05

 Reverse takeover or reverse merger

 Process of reverse merger
 Benefits of reverse merger
 Drawback of reverse merger
 Future financing
 Examples
 A reverse takeover or reverse merger (reverse IPO) is
the acquisition of a public company by a private
company so that the private company can bypass the
lengthy and complex process of going public.
 The publicly traded corporation is known as shell
corporation as it has little or no assets.
 The private company obtains a shell company by
purchasing controlling interest through a new issue of
shares.
 The private company reverse merges into the already
existing public company and an entirely new
operating entity comes into existence.
 A large company may reverse merge into another
smaller company if there is an opportunity to enter
new business.
 To ensure a smooth reverse merger, the public
company should be a shell company, that is, the one
which simply has an organization structure but
negligible business activity.
 In a reverse takeover, shareholders of the private
company purchase control of the public shell
company and then merge it with the private company.
 The publically traded corporation is called a “shell”
since all that exists of the original company is its
organizational structure. The private company
shareholders receive a substantial majority of the
shares of the public company and control of its board
of directors.
 After the private company obtains a majority of the
public company’s shares and complete the merger, it
appoints a new management and elects a new board
of directors.
 The new public corporation thus establishes a base of
shareholders sufficient to met the listing
requirements.
 The advantages of public trading status include the
possibility of commanding a higher price for a later
offering of the company’s securities.
 Going public through a reverse takeover allows a
privately held company to become publicly held at a
lesser cost, and with less stock dilution than through
an initial public offering (IPO)
 In addition, a reverse takeover is less susceptible to
market conditions.
 Reverse takeover always come with some history and
some shareholders. Sometimes this history can be bad
and manifest itself in the form of currently sloppy
records, pending lawsuits and other unforeseen
liabilities.
 One way the acquiring or surviving company can
safeguard against the “dump: after the takeover is
consummated is by requiring a lockup on the shares
owned by the group from which they are purchasing
the public shell.
 The issuance of additional stock in a secondary
offering
 An exercise of warrants, where stockholders have the
right to purchase additional shares in a company at
predetermined prices when many shareholders with
warrants exercise their option to purchase additional
shares, the company receives an infusion of capital.
 Increased liquidity of a company stock
 Higher company valuation due to a higher share price
 The corporate shell of REO Motor Car company, in
what amounted to a reverse ”hostile” takeover, was
forced by dissident shareholders to acquire a small
publicly traded company, Nuclear consultants.
Eventually this company became the modern-day
Nucor.
 ValuJet Airlines was acquired by Air Ways corp. to
form Air Tran Holding with the goal of shedding the
tarnished reputation of the former.
 Aerospatiale was acquired by Matra to form
Aerospatiale-Matra, with the goal of taking the
former, a state-owned company, public.
 The game company Atari was acquired by JT
Storage, as marriage of convenience.
 US Airways was acquired by America West Airlines,
with the goal of removing the former from Chapter
11 bankruptcy.
 The New York Stock Exchange was acquired by
Archipelago Holdings to form NYSE Group. With
the goal of taking the former, a mutual company,
public.
 ABC Radio was acquired by Citadel Broadcasting
Corporation, with the goal of spinning the former off
from its parent Disney.
 Frederick’s of Hollywood parent FOH Holding was
acquired by apparel maker Movie Star in order to
take the larger lingerie maker public.
 Eddie Sobart in a reverse takeover with Westbury
Property Fund allowing transport by ship, road, rail
or boat to and within the UK , using only one
company.
 Clearwire acquired Sprint’s Xohm division, taking
the former company’s name and with Sprint holding
a controlling stake, leaving the resulting company
publicly traded.