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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.
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2826 news items

ZDNet

ZDNet
Mon, 15 Jun 2015 19:03:45 -0700

Western Australia and the ASX have seen a trend of reverse takeovers in the mining sector; last year, Australian cloud provider Bulletproof completed its reverse takeover of mining company Spencer Resources, listing on the ASX as Bulletproof Group ...
 
SYS-CON Media (press release)
Tue, 30 Jun 2015 12:30:13 -0700

Pursuant to a Reverse Takeover (as such term is defined in Policy 5.2 of the Corporate Finance Manual of the Exchange), the Company issued 22,018,170 post-consolidation common shares in exchange for all of the issued and outstanding securities of BVT.

DEALSTREETASIA

DEALSTREETASIA
Tue, 09 Jun 2015 17:59:30 -0700

Singapore-listed Loyz Energy Limited, an upstream player in the oil and gas sector, said it has reached a deal to acquire Primeline Energy Holdings (PEH) for about S$197 million, and the company also added that post the acquisition, it would seek to ...
 
The Business Desk
Wed, 24 Jun 2015 00:07:30 -0700

INDITHERM has completed its £7.2m reverse takeover of a medical device company five times its size The Rotherham-based medical company, that has developed heating solutions which it now focuses on the medical sector, has acquired Inspiration ...
 
London South East
Wed, 01 Jul 2015 02:45:00 -0700

LONDON (Alliance News) - Shares in Touchstone Gold Ltd were suspended from trading on Wednesday after it did not complete a reverse takeover or implement its investing policy within 12 months of becoming an investing company and as it failed to ...

City A.M.

City A.M.
Fri, 03 Jul 2015 01:25:19 -0700

Optimal was granted shareholder approval for the reverse takeover but had to first secure regulatory approval from US authorities over the transfer of Skrill's US division, as well as reaching agreements with the Bank of Montreal, Barclays and Deutsche ...

Citywire.co.uk

London South East
Fri, 12 Jun 2015 01:26:15 -0700

The deal requires shareholder approval because it has been deemed a reverse takeover on account of the significant change in the AIM-listed company's business. Octagonal, which currently has a market capitalisation of GBP3.7 million, said it has raised ...
 
Canada NewsWire (press release)
Tue, 09 Jun 2015 09:26:33 -0700

TORONTO, June 9, 2015 /CNW/ - Gaming Nation Inc. (formerly Oceanside Capital Corp. TSXV: OCC) (the "Company" or "Gaming Nation") (TSXV: FAN) is pleased to announce that it has completed its previously announced reverse takeover transaction with ...
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