Become a Financial Modeling & Valuation Analyst (FMVA)®. Enroll today to advance your career!
Login to your new FMVA dashboard today!

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)?

Reverse Takeover (RTO), often known as reverse IPO, is the process in which a small private company goes public by merging into a larger publicly listed company. The practice is contrary to expectations that 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. Therefore, to escape the laborious venture, a company turns to investment banks that cover them in the underwriting process and the issuance of shares.


Reverse Takeover


Breaking Down Reverse Takeover

The process of reverse takeover usually involves two simple steps:


#1 Mass buying of shares

At the start, the acquirer exercising reverse takeover commissions the mass-buying of the publicly listed shell company’s shares. The goal of mass-buying the target company’s shares is to take over and become the majority shareholder in the company.


#2 Shareholders-shares-buy activities

It is the final 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 implication is that it becomes a publicly traded company, which eventually leads to a merger.


Reverse Take Over - Direction Sign


Benefits of Reverse Takeover

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


#1 No need for registration

To list a private company as public, the investment banks and the financial institution overseeing the underwriting process often carve the shell company to ease the pain of the deal in favor of the private company interested in the takeover. The investment bank agents register the shell company upfront to facilitate the transaction.

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’s not only draining in terms of resources, but it is also expensive. However, by taking the reverse takeover route, the private company will complete the transaction without necessarily taking any capital from the public.


#3 RTO saves time

Typically, the IPO process of registration and listing takes several months to years, which may be exhausting for the company and the persons overseeing the process. A reverse takeover provides relief to the company’s management since it takes less time and requires fewer resources and minimal resources to complete. It reduces the length of the process of going public from several months to less than 30 days or a few weeks.


#4 Guaranteed way to go public

Since an IPO takes longer to materialize, when market conditions negatively shift, the dedicated resource, time, and energy are lost. Conversely, a reverse takeover takes a short duration to complete. Therefore, the private company gets the assurance of going public unless other factors not relating to time affects the deal. Thus, the whole process of reverse takeover is conventional in nature. As a result, it is not affected by the changes in the market.


#5 Gaining entry to a foreign country

If a foreign private company wants to become public in the USA, it needs to meet strict trade regulations such as meeting the US Internal Revenue Service requirements and incurring exorbitant expenses such as company registration, legal fees, and other expenses. However, with enough shareholding in a public listed foreign company, the private company can easily gain access to the foreign country trade with all the benefits of a native company.


Drawbacks of a Reverse Takeover

A reverse takeover presents the following drawbacks:


#1 Masquerading public shell companies

Some public shell companies present themselves as possible avenues that private companies can use to gain a public listing. However, some of them are conduits for liabilities, litigations, and other major fiascos that private companies may be unwilling to get involved in. Therefore, to mitigate such issues, the management needs to do their due diligence on these companies before labeling them as prospects.


#2 Liquidation mayhem

A private company willing to go public using reverse takeover should ask itself, “After the merger, can we still have enough liquidity?” This involves the readiness of the company to take a major investment on its own and how to deal with the aftermath of a possible stock slump when the merger unfolds, that is, whether they will have enough finances to cover their operations even if their shares hit rock bottom.


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 resources will be helpful:

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

M&A Modeling Course

Learn how to model mergers and acquisitions in CFI’s M&A Modeling Course!

Build an M&A model from scratch the easy way with step-by-step instruction.

This course will teach you how to model synergies, accretion/dilution, pro forma metrics and a complete M&A model. View the course now!