REVERSE TAKEOVER – AN EXPLANATION
REVERSE TAKEOVER involves a smaller quoted company taking over a larger unquoted company by a share-for-share exchange. In order to acquire the larger unquoted company, a large number of shares in the quoted company will have to be issued to the shareholders of the larger unquoted company.
Hence, after the takeover the current shareholders in the larger unquoted company will hold the majority of the shares in the quoted company and will therefore have control of the quoted company. Its great ideas to understand what is reverse takeover
Just as an IPO is a time-consuming process. It is also an expensive one due to the volume of work required by investment banks, sponsors, accountants and other advisers. An R-T-O will usually, but not always, cost less.
Higher company valuation
As the shares in the company will be listed, potential investors will deem the shares to be less risky as the company will have to abide by the relevant rules and regulations. Additionally, they will know that the shares are liquid and that whenever they wish to sell there will be a willing buyer. As a result of this, investors are likely to attribute a higher value to the shares.
Easier access to stock markets
As a in stock exchange company: more finance is likely to be available and the cost of that finance is likely to be lower than if the company was still unquoted.
Enhanced ability to use share based incentive plans
Once the shares of a company are in stock exchange: share base d incentive plans can be used as a key tool to attract and retain good quality employees.
Enhanced ability to carry out further takeovers
Once the shares in a company are in stock exchange: the company is able to acquire other companies through further share-for-share exchanges.
An IPO can often take between one and two years to complete whereas an R-T-O can be complete d in as little as 30 days.
While a reverse takeover is usually cheaper than an IPO, there are still significant direct and indirect costs involve. Such as Regulatory costs, Acquisition cost and investor relations.
Lack of expertise
A company achieving a listing through an R-T-O may find that it does not have the expertise to understand and deal with all the regulations and procedures that listed companies must comply with. The long process of listing through an IPO can be better understanding for companies.
As previously discussed, an R-T-O has often been viewed as a poor man’s IPO. Hence, companies that achieve their listing in this way may be consider less favorably by investors.
Although R-T-O can generally be completes more quickly than an IPO as there is less regulation and scrutiny involve. It must be recognize that there are still a significant amount of regulatory hurdles to minimize.
As a result of the lower level of scrutiny that is applies to an R-T-O compared to an IPO. Investors must be aware of the higher level of risk that is attach to companies achieving a listing in this way.
Share price decrease
Many listed companies which could make potential R-T-O targets are in that position because of past problems. Hence, they may have shareholders who are keen to exit from the company as soon as a suitable opportunity arises. Hence, they may ‘dump’ their shares shortly after the R-T-O has completed. To safeguard against the risk of a ‘dump’ occurring, the shareholders may need to guarantee. That they will not sell their shares until a certain period of time has expire since the deal is complete.