Reverse Takeover Meaning Examples Forms Limitations

Reverse Takeover Meaning

A reverse takeover, also called reverse IPO, is a strategy to list a private company by acquiring an already listed public company. Therefore, as a result, it avoids the costly and lengthy process of getting listed on a stock exchange through an Initial Public Offer (IPO). These transactions can also occur with other motives, just from the acquirer’s strategic point of view to expand inorganically or improve business functions if they see value in a public company.

Different Forms of the Reverse Takeover (RTO)

A public company can acquire a significant stake in a private company through an exchange of 50% ownership (most of the time) of a public company. In such a case, a private company becomes a subsidiary of a public company and can also be considered public.The public company sometimes merges with a privately held companyPrivately Held CompanyA privately held company refers to the separate legal entity registered with SEC having a limited number of outstanding share capital and shareowners. read more 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’ to go public. Later on, it renamed itself NYSE and started trading publicly.

Key Takeaways

A reverse takeover is also called a reverse IPO. It is a tactic to list a private company by gaining an already listed public company. Hence, as a result, it averts the costly and lengthy method of getting listed on a stock exchange via an Initial Public Offer (IPO). These transactions occur with other objectives, just from the acquirer’s strategic perspective, to widen inorganically or enhance business functions when they view value in the public company.New York Stock Exchange, Berkshire Hathaway – Warren Buffet, Ted Turner – Rice Broadcasting, and Burger King are examples of the reverse takeover.

#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. So, in 1970, with the limited cash availability, he acquired another U.S.-based listed company called Rice Broadcasting, which later became part of the 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 takeoverTakeoverA takeover is a transaction where the bidder company acquires the target company with or without the management’s mutual agreement. Typically, a larger company expresses an interest to acquire a smaller company. Takeovers are frequent events in the current competitive business world disguised as friendly mergers.read more transaction. A publicly listed shell corporation called ‘Justice Holdings’ was co-founded by the famous hedge-fund veteran Bill Ackman, who acquired Burger King.

Advantages

#1 – Swift Process

Due to various regulatory requirements, the usual way of getting listed through an Initial Public OfferingInitial Public OfferingAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more takes months to years due to various regulatory requirements. Getting listed through reverse takeover can be done within weeks only. It helps the company’s management in saving time as well as effort.

#2 – Minimal Risk

Many times depend upon the microeconomicMicroeconomicMicroeconomics is a ‘bottom-up’ approach where patterns from everyday life are pieced together to correlate demand and supply.read more, macroeconomicMacroeconomicMacroeconomics aims at studying aspects and phenomena important to the national economy and world economy at large like GDP, inflation, fiscal policies, monetary policies, unemployment rates.read more, or political situation and the company’s recent performance. For example, management may decide to go back to the public because getting listed may not fetch a good response from investors, which can deteriorate its valuation.

#3 – Reduced Dependability on the Markets

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

In the case of a reverse takeover, the dependence on the market reduces significantly. The company does not need to care about the response from investors from the first listing. A reverse takeover converts the private company into a public company, and market conditions do not impact its valuation.

#4 – Less Expensive

As described in the last part, the company saves the fees paid to investment banksInvestment BanksInvestment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc.read more. In addition, 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 their investment to sell their shares in the market. In addition, access to the capital becomes easier since the company can go for a secondary listing whenever it needs more money.

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Disadvantages

#1 – Asymmetrical Information

In M&As, the process of due diligence of the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more often gets overlooked or does not involve much scrutiny because the company focuses on its business needs only now. 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 do not have any operations whatsoever or are troubled companies. They provide a safe route to private companies in going public by acquiring them.

#3 – Burden of Regulations

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

Limitations

IPOs are more profitable. Often, it says that IPOs are overpriced, increasing their valuation. That is not the case with reverse takeovers.The positive sentiment created by the investment bank acting as an advisor for the concerned company helps the company get good support in the market, which does not happen with reverse takeovers.

Conclusion

Reverse takeovers provide an excellent opportunity for private companies by bypassing all the complex procedures involved in getting listed through IPOs. 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 constraints 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, regulatory authorities must have proper frameworks in place to check that it does not lead to the loss of capital of investorsLoss Of Capital Of InvestorsCapital Loss is a loss when the value of the consideration received from the result of the transfer of capital assets is less than the aggregate value of the cost of acquisition & cost of the improvement. In simpler words, it can be stated as the loss derived from the transfer of capital assets.read more. 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.