Wikipedia.
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Baltimore Business Journal
Wed, 15 Oct 2014 06:52:30 -0700

View Systems Inc. has agreed to a reverse takeover with Ashburn, Va.-based Potomac River Group LLC. The two companies have signed a letter of intent and expect to execute a deal by the end of the year. Reverse takeovers, also called reverse mergers, ...

AsiaOne

AsiaOne
Sun, 12 Oct 2014 14:56:15 -0700

Shareholders of entertainment firm St James Holdings have overwhelmingly approved a $1.56 billion proposed reverse takeover of their company by Perennial Real Estate Holdings (PREH). All 18 resolutions put to investors at yesterday's extraordinary ...

Channel News Asia

Channel News Asia
Fri, 10 Oct 2014 08:11:15 -0700

SINGAPORE: St James Holdings has received the green light from shareholders to proceed with a reverse takeover deal by Perennial Real Estate Holdings. At an Extraordinary General Meeting on Friday (Oct 10), St James shareholders approved the ...
 
The Globe and Mail (subscription)
Thu, 02 Oct 2014 12:36:48 -0700

But I would argue the most interesting announcement out of the TMX Group over the past seven days was the new beefed-up reverse takeover (RTO) listing rules for the TSX exchange. That announcement came out on September 25, and went into effect ...
 
Marketwired (press release)
Mon, 22 Sep 2014 12:52:30 -0700

Contagious Gaming Inc. (TSX VENTURE:CNS), formerly Kingsman Resources Inc. ("Contagious Gaming" or the "Company") is pleased to announce that on September 19, 2014 the Company completed its reverse takeover transaction (the "RTO") with ...

Express.co.uk

Yorkshire Post
Fri, 10 Oct 2014 00:41:15 -0700

Fletchers Group of Bakeries has been acquired by Finsbury Food in a £56m reverse takeover. The Sheffield-based firm, which produces morning goods and specialist bread products for UK grocery retailers and foodservice customers, was sold by Vision ...
 
Yahoo Malaysia News
Tue, 30 Sep 2014 08:56:15 -0700

GOH Ban Huat Bhd (GBH) and vendors of Dynac Sdn Bhd have aborted a proposed reverse takeover plan (RTO) to turn the company into an oil and gas services player. GBH on Monday received a letter from Dynac's vendors expressing their intention to ...
 
London South East
Wed, 24 Sep 2014 04:37:30 -0700

LONDON (Alliance News) - Adamas Finance Asia Ltd said its loss per share narrowed and its consolidated net asset value more than quadrupled in the first half of the year thanks to its reverse takeover in February, and it's now confident of its future ...
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