Reverse Takeover a Backdoor to Markets; Underlying concepts, Opportunities & Threats [Adv. Financial Management]

Learning outcome of this article you will be able to understand the concept of Reverse Takeover, Associated Risk and Opportunities for the business to undertake this mega activity

Disclaimer: Please read at the end of this article.

Introduction:

A backdoor listing sometimes referred to as a reverse takeover, reverse merger, or reverse initial public offering (IPO), occurs when a privately held company that may not qualify for the public offering process purchases a publicly traded company. In other words, a reverse takeover involves a large unlisted company being bought by a smaller listed company using a share for share exchange. The larger company will then be the dominant partner in a listed company. This is both a method of acquisition and a way of obtaining a stock market listing.

By undertaking a backdoor listing, the private company avoids the public offering process and gains automatic inclusion on a stock exchange. Following the acquisition, the buyer may merge both companies' operations or, alternatively, create a shell corporation that allows the two companies to continue operations independent of each other.

The potential benefits of Back Door Listing:

As previously stated, a Reverse Takeover (RTO) is effectively a way that a currently unquoted company can achieve a listing. Hence, just as with an IPO, the company obtains the benefits of the public trading of its securities.

These benefits include:

Easier access to capital markets

As a listed company, more finance is likely to be available and the cost of that finance is likely to be lower than if the company was still unquoted.

Higher company valuation As the shares in the company will be listed, potential investors will deem the shares to be less risky as the company will have to abide by the relevant rules and regulations. Additionally, they will know that the shares are liquid and that whenever they wish to sell there will be a willing buyer. As a result of this, investors are likely to attribute a higher value to the shares.

Enhanced ability to carry out further takeovers Once the shares in a company are listed, the company is able to acquire other companies through further share-for-share exchanges.

Enhanced ability to use share-based incentive plans Once the shares of a company are listed, share-based incentive plans can be used as a key tool to attract and retain good quality employees.

In addition to the above, an RTO has a number of other potential benefits when compared to a normal IPO.

These include the following:

Speed An IPO can often take between one and two years to complete whereas an RTO can be completed in as little as 30 days. Furthermore, the work required to complete an IPO can mean that the managers of a company have less time to run the company, which may prove detrimental to the growth prospects of the company.

Cost Just as an IPO is a time-consuming process, it is also an expensive one due to the volume of work required by investment banks, sponsors, accountants and other advisers. An RTO will usually, but not always, cost less.

Availability In a market downturn, it is not easy to convince investors to support an IPO, whereas this does not seem to be the case with RTOs.

The potential drawbacks of Back Door Listing:

Lack of expertise A company achieving a listing through an RTO may find that it does not have the expertise to understand and deal with all the regulations and procedures that listed companies must comply with. The long process of listing through an IPO can be viewed as a valuable training period and any company that has been through the process is in a better position to deal with the requirements of the exchange than a company catapulted onto the market through an RTO. Hence, any company considering an RTO must consider the need to hire and/or retain staff from the existing listed company who are able to keep the company compliant with all the relevant regulations.

Reputation As previously discussed, an RTO has often been viewed as a poor man?s IPO. Hence, companies that achieve their listing in this way may be viewed less favourably by investors than companies that have completed an IPO.

Risk As a result of the lower level of scrutiny that is applied to an RTO compared to an IPO, investors must be aware of the higher level of risk that is attached to companies achieving a listing in this way. In particular, the unquoted company carrying out an RTO must ensure that there is a thorough investigation of the listed company which they are taking over so that all potential problems and liabilities are revealed.

Regulation Although RTOs can generally be completed more quickly than an IPO as there is less regulation and scrutiny involved, it must be recognized that there are still a significant amount of regulatory hurdles to overcome.

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About Author (Rajeev Giri): I am pursuing ACCA with 4 more papers left to attain membership and hold certification IFRS from ACCA, Diploma in Accounts and Business and Accounting Technician certificate from ICAI (India). Have strong desire and passion to work in Big4 Firms while pursuing or post completion of my ACCA studies.

Disclaimer:

This article has been prepared while studying for ACCA paper and solely prepared by me from my study notes and using some study resources which I usually use for my study and revision purpose. If you find any mistakes in my any articles kindly bring it to my notice. I shall review it and correct it wherever required. This article is not an infringement of any copywrites. If you find any resemblances with any of other author books or online media/agencies it is just mere coincidence or usage of same words. Thanks for your time and patience to go through my articles.