Reverse Takeover (RTO) - Explained
What is a Reverse Takeover?
Written by Jason Gordon
Updated at July 8th, 2021
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Table of Contents
What is a Reverse Takeover (RTO)?How Does a Reverse Merger or Backdoor Listing Work?Academic Research on Reverse Takeover (RTO) / Backdoor ListingWhat is a Reverse Takeover (RTO)?
The reverse takeover, also known as Backdoor Listing, is the acquisition of a public company by a privately held company so that the private company becomes publicly traded without an initial public offering. In this process, the private company purchases enough shares of a public company so that they have the controlling power. Then the shareholders of the private company exchange their shares in the private company for the shares of the public company. This allows the private company to effectively become public and avoids the costly and time-consuming process of going public. This process is also known as a reverse merger or reverse IPO.
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How Does a Reverse Merger or Backdoor Listing Work?
The process of setting up an IPO is expensive and lengthy. So, the companies may take this route of going public to avoid the process. However, in this process, the company doesnt raise any additional funds and the company needs to have enough money to fund the whole process. The name of the publicly traded company is often changed in this process but that is not required by the law. After the acquisition the owner may merge the operations of the two companies, otherwise, they may create a shell corporation. The process of setting up an IPO may take months or even years and involves a considerable amount of the cost. In this process, the privately held company gains automatic inclusion on a stock exchange within a few weeks. This strategy may also be used by foreign companies to get access to the U.S. market. The foreign company needs to purchase enough shares of a U.S based company so that they get the controlling power in the company. Then it can move to merge the foreign company with the U.S based company and gain entry to the market without following the traditional process. However, the final resulting company needs to file SEC Form 8-K to disclose the transaction. It also needs to fulfill all the legal requirement by the Security and Exchange Commission and other relevant regulations. Studies have shown the performance level and survival rate of the companies that go public through backdoor listing is poorer than the companies that followed the traditional path of IPO. Acquisition of a larger company by a smaller company through a share-for-share exchange is also called reverse takeover.
Academic Research on Reverse Takeover (RTO) / Backdoor Listing
- The reverse takeover: implications for strategy, Makamson, E. L. (2010). Academy of Strategic Management Journal,9(1), 111. This research thesis analyzes the reverse takeovers and the options in turns which include the makeovers. According to the crash in 1995, the company suffered a highly popular loss during a takeoff followed by another crash in 1996 which resulted in the death of 110 passengers on board. In a nutshell, this paper explains the implications of strategies and how to go about eradicating them.
- Regulating theReverse Takeover, Brock, J. (2002). U. Toronto Fac. L. Rev.,60, 1. This paper explains the Reverse takeover as well as the various regulating rules guiding these takeovers.
- Reverse takeoverand firm survivability, Jambal, K., Lee, B. S., Lee, S. W., & Park, K. (2012). According to this research paper, the investigation was carried out to study how firms governance and financial characteristics affect the survival of the reverse takeovers. A sample of reverse takeovers was used to explain this process. This sample takeover that took place from 2000 to 2009 in the united states was used as a case study and the result shows that firms having reverse takeovers prone to survive when they have increased interest coverage ratio of the shell while its level of profitability is lower just immediately before the reverse takeover and the new firms becomes relatively smaller compared to the public shell.
- Reverse takeover: the moderating role of family ownership, Feito-Ruiz, I., Cardone-Riportella, C., & Menndez-Requejo, S. (2016). Applied Economics,48(42), 4051-4065. This paper analyses the determinants of the reverse takeovers by studying the influence of target firm shareholders type I the stated agreement. Reverse takeovers that were implemented in the Alternative Investment Market from 1999-2012 was studies in this research thesis. Special focuses were placed on the differences between non-family and the family target firms as well as the influence of the financial crisis. A theory that family firms have a lower level of profitability of agreeing to a reverse takeover to avoid new shareholders from entering the firms and diluting the ownership structures was proposed.
- Areverse takeoveras an exit strategy of venture capital: Korean evidence, Kim, I., & Chang, Y. K. (2014).Pacific-Basin Finance Journal,29, 182-198. This paper studies the properties of firms that chose between three main but different methods (IPOs, reverse takeovers, sellouts) to get the exchange listing by adopting the use of Korean data over the period of 2000-2010. According to this paper, the VC-backed firms choose the reverse takeovers rather than the sellouts or IPOs in order to go viral after controlling the other determinants. The result obtained from this paper shows that venture capital adopts the use of a reverse takeover as an alternative exit point since it is obvious from their portfolio that the reverse takeover constitutes a low-cost and fast going-public method.
- Reverse TakeoverAdventures, McKie, C., & Eldridge, J. (2007).Int'l Fin. L. Rev.,26, 38. This paper explains the various hurdles encountered in the process involved in the reverse takeover and also explains the processes involved in implementing these steps into the economy.
- Reverse Takeover, Corporate Governance, and Survivability, Jambal, K., Lee, S. W., & Park, K. According to this research thesis, investigations were carried out to study how firm financial characteristics and the governance properties affects the reverse takeovers survival either positively or negatively. This paper adopts the use of a sample of reverse takeover that took place from 2000-2009 in the United States. The result gotten from this research indicates that the reverse takeovers are likely to survive when they have a higher interest coverage ratio. Also, firms should endeavour to improve their financial conditions of merging of firms to survive during the reverse takeovers. Also, they should practice good and corporate governance.
- Private-owned Enterprises' IPO afterReverse Takeoverand Financing Problems Solving, Guoping, L. (2009).Reform,9, 021. This paper explains the correlation between the Private owned enterprises IPO immediately after the reverse takeover and the financing problems facing these private firms. Also, this paper provided empirical results which can be used to solve these problems.
- Reverse Takeover: an alternative mechanism to go public, Kyfonidou, M. (2015). This research paper examines a sample of 222 private firms that registered for advertising publicly through a reverse takeover transaction. The moment the transaction was completed, the new enlarged firm usually operates in the tutelage of the management and under the name of the private firm. However, according to this paper, apart from a significant wealth gain that the shareholders get from the short period of time in this event, a very significant improvement in the post-reverse takeover long-term financial performance is also seen. Hence, the reverse takeover should be considered as a more dangerous and risky process not just because it is less expensive and consumes little or no time compared to the IPO but because of the performance of the new company in the long-run.
- Reverse Takeover: A Back Door to the market, Svensson, J., Thorstensson, M., & Fltmars, H. (2008). This paper explains the alternative method that can be adopted instead of following the rules and ways of the reverse takeover method.
- Reverse Takeover. Strategic motivation and financial performance based on a case study of the West African Mining Industry, Lehmann, K. (2013). This research thesis explains the strategic motivation as well as the financial performance of the reserve takeover based on the case study of the West African Mining Industry.