Reverse Takeover

Reverse Takeover Meaning

Reverse takeover also called reverse IPO, is a strategy to list the private company on an exchange by acquiring an already listed public company and therefore, as a result, avoids the costly and lengthy process of getting listed on a stock exchange through an initial public offer (IPO). These transactions can take place with other motives as well just from a strategic point of view by the acquirer to expand inorganically or to improve business functions as well if they see a value in a public company.

Different Forms of the Reverse Takeover (RTO)

• A public company can consider acquiring a significant stake in a private company, through an exchange of a majority of 50% ownership (most of the time) of a public company. In such a case, a private company becomes a subsidiary of the public company and can also be considered as public now
• At times, the public company merges with a privately held company through a stock swap. Eventually, the private company takes on significant control over the public company

Reverse Takeover Examples

#1 – New York Stock Exchange

In 2006, the New York Stock Exchange acquired Archipelago Holdings and created the ‘NYSE Arca Exchange’ in order to go public. Later on, it renamed itself to NYSE and started trading publicly.

#2 – Berkshire Hathaway – Warren Buffet

The company owned by one of the wealthiest men in the world ‘Warren Buffet,’ Berkshire Hathaway, also used this route to go public. Though Berkshire was engaged in the textile business, it merged with the private insurance company owned by Warren Buffet.

#3 – Ted Turner – Rice Broadcasting

Ted Turner inherited a small billboard company from his father which was not doing well financially. In 1970, with the limited cash availability, he acquired another US-based listed company called Rice Broadcasting, which later became part of media giant The Time Warner group.

#4 – Burger King

In 2012, Burger King Worldwide Holdings Inc., a hospitality services chain that serves burgers in its restaurants, executed a reverse takeover transaction in which a publicly listed shell corporation called ‘Justice Holdings’, which was co-founded by the famous hedge-fund veteran Bill Ackman, acquired the Burger King.

Advantages

#1 – Swift Process

The usual way of getting listed through Initial Public Offering takes months to years due to various regulatory requirements, while getting listed through reverse takeover can be done within weeks only. It helps the company’s management in saving time as well as efforts.

#2 – Minimal Risk

Many times depending upon the microeconomic, macroeconomic, or political situation, as well as the recent performance of the company, management may decide to go back on its decision of going public because getting listed at that point of time may not fetch a good response from investors and it can deteriorate the valuation of the company.

#3 – Reduced Dependability on the Markets

Before going public, there are several other tasks that the company needs to undertake in order to create a positive sentiment in the market for its IPO, which includes roadshows, meetings, and conferences. These tasks require significant efforts from the management as well as the costs because the company hires investment banks as advisors for these tasks.

But in case of a reverse takeover, the dependence on the market gets reduced significantly because the company does not need to care about the response it will get from investors from the first listing. Reverse takeover simply converts the private company into a public company, and market conditions do not impact its valuation to that extent.

#4 – Less Expensive

As described in the last part, the company saves the fees that are to be paid to investment banks. The costs involved with regulatory filings and prospectus preparation also get exempted.

#5 – Benefits of Getting Listed

Once the company is public, it becomes easier for the shareholders to exit from their investment as they can sell their shares in the market. Access to the capital becomes easier as well since the company can go for secondary listing whenever it needs more capital.

Disadvantages

#1 – Asymmetrical Information

In M&As, the process of due diligence of the financial statements often gets overlooked or does not involve that much scrutiny because the companies focus on their business needs only at that point in time. At times, the management of the companies manipulates their financial statements too to get good value for their company.

#2 – Possibilities of Fraud

At times shell companies can misuse this opportunity. They don’t have any operations whatsoever or are troubled companies. They provide a safe route to private companies in going public through acquiring them.

#3 – Burden of Regulations

There are a lot of compliance issues when a company goes public. Taking care of these compliances require significant efforts, and thus management gets busier in sorting out administrative issues first, which hinders the growth of the company

Limitations

• IPOs are more profitable: It is often said that IPOs are overpriced, which increases the valuation of the company. This is not the case with reverse takeovers.
• The positive sentiment created by the efforts of the investment bank acting as an advisor for the concerned company helps the company in getting good support in the market, which does not happen with reverse takeovers.

Conclusion

• Reverse takeovers provide an excellent opportunity to the private companies by bypassing all the complex procedures that the whole process of getting listed through IPOs involves. They are a cost-effective alternative for such companies to go public.
• However, considering the limitations of reverse takeovers and possibilities of misuse due to limitations related to transparency in the transaction and lack of information, it provides an option to misuse the loopholes in this route to financial sector-focused companies.
• Thus, it is necessary that regulatory authorities have proper frameworks in place to check that it does not lead to the loss of capital of investors. Once such externalities are taken care of, the only thing management of the companies needs to take care of are the additional responsibilities that come up as a public company, which, if handled properly, can lead to good output in the future.

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