A reverse takeover is when a private company acquires a public company to go public, without having to mount an initial public offering. This type of merger can be used by a public company that cannot meet the criteria for listing on a stock exchange. However, the private company must have enough cash to buy a majority stake in the public company, and a reverse takeover generally does not produce additional capital for the resulting public company.
When a private company acquires a public company to go public, it is called a reverse takeover. This type of transaction can sometimes be referred to as a reverse merger or reverse initial public offering (IPO). There are several reasons why a company might use this type of merger.
Sometimes a company will execute 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, difficult to achieve. If a company wants to go public when there has been a big sell-off in the market, for example, a reverse takeover may be its best option.
Reverse takeovers can also be used by a public company that cannot meet the criteria for listing on a stock exchange, either because its share price is too low, it does not meet the thresholds for certain financial reasons, or other reasons. In this case, the company doing the reverse takeover simply acquires a publicly traded company. This type of maneuver is sometimes called a back door listing, as the company taking over the listed company is gaining its stock market listing ‘through the back door’.
To arrange a reverse takeover, the private company must buy enough shares in the public company to have a controlling interest. The private company can vote for the merger 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. Thus, because the merged company is publicly traded, the transaction effectively takes the private company public.
The downside of using a reverse takeover to take a private company public is that the private company must have enough cash to buy a majority stake in the public company. For this reason, a reverse takeover generally 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 a significant one. A reverse takeover will not have this effect. On the other hand, the value of the private company’s stock is not diluted as much, so executive holdings typically remain largely intact in this type of acquisition.
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