Reverse Takeovers  by Les Nemethy and Sergey Glekov

In a typical merger deal, the bidding company acquires the target company and the bidder’s existing shareholders obtain the majority in the combined entity. In a reverse takeover (RTO), the inverse occurs: the target firm’s shareholders become the majority shareholders of a merged public company. “Reverse” refers to the fact that the initiator of the merger is the private target, which ultimately takes control over the public combined entity.

An RTO can help private shareholders avoid much of the time, expense and tedium of an Initial Public Offering (“IPO”). Hence, the process is sometimes referred to as a “backdoor IPO” or a “backdoor listing”.

Quite often, the publicly traded company involved in a reverse is an inactive “shell” corporation. A merger of the public and private entities allows the private company to shift its assets and operations into a public entity with relative ease.

The first part of this article will compare the pros and cons of an IPO versus an RTO; then we will provide some statistics on the prevalence of RTO’s in Europe and North America; finally, we will finish by illustrating with some concrete examples.

A, Pros and Cons of IPO vs RTO

An RTO can typically be accomplished for a fraction of the cost of an IPO. The process of listing a company and taking it public requires hiring an underwriter, extensive disclosure, due diligence process undertaken by an underwriter, filings with stock exchange and fees paid to stock exchange. The underwriting process usually provides a certain comfort to investors that securities purchased are of a certain quality.

Given that an RTO is a somewhat short-circuited process, without underwriter, investors have less comfort as to the quality of securities purchased. This may result in securities trading at a discount.  While a traditional IPO may require months or years to complete, an RTO may be completed within weeks1.

B, Prevalence of RTO’s

Reverse mergers initially gained popularity in the US over-the-counter (OTC) markets in the 1980’s. Despite more publicity given to US RTOs, back-door listings are a global phenomenon. In Australia RTO’s are frequent in the mining industry. In Hong Kong, RTOs are popular in the real estate development sector2.

RTOs are a popular mechanism for going public in Europe as well, especially in the UK and Sweden. According to a study3 which examines 224 reverse takeovers in Europe between 1996 and 2015, there were 167 private and 154 public companies involved in RTO transactions. (Please note that the number of public and private entities involved in RTO’s are not necessarily the same in a given country or region, given that there are many cross-border transactions). Exhibit 1 – European RTOs 1996-2015: Distribution by Country4
Country Private firms Public firms
Belgium 3 6
Czech Republic 1
Denmark 3 1
Finland 3 3
France 3 3
Germany 4 6
Ireland 3
Isle of Man 2
Italy 2 2
Netherlands 3 4
Norway 3 5
Poland 4 3
Russia 2
Spain 5 6
Sweden 22 21
Switzerland 2 2
United Kingdom 167 154
Total 224 224
As we can see from above, 12% of the 224 firms merged with a foreign entity.  The exhibit below provides data on the distribution of RTO’s in Europe according to industry: Exhibit 2 – European RTOs 1996-2015: Distribution by Industry5
Industry No. of firms Percentage
High technology 46 20.54%
Financials 35 15.63%
Consumer products and services 24 10.71%
Media and entertainment 24 10.71%
Healthcare 17 7.59%
Telecommunications 15 6.70%
Industrials 14 6.25%
Materials 12 5.36%
Energy and power 11 4.91%
Real estate 11 4.91%
Consumer staples 9 4.02%
Retail 5 2.23%
Government and agencies 1 0.45%
Total 224 100%

C, Examples of RTO’s

The Exhibit below provides examples of concrete RTO’s during 2019. Exhibit 3 – Selected recent RTOs in Europe6
Stock Exchange Public Company Private Company Date of Transaction Country of operation Sector
AIM Polemos Plc (Digitalbox Plc) Digitalbox Publishing 28 February 2019 UK Media
Nasdaq First North Indentive AB (Artificial Solutions International AB) Artificial Solutions Holding ASH AB  28 February 2019 Sweden Software & Computer Services
AIM Chaarat Gold Holdings Kapan Mining Ltd 04 February 2019 Armenia/ Kyrgyzstan Mining

A reverse takeover might be considered an option for a company that has already decided that it would like to do an IPO, as an accelerated and cheaper route to a public vehicle.  However, for those owners of private companies that have decided against an IPO for reasons of expense, delays, risks and effort, RTO might warrant a fresh look.
2 A comparative analysis between IPOs and reverse takeovers: Evidence from Europe by Vasileios G. Oikonomou, Antonios I. Tsianakidis
3 ibid
4 A comparative analysis between IPOs and reverse takeovers: Evidence from Europe by Vasileios G. Oikonomou, Antonios I. Tsianakidis
5 ibid
6 Allenby Capital Limited, Mynewsdesk

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