Reverse Takeover (RTO) or Backdoor Listing

The process of acquisition of a public company by a private company so that the acquiring company (private company) becomes a public company without going through an IPO process is called Reverse Takeover or Backdoor Listing or Reverse IPO.

How does Reverse Takeover work?

Reverse Takeover can be done in these two manners :
a. A public company can acquire stake in a private company through majority ownership. The private company thus becomes subsidiary of the public company and hence, is considered to be a public company.
b. The public company can merge with the privately held company through a stock swap. The private company gradually takes control of the public company.

What are the benefits of Reverse Takeover?

Some benefits of a Reverse Takeover are :
a) Quick process – The process of IPO is generally long drawn and the company has to comply with certain rules and regulations which might take up significant time and effort. The management can save on this by going through a RTO.
b) Minimum risk – The process of RTO saves several types of risks like micro, macro, political as well as economy related as compared to the normal listing of a company.
c) Low dependance on activities like road shows, meetings and marketing etc. This saves the management cost and any negative market response, unlike in an IPO.
d) Less ccost – Underwriting fee for investment banks and charges related to prospectus, filing etc can be saved.

What are the drawbacks of RTO process?

Some drawbacks of a Reverse Takeover are :
a. In IPOs, the company can list at a premium with significant potential of profit for promoters as well as investors.
b. The pre IPO marketing and road shows by investment banks give the company a significant face and build up and creates positive shareholder interest which is not a case in RTO.