A reverse takeover is when a private company acquires a public company to go public. It can be used to avoid the expense and time of an initial public offering or by a public company that cannot meet criteria to go public. The private company must buy a controlling interest in the public company and exchange shares. However, it does not produce additional capital for the public company.
When a private company acquires a public company to go public, it is referred to as a reverse takeover. This type of transaction may sometimes be referred to as a reverse merger or reverse initial public offering (IPO). There are several reasons a company might use this type of merger.
A company sometimes performs a reverse takeover to become a public company without having to mount an initial public offering. Initial public offerings can be expensive and time consuming and, in some economic climates, can be difficult to pull off. If a company wants to go public when it just had a big sell-off in the market, for example, its best option might be to do a reverse takeover.
Reverse buyouts can also be used by a public company that cannot meet the criteria to go public, either because its share price is too low, it doesn’t meet thresholds for certain financial ratios, or for other reasons. In this case, the company making the reverse buyout simply buys a publicly traded company. This type of maneuver is sometimes called a back door listing, as the company buying out the publicly traded company is gaining its stock price “through the back door.”
To make a reverse takeover, the private company must buy enough shares in the public company to have a controlling interest. The private company can then vote to merge with the public company. Once the merger is complete, the shareholder or shareholders of the private company simply exchange their shares in that company for shares in the public company. In this way, since the merged company is publicly traded, the transaction effectively makes the company private public.
The disadvantage of using a reverse takeover to take a private company public is that the private company must have enough cash to buy a controlling interest in the public company. For this reason, a reverse takeover typically does not produce additional capital for the resulting public company. An initial public offering will provide an influx of capital into the now public company, sometimes significant. A reverse capture will not have this effect. On the other hand, the value of the privately held company’s stock isn’t diluted that much, so executive holdings usually remain virtually untouched in this type of acquisition.
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