Reverse Takeover

What is a “Reverse Takeover”?

A Reverse Takeover (RTO) is when a private company enters into a sale with a public company and the end result is that the private company has effectively become listed on the stock exchange. The publicly listed company is acquired by the private company through a purchase of shares or an agreed deal. The transaction results in a fundamental change in the listed company’s business, the board, and voting control of the listed company.

A reverse takeover can be a quicker way to bring a private company to the public markets without going through the costly and lengthy process of IPO. A reverse takeover is also known as a reverse merger or reverse IPO.

Reverse Take Over Process

The publicly listed company is often a cash ‘shell’ or a special purpose acquisition company (“SPAC”) – which are vehicles listed on the stock exchange very little assets other than cash. They are purpose-built to acquire an appropriate business in a specified sector. Cash shells are often used to acquire companies that are expected to grow rapidly. Following an RTO, the cash shell becomes an operating company and operates in the business of the acquired company.

In an RTO transaction, the public and the private companies conduct due diligence on each other, exchange information, negotiate terms, and finally sign a share exchange or share purchase agreement.

The public company issues substantial new shares and relinquishes board control to the private company’s shareholders. The private company shareholders receive the share payment from the public company and, in exchange, give the shares in the private company to the shell company that they now control.

The private company’s shareholders effectively become the majority shareholders of the public company, which completes the RTO. After completing an RTO, the private company’s shareholders become shareholders of the listed company, and the private company normally becomes a 100% subsidiary of the listed company.  Thus, the private company becomes publicly held through the RTO.

RTO Process

When the private company acquires the listed company, it creates an enlarged group following the reverse takeover. The shareholders of the private company are now shareholders of a listed company, and this can be completed in a matter of weeks.

Post RTO Group Structure

Post deal this is what the structure of the company will look like. Often the name of the listed company will change post deal to reflect the new company shape. The corporate structure will also be re-shaped to fit the new company’s business goals and merged assets.

Example of a Reverse Takeover

On 23 September 2013, Phytopharm PLC announced acquisition terms for IXICO, a privately held medical technology company. Given the size of IXICO in relation to Phytopham, the acquisition was classified as an RTO and the trading of its shares was suspended. Phytopharm’s performance had been flagging following the failure of one of its clinical trials for a Parkinson’s disease drug. It has attracted the attention of IXICO who felt the company’s focus on ‘brain health’ could be complementary to its own medical imaging analysis business. The deal was completed by October 2013 and the company was renamed IXICO.

Read about more examples of reverse takeovers in recent years in the free downloads section.

Reasons For The RTO and Synergies Between The Two Companies:

Since its inception in 2004, IXICO had established itself as a leading provider of medical imaging analysis services in the clinical trials market. The company had shown consistent revenue growth over the previous three years, was increasingly recognized as a center of excellence, and specialized know-how in brain health and dementia. The company had valuable, innovative, and commercialized services, geared towards the clinical trials and experimental medicines market. IXICO had the potential to expand its business from the clinical trials market into the diagnostics market.

The two companies’ directors had the shared vision to expand the business internationally and develop more product offerings for those involved in researching and treating severe brain diseases, enabling them to help patients quicker. The management teams of both companies saw strong synergies between both companies. The directors could build on IXICO’s proven track record to grow shareholder value in the medium and longer-term following the RTO.

Highlights of This RTO Transaction

• Acquisition consideration: an aggregate consideration of £5.6m was satisfied by Phytopharm PLC issuing 8,479,753 new ordinary shares at 66p per share
• Share swap: IXICO shareholders received 15.67 new shares for each IXICO ordinary share held
• Shareholders’ position in the enlarged issued share capital: Phytopharm PLC shareholders owned 45%, and IXICO shareholders owned 55%
• IXICO effectively became a publicly listed company through the RTO: its shareholders became the majority shareholders of the enlarged issued share capital

Benefits and Drawbacks of a Reverse Takeover

Here are a few benefits and drawbacks of a reverse takeover:

Benefits of a Reverse Takeover

1. Quicker and Cheaper Process: an RTO can be faster and less expensive than an IPO, although it still requires regulatory approval.
2. Greater Liquidity: after an RTO, the previously privately owned company shareholders benefit from the greater liquidity of their stocks.
3. Access to Capital Markets: the private company gains greater access to capital markets, allowing both retail and institutional investors to invest, which can drive up its valuation.

Drawbacks of a Reverse Takeover

1. Regulatory Approval: despite being quicker and cheaper than an IPO, an RTO still requires regulatory approval, and in some countries, the due diligence and disclosure requirements can be similar to those of an IPO.
2. Investor Caution: investors need to carefully assess the new company, ensuring that sufficient due diligence has been conducted and that the management team has the necessary expertise to take the public company forward.

Conclusion

Reverse takeover/merger transactions have become increasingly popular in the global stock markets. In the US, an RTO is used by private companies to raise funds on the public market without the lengthy and expensive process of an initial public offering (IPO). However, in the UK, the transaction will require the publication of a prospectus, and the enlarged company will be treated as a new applicant for admission. As a result, an RTO is not considered a shortcut to going public in the UK. It is more usual for the target to be active in the same sector as the buyer. Nonetheless, reverse takeovers continue to be an option for companies seeking to strengthen their position and attract investment.

Additional Resources

Initial Public Offering (IPO)