An RTO involves a smaller quoted company taking over a larger unquoted company by a share-for-share exchange. In order to acquire the larger unquoted company, a large number of shares in the quoted company will have to be issued to the shareholders of the larger unquoted company.
After the takeover the current shareholders in the larger unquoted company will hold the majority of the shares in the quoted company and will therefore have control of the quoted company.
Reverse takeovers benefits include:
Easier access to capital markets
As a listed company, more finance is likely to be available and the cost of that finance is likely to be lower than if the company was still unquoted.
Higher company valuation
As the shares in the company will be listed, potential investors will deem the shares to be less risky as the company will have to abide by the relevant rules and regulations.
Enhanced ability to carry out further takeovers
Once the shares in a company are listed, the company is able to acquire other companies through further share-for-share exchanges.
Enhanced ability to use share based incentive plans
Once the shares of a company are listed, share based incentive plans can be used as a key tool to attract and retain good quality employees.
Reverse takeovers – the potential drawbacks:
Lack of expertise
A company achieving a listing through an RTO may find that it does not have the expertise to understand and deal with all the regulations and procedures that listed companies must comply with.
Reputation
RTO has often been viewed as a poor man’s IPO. Hence, companies that achieve their listing in this way may be viewed less favourably by investors than companies that have completed an IPO.
Risk
As a result of the lower level of scrutiny that is applied to an RTO compared to an IPO, investors must be aware of the higher level of risk that is attached to companies achieving a listing in this way.
As with anything that seems too good to be true, it must be recognized that an RTO is not without significant complication and cost. Just as there is no such thing as a free lunch, there is also no easy way to achieve a listing.
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Miro Zecevic 