Reverse Takeovers - Evaluating a Possible Alternative to the IPO Exit Strategy

From the very first business contract there were loopholes. These are ways around a particular rule or guideline that offer a more desirable outcome. It isn’t breaking the law, but coming up with an alternative approach.

That’s the best way to describe a reserve takeover: it’s a loophole to expedite the IPO strategy and provides a viable alternative for private companies to become publicly traded companies without a lot of hassle.

The Basics of a Reverse Takeover

In a reverse takeover, a private company buys controlling interest in a publicly traded company. The private company then merges with that public entity and in effect becomes a publicly traded company. The original public company is known as a shell company. That’s because all that really exists is the organizational structure and all that comes with that in terms of approved documents, corporate filings and other paper work.

The shareholders who are part of the private company assume a majority stake in this shell company and thereby are granted controlling interest. If the shell company is in compliance then this type of transaction can be completed in a matter of weeks as opposed to months (or years) following the normal course of filing for an IPO. There needs to be due diligence in terms of the proper disclosure forms filed once the merger has been enacted.

The Pros of a Reverse Takeover

On the top of the list of benefits of a reserve takeover is the potential for bigger earnings. The contributing factor is because there is less stock dilution than with a traditional IPO. There is also no need to raise capital as you would with the former IPO which makes this an affordable and streamline process.

The reverse takeover is often less beholden to the fluctuating and sometimes volatile market conditions. Even the hint of a bad review or negative earning potential can send a stock plummeting. That is not something you want released on the day of your IPO offering.

Look no further than the IPO offering of Facebook for a perfect example of this.

Finally, because a reverse takeover is less time consuming, the private company in play can focus on their business instead of all enormous “to-do” list required to get ready for a standard IPO. In the long run that’s going to be good for business all around.

The Cons of a Reverse Takeover

Think of a reserve takeover as moving your business into an established warehouse building. There might be some problems with that “warehouse” that could impact your business. The shell company might have some sloppy bookkeeping practices or pending lawsuits.

 There might even be some greedy shareholders who want to dump their shares right out of the gate. That could impact the offering. This can be avoided with a share lockup put into place before the merger.

There is also a huge learning curve for a private company to go through once it enters into the world of a publicly traded company. Sometimes those board members aren’t ready for the new game.

Is a reverse takeover right for you?