Choice between Alternative Routes to Go Public: Backdoor Listing versus IPO

Abstract

This paper examines the decision of private firms to go public through two alternative routes – IPO vs. backdoor listing (BDL). The latter involves a sequence of structured inter-company events by which a private firm achieves a listing status by undertaking a reverse takeover of a publicly-listed firm and using the corporate shell of the listed entity as a vehicle to go public. By pooling samples of BDL and matched IPO firms together in a logit regression framework, this paper presents and tests a choice model based on the importance of firm characteristics and deal-level variables as differentiating factors in the choice between alternative routes. Results indicate that BDL firms are more heavily concentrated in the high-tech sectors and are less liquid, less profitable and more at a development stage than their IPO counterparts. Contrary to common belief, BDL transactions generally take a longer duration to complete than IPOs. In addition, BDL transactions are associated with more cashing-out activity and lower retained ownership by private firm owners (i.e., more sell down). BDL firms also raised smaller proceeds than their IPO counterparts at the consummation of the deal and are less likely to engage the service of an underwriter. Nevertheless, no significant difference in the degree of underpricing (first-day return) between the matched BDL and IPO sample can be established.