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Reverse Takeover (RTO)

The process in which a small private company goes public by merging into a larger publicly listed company

What is Reverse Takeover (RTO)?

A Reverse Takeover (RTO), often known as a reverse IPO, is the process in which a small private company goes public by acquiring a larger, already publicly listed company. The practice is contrary to the norm because the smaller company is taking over the larger company – thus, the merger is in “reverse” order.

In a typical public listing, a private company must undergo an initial public offering (IPO). The process is not only time-consuming, but it is also exceedingly costly. To bypass the expensive and laborious process, a private company can go public more simply by acquiring a public company.

 

Reverse Takeover

 

Breaking Down a Reverse Takeover

The process of reverse takeover usually involves two simple steps:

 

#1 Mass buying of shares

At the start, the acquirer conducting a reverse takeover commissions the mass-buying of the publicly listed company’s shares. The goal is to gain control of the target company by acquiring 50%+ of the outstanding voting shares.

 

#2 Shareholders-shares-buy activities

It is the next phase that leads to the merger and public listing. The process involves the private company’s shareholders engaging actively in the exchange of its shares with those of the public company.  The public company – which is now effectively a shell company – cedes a large majority of its stock shares to the private company’s shareholders, along with control of the board of directors. They pay for the shell company with their shares in the private company.

 

Reverse Take Over - Direction Sign

 

Benefits of a Reverse Takeover

The private company that merges into a publicly listed company enjoys the following benefits:

 

#1 No need for registration

Since the private company will acquire the public listed company through the mass buying of shares in the shell companies, the company will not need any registration, unlike in the case of IPO.

 

#2 Less expensive

Choosing to go public through the issue of an Initial Public Offering is not an easy task for a small private company. It can be prohibitively expensive. The reverse takeover route typically costs only a fraction of what the average IPO costs.

 

#3 RTO saves time

The IPO process of registration and listing can take several months to even years. A reverse takeover reduces the length of the process of going public from several months to just a few weeks.

 

#4 Gaining entry to a foreign country

If a foreign private company wants to become a publicly listed firm in the United States, it needs to meet strict trade regulations, such as meeting the US Internal Revenue Service requirements, and incur exorbitant expenses such as company registration, legal fees, and other expenses. However, a private company can easily gain access to a foreign country’s financial market by executing a reverse takeover.

 

Drawbacks

A reverse takeover presents the following potential drawbacks:

 

#1 Masquerading public shell companies

Some public shell companies present themselves as possible vehicles that private companies can use to gain a public listing. However, some are not reputable firms and may entangle the private company in liabilities and litigation.

 

#2 Liquidation mayhem

A private company willing to go public using reverse takeover should ask itself, “After the merger, will we still have enough liquidity?” The company may have to deal with a possible stock slump when the merger unfolds. It’s critical that the new company has adequate cash flow to navigate the transition period.

 

Additional resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

  • Control Premium
  • Horizontal Merger
  • Staggered Board
  • White Knight

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