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Reverse Takeover (RTO): Definition, How it Works

Kison Patel
CEO and Founder of DealRoom
Kison Patel

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

CEO and Founder of DealRoom

When people refer to a company ‘going public’, the usual understanding is that the company has undergone an initial public offering (IPO). But there’s another, lesser considered way for a company to achieve publicly listed status: A reverse takeover.

DealRoom regularly helps companies go public and this is our guide to reverse takeovers.

What is a Reverse Takeover?

A reverse takeover is the process by which a private company acquires a majority stake in a publicly listed company thereby itself becoming a publicly listed company. The reverse takeover (RTO) is often cheaper, faster, and less cumbersome from a regulatory perspective than the IPO process, which can cost several million dollars and up to two years to execute - with no guarantee of success after the investment of resources.

Reverse takeovers begin when private companies decide they want to be publicly listed. This is usually motivated by the need to raise funds (the overriding motivation behind most companies going public).

The decision then becomes whether to go through the traditional IPO process, which involves hiring an investment bank, conducting several months of negotiations with the SEC, an investment road show, and more.

How Does a Reverse Takeover Work?

As mentioned in the previous section, this considerable workload may bring no end product: Several companies go through all the steps to list on public indices only to later decide that the prevailing conditions aren’t favorable to do so. The reverse takeover provides an alternative. By acquiring a majority share of a company already listed on a stock exchange, a private company can itself effectively become publicly listed.

The transaction doesn’t have to be large, and more often than not, they aren’t: Reverse takeovers often involve the acquisition of a shell corporation, which is often thinly traded, has very few assets on its balance sheet, and is inactive from an operational standpoint.

It could be a so-called ‘penny stock’, thus reducing its market capitalization and making it more easily acquireable by the private company.

Once acquired, the private company can rebrand to that of the public company it has acquired, or rebrand the acquired firm (and changing its ticker on the index).

In theory, the new entity can take advantage of all of the benefits that public companies enjoy - higher profile, increased analyst coverage, increased access to funds, but success is not a guarantee: Investors won’t be convinced by a reverse takeover alone - the fundamentals have to be present.

This leads us to the issue of whether reverse takeovers are successful or not. Reverse mergers are a means to an end (a company going public) rather than an end in themselves.

The timeline for a reverse merger can vary considerably from transaction to transaction; however, there are key events and requirements that generally apply to all reverse mergers.

They cannot create value unless there are benefits to the private company going public. A reverse takeover is therefore not a silver bullet for value creation, and the implications of going public need to be considered on their merits.

Advantages and Disadvantages of Reverse Takeovers

Advantages:

  • Less dependence on market conditions: Unlike an IPO, which involves fundraising, a reverse takeover is essentially a vehicle to become public. From this perspective, it doesn’t matter where the market is in its cycle.
  • Faster access to public listing: In theory, the reverse takeover should enable the company making the acquisition to avail of all the benefits of public companies (increased visibility, access to funding, analyst coverage, etc.).

Disadvantages:

  • Regulatory burden: There are no short-cuts to compliance in running publicly-listed companies. While companies may be able to skip the red-tape involved in the IPO process, there will still be quarterly and annual filings, and far more red-tape than the typical private company is used to.
  • Due diligence required: Extensive due diligence is required for the acquisition of the shell company, in particular understanding what the benefits of acquiring the company are outside of merely becoming public.

Example of a Reverse Takeover (RTO)

The biggest reverse takeover of 2021 was the acquisition of Green Globe International by herb and CBD hemp cigarette industry leader Hempacco for $4.6 billion.

This deal was an interesting case study in the benefits that some industries in particular can take from reverse takeovers. As companies in the CBD and cannabis space, an IPO would understandably have had significant regulatory hurdles for Hempacco. These were overcome with the reverse takeover.

This was alluded to at the time of the takeover, when its CEO said:

"As a publicly-traded company, we believe we are now better positioned than ever to begin our strategy of disrupting the nearly trillion-dollar tobacco industry” before continuing: ‘"Although we are pleased to begin trading on the OTC Markets, one of management's single highest priorities outside of our Disrupting Tobacco™ and our day-to-day operations is to begin the process of up listing to a more senior exchange, such as the Nasdaq or NYSE."

How we can help

DealRoom works with companies looking to go public on an ongoing basis, whether that’s through an IPO or a reverse takeover.

Executives considering a reverse takeover for their company can also benefit from the wealth of relevant resources on M&A Science, where industry experts talk through the merits and pitfalls of these transactions.

Talk to us today about the difference we can make to your process.

stream your due diligence with dealroom

When people refer to a company ‘going public’, the usual understanding is that the company has undergone an initial public offering (IPO). But there’s another, lesser considered way for a company to achieve publicly listed status: A reverse takeover.

DealRoom regularly helps companies go public and this is our guide to reverse takeovers.

What is a Reverse Takeover?

A reverse takeover is the process by which a private company acquires a majority stake in a publicly listed company thereby itself becoming a publicly listed company. The reverse takeover (RTO) is often cheaper, faster, and less cumbersome from a regulatory perspective than the IPO process, which can cost several million dollars and up to two years to execute - with no guarantee of success after the investment of resources.

Reverse takeovers begin when private companies decide they want to be publicly listed. This is usually motivated by the need to raise funds (the overriding motivation behind most companies going public).

The decision then becomes whether to go through the traditional IPO process, which involves hiring an investment bank, conducting several months of negotiations with the SEC, an investment road show, and more.

How Does a Reverse Takeover Work?

As mentioned in the previous section, this considerable workload may bring no end product: Several companies go through all the steps to list on public indices only to later decide that the prevailing conditions aren’t favorable to do so. The reverse takeover provides an alternative. By acquiring a majority share of a company already listed on a stock exchange, a private company can itself effectively become publicly listed.

The transaction doesn’t have to be large, and more often than not, they aren’t: Reverse takeovers often involve the acquisition of a shell corporation, which is often thinly traded, has very few assets on its balance sheet, and is inactive from an operational standpoint.

It could be a so-called ‘penny stock’, thus reducing its market capitalization and making it more easily acquireable by the private company.

Once acquired, the private company can rebrand to that of the public company it has acquired, or rebrand the acquired firm (and changing its ticker on the index).

In theory, the new entity can take advantage of all of the benefits that public companies enjoy - higher profile, increased analyst coverage, increased access to funds, but success is not a guarantee: Investors won’t be convinced by a reverse takeover alone - the fundamentals have to be present.

This leads us to the issue of whether reverse takeovers are successful or not. Reverse mergers are a means to an end (a company going public) rather than an end in themselves.

The timeline for a reverse merger can vary considerably from transaction to transaction; however, there are key events and requirements that generally apply to all reverse mergers.

They cannot create value unless there are benefits to the private company going public. A reverse takeover is therefore not a silver bullet for value creation, and the implications of going public need to be considered on their merits.

Advantages and Disadvantages of Reverse Takeovers

Advantages:

  • Less dependence on market conditions: Unlike an IPO, which involves fundraising, a reverse takeover is essentially a vehicle to become public. From this perspective, it doesn’t matter where the market is in its cycle.
  • Faster access to public listing: In theory, the reverse takeover should enable the company making the acquisition to avail of all the benefits of public companies (increased visibility, access to funding, analyst coverage, etc.).

Disadvantages:

  • Regulatory burden: There are no short-cuts to compliance in running publicly-listed companies. While companies may be able to skip the red-tape involved in the IPO process, there will still be quarterly and annual filings, and far more red-tape than the typical private company is used to.
  • Due diligence required: Extensive due diligence is required for the acquisition of the shell company, in particular understanding what the benefits of acquiring the company are outside of merely becoming public.

Example of a Reverse Takeover (RTO)

The biggest reverse takeover of 2021 was the acquisition of Green Globe International by herb and CBD hemp cigarette industry leader Hempacco for $4.6 billion.

This deal was an interesting case study in the benefits that some industries in particular can take from reverse takeovers. As companies in the CBD and cannabis space, an IPO would understandably have had significant regulatory hurdles for Hempacco. These were overcome with the reverse takeover.

This was alluded to at the time of the takeover, when its CEO said:

"As a publicly-traded company, we believe we are now better positioned than ever to begin our strategy of disrupting the nearly trillion-dollar tobacco industry” before continuing: ‘"Although we are pleased to begin trading on the OTC Markets, one of management's single highest priorities outside of our Disrupting Tobacco™ and our day-to-day operations is to begin the process of up listing to a more senior exchange, such as the Nasdaq or NYSE."

How we can help

DealRoom works with companies looking to go public on an ongoing basis, whether that’s through an IPO or a reverse takeover.

Executives considering a reverse takeover for their company can also benefit from the wealth of relevant resources on M&A Science, where industry experts talk through the merits and pitfalls of these transactions.

Talk to us today about the difference we can make to your process.

stream your due diligence with dealroom

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