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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.
This page uses Creative Commons Licensed content from Wikipedia. A portion of the proceeds from advertising on Digplanet goes to supporting Wikipedia.
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2834 news items

 
London South East
Tue, 17 Feb 2015 01:11:15 -0800

Following the deal, which constitutes a reverse takeover under AIM rules, Consolidated General Chairman Robert Adair and Chief Executive Jean-Pierre Conrad will be appointed to the board of Ambrian as chairman and CEO respectively. "The merger with ...
 
London South East
Mon, 16 Feb 2015 02:00:47 -0800

LONDON (Alliance News) - 24/7 Gaming Group Holdings PLC Monday said it is now classified as an investing company under AIM rules, with the suspension of trading in the company's shares lifted after it opted against going ahead with a previously ...
 
ZDNet
Thu, 26 Feb 2015 21:02:38 -0800

The result comes as it works to establish its presence in the United States following its backdoor public listing late last year, made possible by a reverse-takeover deal worth AU$57 million with Australian Securities Exchange (ASX)-listed uranium ...

The Globe and Mail

The Globe and Mail
Fri, 27 Feb 2015 19:16:02 -0800

CMT was looking to do what's called a reverse takeover with a cheap listed shell company. It's a legal shortcut to the stock market – and the company had a target in mind. That was Revolution Technologies, a Toronto-based technology outfit that had ...
 
ZDNet
Wed, 25 Feb 2015 21:48:45 -0800

In November last year, Australian data security firm Covata listed on the Australian Securities Exchange via a reverse takeover. It intended to use some of the funds raised to help it ramp up operations at its second headquarters in Reston, Virginia ...

Forbes

Forbes
Wed, 25 Feb 2015 13:45:33 -0800

Some analysts believe Northernlight Shanghai, in particular, is a reach as its price tag is 20 times the market cap of KOP Ltd., a property unit of KOP Group that Ong listed on the Singapore exchange last year through a S$150 million reverse takeover ...
 
Financial Post
Wed, 25 Feb 2015 17:27:19 -0800

Jetlines, which plans to offer ultra-cheap flights from Vancouver to secondary airports in Western Canada, announced earlier this month that it was walking away from a reverse takeover deal with a capital pool company called Inovent Capital Inc. after ...

Irish Times

Irish Times
Mon, 02 Feb 2015 00:15:00 -0800

Dalata has said its €455 million takeover of most of the Moran Bewley group will be completed tomorrow. The State's mergers watchdog last week approved the reverse takeover, which will see Dublin-listed Dalata take over nine Moran Bewley hotels in ...
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