Reverse Takeover (RTO)

Entails the share-for-share acquisition of a more prominent unquoted firm

A Reverse Takeover entails the share-for-share acquisition of a more prominent unquoted firm by a smaller quoted company. The shareholders of the larger unquoted company will need to be issued a sizable number of shares in the listed company to purchase the more prominent unquoted firm. 

As a result, the more significant unquoted business's current shareholders will control the quoted company following the takeover because they will own most of its shares.

Upon completion of an RTO, it is usual for the listed business to adopt the name of the previously unquoted firm and be run by the senior management team from that company.

The previously unquoted company has effectively become listed on the stock exchange thanks to the RTO. By joining Westbury, a real estate and logistics firm, Eddie Stobart, a road transport business with headquarters in the UK, gained a listing in this fashion in 2007.

RTOs have frequently been referred to as the inferior version of initial public offerings (IPOs), possibly due to US research demonstrating that firms that list via reverse mergers have lower survival rates and perform worse than firms that list via standard IPOs.

Let us take an Overview of IPO and its importance for a company … 

IPO Overview

A company issues shares to the public for the first time through an initial public offering (IPO). When a private corporation decides to go "public," this happens.

In other words, a previously privately owned business becomes publicly traded.

A corporation has very few shareholders before the IPO. Founders, angel investors, and venture capitalists are all included in this. 

However, the corporation makes its shares available for public purchase during an IPO. Therefore, you can become a shareholder and purchase shares directly from the business as an investor.

Here are some reasons for a Company to go Public:

1. To receive funds for development and expansion:

Every business requires money to expand operations, develop new products, or pay the debt. A corporation can get this much-needed funding by going public, which is a great strategy.

2. Enabling owners and early investors to profit by selling their shares:

Initial investors and venture capitalists also view it as an exit plan. For example, a corporation can become liquid by selling its shares in an IPO. At this point, venture capitalists sell their shares in the company to realize profits and leave the business.

3. More People Being Aware:

The calendar for the stock market has "stars" next to IPOs. These events are receiving a lot of attention from the media. This is a fantastic technique for a business to advertise its goods and services to a new clientele in the market.

How is an IPO issued?

This manual will outline the steps that make up the procedure, which can take anywhere from six months to more than a year to finish.

1. Selecting an investment bank:

Choosing an investment bank to serve as an underwriter is the first stage. An investment bank's responsibility, in this case, is to assist the company in establishing different aspects, including

  • How much capital the business hopes to raise

  • The kinds of securities that will be made available

  • The initial share price.

There may be several investment banks involved in a significant IPO. In the IPO process, investment banks essentially serve as facilitators.

2. Due diligence and filings:

You must decide precisely what regulatory paperwork and data must be given to the US Securities and Exchange Commission after selecting a bank to cooperate with (SEC). 

Furthermore, this is where the agreements between your company and the investment bank are negotiated. The bank will act as an underwriter to support the public's investment in your company. 

Among the paperwork that must be drafted and agreements that must be reached are:

  • An engagement letter.

  • A best efforts agreement.

  • A letter of intent.

  • A registration statement.

3. Pricing:

The underwriter and your company will discuss an offer price the day before your company lists on the stock exchange. Then, at the time of each share's initial market offering, it will be sold for this price. 

Pricing is generally lower than anticipated to ensure that all of the company's shares are purchased at the beginning of the sale. 

As there is more demand for shares, the trading price will climb.

4. Stabilization:

The underwriter you collaborated with will offer extra guidance and examine the market value of your company's shares after the IPO. From this point, the organization can perform stabilizing procedures to ensure that trading in your company's shares stays strong and healthy.

5. Then move toward market competition:

The final stage of the IPO process starts 25 days after the IPO. It is after the mandated period set by the SEC ends. This is the phase of the company transitioning into market competition.

Reverse Takeover Advantages

As was already said, an RTO effectively allows a firm not yet quoted to become listed. As a result, the company reaps the rewards of the public trading of its securities, precisely like with an IPO. These advantages consist of several advantages:

1. Access to capital markets: 

As a listed firm, more financing is probably accessible, and it's probably cheaper than it would be if the company were still unquoted.

2. Increased corporate value:

Potential investors will view the company's shares as less risky because the company will have to follow the necessary laws and regulations since the shares will be listed. 

Additionally, they will be aware that the shares are liquid and that a buyer will be available whenever they choose to sell. As a result, investors are expected to place a higher value on the claims.

3. Increased capacity for carrying out additional takeovers:

Once a company's shares are listed, it can buy other businesses by engaging in different share-for-share transactions.

4. Improved capacity for share-based incentive plans:

After a company's shares are listed, share-based incentive plans can be crucial for luring and keeping high-caliber staff.

5. Coverage by current analysts:

Analyst coverage for a listed business subject to an RTO is probably already in place, and it typically remains so after the RTO. However, IPO-using companies can find it difficult to attract significant analyst attention, mainly if they are smaller.

Potential investors might not know much about the company without sufficient analyst coverage and might not be interested in investing.

Reverse Takeover Disadvantages 

The idea of a reverse merger can be viewed from another perspective. Here are some disadvantages of a Reverse Takeover based on researchers

1. Lack of knowledge:

A firm that obtains a listing through an RTO can discover that it lacks the knowledge necessary to comprehend and cope with all the rules and processes listed companies must follow.

2. Reputation:

As was previously said, an RTO is frequently seen as a less expensive version of an IPO. As a result, investors may not view companies who obtain their listings in this manner as favorably as those that have completed an IPO. The causes of this, in part, can be traced back to recent events.

3. Risks:

Investors need to be aware of the higher risk associated with companies achieving a listing in this fashion because an RTO receives less scrutiny than an IPO. 

To uncover potential issues or liabilities, the unquoted firm conducting the RTO must ensure that the listed company it is taking over is appropriately examined.

4. Regulation:

Even though less regulation and scrutiny are involved in RTOs than in IPOs, it must be acknowledged that there are still many regulatory obstacles to clear.

5. Reduction in share price:

Due to historical issues, many listed companies that could serve as potential RTO targets are in that situation. 

Therefore, they might have investors anxious to leave the business as soon as a good chance presents itself, and as a result, they might "dump" their shares quickly after the RTO is through.

6. Costs:

Although it is typically less expensive than an IPO, substantial direct and indirect expenditures are still involved. Therefore the overall cost is sometimes much higher than initially anticipated.

Other Disadvantages

Although a reverse merger may be less complicated, it needs to be done with care and compliance in mind.

1. Regulation expenses

An RTO, as was previously noted, is a complicated procedure, and it will be expensive to ensure that the regulatory obstacles are adequately cleared.

2. Cost of acquisition

Potential targets for listed companies are frequently valued at a significant premium to their genuine value because an RTO is commonly viewed as more straightforward and quicker than an IPO, particularly in the Chinese market.

3. Shareholder relations

RTO transactions only truly offer liquidity to a formerly private firm if there is genuine investor interest in the company, even though they may profit from current analyst coverage. 

A thorough investor relations and investor marketing program will frequently be needed to develop this interest. This is also another potential RTO indirect cost.

Initial Public Offering (IPO) versus Reverse Takeover (RTO)

Therefore, to summarize, Every business has stock shares. A company will make some stock shares available when it goes public. 

The company's stock shares are available for purchase by investors and traders, which provides funding for expansion. 

However, a company can go public in other ways besides an initial public offering (IPO). For example, reverse mergers have gained popularity as a substitute in recent years.

Reverse takeover examples

The reverse takeover of Warren Buffet's investment company Berkshire Hathaway into the public market is a well-known example. 

Buffett acquired Berkshire Hathaway, a manufacturer of fabrics, in 1965 but later sold off its textile division and combined it with his insurance conglomerate


He published his holding company with the aid of one of the most well-known reverse takeovers in history.

Another well-known instance is the reverse merger of Burger King and Justice Holdings, a publicly traded shell company that took over Burger King in 2012. After being acquired by 3G Capital in 2010, the fast-food restaurant became private 18 months later. 

According to the agreement between Justice Holdings and 3G Capital, Burger King is again a public business.

Reverse takeovers can be traded in a variety of ways. The most common method is stock trading, which is significantly different from investing because you don't own the shares. In its place, you are guessing which way the shares will move. 

If you go long, you anticipate a price increase; if you go short, you anticipate a price decrease. 

During this policy, there are two ways to trade shares: using a contract for difference (CFD).

In a contract for difference (CFD), you consent to trade the price difference between when you open and close your position in the company's stock.

To Conclude the Takeover Policy 

Because a reverse takeover is completed quickly, a company is less dependent on favorable market conditions than it would be for an initial public offering (IPO).

Many businesses have invested time and money in an IPO only to see it postponed because the market conditions-often the number of purchasers in a particular market-were unfavorable to the company's listing.

Reverse takeover trading can be highly complex and time-consuming. We've listed a few crucial points for you below to assist:

  1. Companies can become public through reverse takeovers without spending the time or money necessary for an IPO.

  2. It has significant advantages for the company but can be risky for traders and investors.

  3. Research must always be done before buying or selling any company's stock.

  4. This can be challenging because the private company is not required to disclose its financial information until the reverse takeover is complete.

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Researched and authored by 'Charbel Yammine'  | LinkedIn

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