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A reverse takeover occurs when a publicly-traded smaller company acquires ownership of a larger company. It typically requires reorganization of capitalization of the acquiring company.
In the event that the larger company is publicly traded, the reverse takeover results in a privately held company becoming a publicly held company without going the traditional route of filing a prospectus and undertaking an initial public offering (IPO). Rather, it is accomplished by the shareholders of the private company selling all of their shares in the private company to the public company in exchange for shares of the public company. A prospectus is a legal document that institutions and businesses use to describe the securities they are offering for participants and buyers. ...
“IPO†redirects here. ...
A shareholder or stockholder is an individual or company (including a corporation) that legally owns one or more shares of stock in a joint stock company. ...
A private company is a company that is independently owned. ...
This article does not cite any references or sources. ...
Process In a reverse takeover, shareholders of the private company purchase control of the public shell company and then merge it with the private company. The publicly traded corporation is called a "shell" since all that exists of the original company is its organizational structure. The private company shareholders receive a substantial majority of the shares of the public company and control of its board of directors. The transaction can be accomplished within weeks. If the shell is an SEC-registered company, the private company does not go through an expensive and time-consuming review with state and federal regulators because this process was completed beforehand with the public company. The U.S. Securities and Exchange Commission, commonly referred to as the SEC, is the United States governing body which has primary responsibility for overseeing the regulation of the securities industry. ...
The transaction involves the private and shell company exchanging information on each other, negotiating the merger terms, and signing a share exchange agreement. At the closing, the shell company issues a substantial majority of its shares and board control to the shareholders of the private company. The private company's shareholders pay for the shell company by contributing their shares in the private company to the shell company that they now control. This share exchange and change of control completes the reverse takeover, transforming the formerly privately held company into a publicly held company.
Benefits The advantages of public trading status include the possibility of commanding a higher price for a later offering of the company's securities. Going public through a reverse takeover allows a privately held company to become publicly held at a lesser cost, and with less stock dilution than through an initial public offering (IPO). While the process of going public and raising capital is combined in an IPO, in a reverse takeover, these two functions are separate. A company can go public without raising additional capital. Separating these two functions greatly simplifies the process.
In addition, a reverse takeover is less susceptible to market conditions. Conventional IPOs are risky for companies to undertake because the deal relies on market conditions, over which senior management has little control. If the market is off, the underwriter may pull the offering. The market also does not need to plunge wholesale. If a company in registration participates in an industry that's making unfavorable headlines, investors may shy away from the deal. In a reverse takeover, since the deal rests solely between those controlling the public and private companies, market conditions have little bearing on the situation. In finance, financial markets facilitate: The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); and International trade (in the currency markets). ...
The process for a conventional IPO can last for a year or more. When a company transitions from an entrepreneurial venture to a public company fit for outside ownership, how time is spent by strategic managers can be beneficial or detrimental. Time spent in meetings and drafting sessions related to an IPO can have a disastrous effect on the growth upon which the offering is predicated, and may even nullify it. In addition, during the many months it takes to put an IPO together, market conditions can deteriorate, making the completion of an IPO unfavorable. By contrast, a reverse takeover can be completed in as little as thirty days.
Additionally, many shell companies carry forward what is known as a tax-loss. This means that a loss incurred in previous years can be applied to income in future years. This shelters future income from income taxes. Since most active public companies become dormant public companies after a string of losses, or at least one large one, it is more likely that a shell company will offer this tax shelter.
It is highly unusual to preserve any benefit from the tax loss carry forward in a shell company. The tax regulations normally reduce the loss carry forward by the percentage of the change in control. In a well structured reverse merger, the private company should end up with 95% or more of the stock after the merger, thus reducing the tax loss carry-forward by this amount.
Drawbacks Reverse Takeovers always come with some history, and some shareholders. Sometimes this history can be bad, and manifest itself in the form of unseen liabilities, sloppy records, lurking lawsuits (lying in wait for the company to gain assets which to pursue), and other skeletons in the closet. Additionally, these shells may sometimes come with angry or deceitful shareholders who are anxious to "dump" their stock at the first chance they get. Possibly the biggest caveat is that most CEO's are naive and inexperienced in the world of publicly traded companies, and are experienced in the public markets. Due diligence and experienced advisors can overcome all of these drawbacks. RTO's can be explosive vehicles for corporate growth, but they are not to be taken lightly.
Future financing The greater number of financing options available to publicly held companies is a primary reason to undergo a reverse takeover. These financing options include: - The issuance of additional stock in a secondary offering
- An exercise of warrants, where stockholders have the right to purchase additional shares in a company at predetermined prices. When many shareholders with warrants exercise their option to purchase additional shares, the company receives an infusion of capital.
- Other investors are more likely to invest in a company via a private offering of stock when a mechanism to sell their stock is in place should the company be successful.
In addition, the now-publicly held company obtains the benefits of public trading of its securities: - Increased liquidity of company stock
- Higher company valuation due to a higher share price
- Greater access to capital markets
- Ability to acquire other companies through stock transactions
- Ability to use stock incentive plans to attract and retain employees
In finance, valuation is the process of estimating the market value of a financial asset or liability. ...
Examples In all of these cases sans US Airways and America West Airlines, shareholders of the acquiree controlled the resulting entity. With US Airways and America West Airlines, US Airways creditors (not shareholders) were left with control. - The corporate shell of REO Motor Car company, in what amounted to a reverse "hostile" takeover, was forced by dissident shareholders to acquire a small publicly traded company, Nuclear Consultants. Eventually this company became the modern-day Nucor.
- ValuJet Airlines was acquired by AirWays Corp. to form AirTran Holdings, with the goal of shedding the tarnished reputation of the former.
- Aérospatiale was acquired by Matra to form Aérospatiale-Matra, with the goal of taking the former, a state-owned company, public.
- US Airways was acquired by America West Airlines, with the goal of removing the former from Chapter 11 bankruptcy.
- The New York Stock Exchange was acquired by Archipelago Holdings to form NYSE Group, with the goal of taking the former, a mutual company, public.
- ABC Radio is to be acquired by Citadel Broadcasting Corporation, with the goal of spinning the former off from its parent, Disney.
- Frederick's of Hollywood parent FOH Holdings was acquired by apparel maker Movie Star in order to take the larger lingerie maker public.[1]
- Eddie Stobart in a reverse takeover with Westbury Property Fund allowing transport by ship, road, rail or boat to and within the UK, using only one company.
Nucor Corporation (NYSE: NUE) is one of the largest steel producers in the United States, and the largest of the mini-mill operators (those using electric arc furnaces to melt scrap steel, as opposed to companies using traditional blast furnace technology). ...
This article does not cite any references or sources. ...
AirTran Holdings NYSE: AAI is an airline holding company. ...
The Aérospatiale Corvette first flew in 1970 and went into service in 1974. ...
Mécanique Avion TRAction or Matra is a French company covering a wide range of activities mainly related to aeronautics and weaponry which today operates as the Lagardère Group. ...
Aérospatiale-Matra was a European missile and aircraft manufacturer. ...
US Airways is an American low-cost airline[1] headquartered in Tempe, Arizona, owned by US Airways Group, Inc. ...
America West Airlines (IATA: HP, ICAO: AWE, and Callsign: Cactus), operating as US Airways, is one of the United States ten major airlines. ...
The New York Stock Exchange (NYSE), nicknamed the Big Board, is a New York City-based stock exchange. ...
NYSE Group, Inc. ...
A mutual organization (or society) is a cooperative organization (which is often, but not always, a company or business) based on the principle of mutuality. ...
For other uses, see ABC Radio (disambiguation). ...
Citadel Broadcasting Corporation NYSE: CDL is a Las Vegas, Nevada based broadcast holding company. ...
Disney may refer to: The Walt Disney Company and its divisions, including Walt Disney Pictures. ...
Fredericks of Hollywood is a well known retailer of lingerie in the United States, with stores in most modern shopping malls across the USA. The business was started by Frederick Mellinger (inventor of the push-up bra) in 1946. ...
A movie star or film star is a celebrity who is a person known for his or her roles in motion pictures. ...
Eddie Stobart is the father of Edward Stobart the British entrepreneur who created the successful haulage firm Eddie Stobart Ltd. ...
See also Capital formation is a term used in national accounts statistics and macroeconomics. ...
“IPO†redirects here. ...
A private company is a company that is independently owned. ...
This article does not cite any references or sources. ...
A private investment in public equity, often called a PIPE deal, involves the selling of publicly traded shares to private investors, rather than to the public through an offering registered with the Securities and Exchange Commission. ...
References Reuters Group plc (LSE: RTR and NASDAQ: RTRSY); pronounced is known as a financial market data provider and a news service that provides reports from around the world to newspapers and broadcasters. ...
is the 353rd day of the year (354th in leap years) in the Gregorian calendar. ...
Year 2006 (MMVI) was a common year starting on Sunday of the Gregorian calendar. ...
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