8 - Reverse mergers in the United Kingdom: Listed targets and private acquirers

Abstract

This chapter investigates reverse mergers in the United Kingdom during the years 1990–2001. Reverse mergers provide an alternative way of going public. In reverse mergers a private company de facto acquires a public target company whereas, de iure, it is the public company that acquires the private company. This way the private company, the acquirer in economic terms, can obtain a stock market listing for its shares via the “backdoor” without the costs and time it takes to conduct an IPO. Whereas an IPO requires a careful procedure and intense regulatory scrutiny, a reverse merger is faster and offers greater flexibility. Additionally, the firms do not have to pay high fees to investment banks to assist them in conducting the IPO. Moreover, an IPO can be very difficult in poor stock market conditions. The study finds that reverse mergers are value-creating events for the shareholders of the target public company. The announcement return is higher if the target company experiences poor performance in the year prior to the reverse merger and if the private company is large relative to the public company. Abnormal returns are higher when the target firm is more in need of a takeover and when the takeover is more likely to succeed. The long-run stock returns and the operating performance of reverse-merger firms are also similar to those of their matched IPO counterparts.