Reverse Takeovers Research Articles

White Knights or Machiavellians? Understanding the motivation for reverse takeovers in Singapore and Thailand

This paper analyzes 47 reverse takeovers (RTOs), in which privately held firms acquire public firms to obtain listing status in Singapore and Thailand between 2007 and 2015. Unlike U.S. RTOs in prior studies, these transactions cannot be regarded as short-cuts to bypass listing rules since merged firms must meet the same minimum listing requirement as firms listing with IPOs. Rather, private firms treat RTOs as an opportunity to become public firms without immediate dilution by acquiring smaller firms at bargain prices. By examining shareholder circulars and analysis of transaction characteristics, we find that co-parties tend to cite growth from business diversification as their motivation for RTOs. Distressed public firms more frequently emphasize the motivation to reorganize and revive by merging with stronger private firms. Analysis of return and financial accounting performance shows that the merged firms experience improved growth and generate positive wealth impact; thus, offering opportunity for incumbent shareholders of public firms to recover some of their investment value.

Why Do Small Acquirors Do Better?

This paper studies why small acquirors realize better announcement window abnormal returns than large acquirors. Using a sample of 12,493 completed mergers announced between 1980 and 2010, it finds that much of the differential is due to market inefficiencies. It finds that (i) the presence of merger arbitrageurs in equity deals for public targets understates the wealth effect for shareholders of large acquirors and (ii) higher diversity of opinion as to share value and short selling restrictions (which apply disproportionately to small acquirors) cause the wealth effect for small acquirors in all cash deals to be overstated. It finds little evidence to suggest that the size effect is due to benefits that mergers bring to small acquirors that they do not bring to large acquirors, such as decreases in information asymmetry, lower idiosyncratic risk or the greater potential to be added to stock indices. This paper does find, however, that the largest part of the size effect can be accounted for by firms in the lowest size decile of acquirors and that part of the size effect is likely due to the very high announcement window abnormal return for acquirors in reverse takeovers, which tend to be small acquirors.

Investigating the valuation effects of reverse takeovers: evidence from Europe

This study examines a European sample of 222 private firms that opted for going public through a reverse takeover transaction during the period 1992–2011. In particular, our study investigates whether reverse takeovers announcements are value-increasing transactions, especially in countries that follow strong governance structures. Moreover, the post-reverse takeover stock price and operating performance is also at the epicenter of the current study. Employing the classical event study methodology, we document significant wealth gains for the shareholders of public firms involved in reverse takeovers. The market reaction is stronger when stricter corporate governance structures prevail in the countries where public firms trade. However, the short-term gains seem to revert to substantial losses over the long-term lending support to the overreaction phenomenon. We further detect negligible improvement in the post-reverse takeover financial performance of the new entity raising further concerns over the efficacy of such transactions.

Reverse takeover: the moderating role of family ownership

ABSTRACTThe aim of this study was to analyse the determinants of reverse takeovers, examining the influence of target firm shareholders’ type in the agreement. We examine reverse takeovers implemented in the Alternative Investment Market between 1999 and 2012, paying special attention to the differences between family and non-family target firms, as well as the impact of the financial crisis.We propose that family firms have a lower probability of accepting a reverse takeover (‘shell’ firm), to avoid both diluting the ownership structure (loss of control) and new shareholders entering their firm. Our main findings show that the higher the percentage of ownership held by family holders, the lower the probability of their being the target firm in a reverse takeover. This effect is maintained during the crisis period, in accordance with the expectation that family firms will have fewer financial constraints.

A reverse takeover as an exit strategy of venture capital: Korean evidence

We investigate the characteristics of firms that choose between three different methods, IPOs, sellouts, or reverse takeovers, to obtain exchange listings using Korean data over the period of 2000–2010. We document that VC-backed firms tend to choose reverse takeovers rather than IPOs or sellouts to go public after controlling for other determinants. We also find that VC-backed reverse takeover firms have higher leverage, lower profitability, and higher information asymmetry than VC-backed IPO firms. The results suggest that venture capital uses a reverse takeover as an alternative exit method from their portfolio firms since reverse takeovers constitute a fast and low-cost going-public mechanism. We then find that reverse takeover firms perform worse than IPO firms over the long term regardless of whether they are VC-backed or not.

Corporate governance standards in cross-border investing: lessons learned from Chinese companies listed in the United States

This paper will examine five Chinese company stocks that have been listed on United States exchanges with either initial public offerings (IPOs) or reverse mergers, often called reverse take-overs (RTOs). Their shares were initially well received in the market, especially as China’s economy continued to grow at rates much higher than the rest of the world’s countries, with increasing stock prices creating significant gains for their investors. However, in spite of these firms’ apparent compliance to the U. S. regulations, there is now evidence of fraud, poor auditing, and a lack of corporate governance and control. The resultant stock price declines have led to billions of dollars of losses for investors, and some of these Chinese firms have subsequently been delisted by U. S. stock exchanges. In this paper, we will show that had auditors, boards of directors, and financial analysts been more diligent and responsible, these problems could have been identified earlier than they were. Perhaps some of the investors’ losses could have been prevented

Local enablers of business models: The experience of Brazilian multinationals acquiring in North America

Despite the rapid growth of South–North investments, the literature is still incipient to look into the broad range of issues associated with them. This article focuses on reverse takeovers and discusses the reasons why emerging-country firms, Brazilian multinationals in particular, are able to profitably acquire firms in developed countries, chiefly in the United States. The research addresses two specific subjects in international business literature: country-choice and entry-mode. The analytical approach assumes that reverse takeovers are part of the dynamic reconfiguration of global production systems which, in turn, are influenced by shifting conditions in countries' business environments. Changes in business environments impact local firms' business models and their positioning in global production networks and international markets as well. Reverse takeovers are facilitated when both the simultaneous evolution of the developed country multinational and the emerging country multinational business models establish a common ground for the transaction. Through the analysis of Brazilian multinationals' acquisitions in North America, relevant insights pertaining to the realms of firm-specific advantages, country-choice and entry mode in reverse takeovers are unveiled.

Reverse Takeover and Firm Survivability

Manuscript Type: Empirical Research Question/Issue: This paper investigates how firm financial characteristics and governance characteristics affect reverse takeovers’ survival. Research Findings/Insights: Using a sample of reverse takeovers that took place during the 2000–2009 period in the U.S., we find that firms with reverse takeover are more likely to survive when they have higher interest coverage ratio of the shell, while its profitability (return on equity) is lower just before the reverse takeover and the new firm is relatively smaller than the public shell. In addition, firms with new CEOs are more likely to survive than firms without CEO replacement, and this effect is pronounced when the shell has lower liquidity. Theoretical/Academic Implications: Our findings suggest that the survivability of reverse takeovers relies both on the financial conditions of the merging firms and on their presumed value-enhancing governance characteristics. Practitioner/Policy Implications: Conventionally, firms try to improve the financial conditions of the merging firms to survive in the reverse takeover. Our empirical results however stress that firms should also practice good corporate governance in order to be successful in reverse takeover.

What’s in a Shell? Analysing the Gain to Shareholders from Reverse Takeovers

We examine the wealth effect of reverse takeover transactions to shareholders of shell companies. Using three return proxies, including buy-and-hold return, expert-based return and implied premium ratio, we find evidence strongly consistent with a significant gain to shareholders of shell companies participating in such transactions. We also argue that the source of the gain (shell premium) arises from the listing status embedded in the corporate shell of the public firms, which can be utilised by private firms as a vehicle for going public via the backdoor. Multivariate analysis also suggests that, after controlling for other potential factors, the magnitude of the shell premium is positively related to the number of shareholders on the shell company’s share register. In addition, we find that the invocation of the takeovers provisions of the Corporations Act has a positive effect on the gain to public firm shareholders by enhancing their bargaining power when negotiating the deal with the private firm.

Reverse takeovers: an alternative to the IPO?

We examine the stock price behaviour of 23 Reverse Takeovers (RTs) that took place in the UK. A RT refers to a private company that acquires a publicly traded company in the stock exchange that is generally a cash shell. We examine the effects of the RTs on the wealth of public company's shareholders and we find that the stock price reaction of the public firm around the announcement date does not provide any evidence of systematic pattern. The only pattern observed is the disappearance of negative Abnormal Returns (ARs) for the target after the takeover.

Alternatives for Going Public: Evidence from Reverse Takeovers, Self-Underwritten IPOs, and Traditional IPOs

We examine the characteristics of firms using reverse takeovers and self-underwritten IPOs as an alternative to the traditional underwritten IPO. We find that at the time they go public, firms that use alternative mechanisms tend to be less profitable than contemporaneously issued IPO firms of comparable size in the same 3 digit SIC code, but they do not exhibit significantly higher distress. However, by two years post going public, they have significantly increased debt and experience declines in profitability and balance sheet liquidity. Furthermore, we find that RT and SU firms are characterized by lower levels of trading liquidity and significantly higher volatility, as measured by the standard deviation of returns. While the combined sample of RT and SU firms have comparable institutional ownership post going public to their control IPO firms, RT firms are characterized by significant lower institutional ownership than their matches, and while IPO firms experience significant increases in institutional support, those using RTs and SUs experience declines. We also find evidence that firms utilizing alternative going public mechanisms outperform their matched traditional IPO counterparts in the short term, and exhibit comparable performance in the three years following going public as indicated by equal-weighted buy and hold returns.

Disclosure, financial misconduct and listed companies: a critical analysis of the UKLA’s continuing obligations regime

Examines the continuing obligations regime imposed on listed public companies via the United Kingdom Listing Authority’s Listing Rules, and how far this protects a company’s shareholders against, for instance, financial misconduct by the company directors. Discusses each of the obligations: disclosure of information, regulation of transactions (including reverse takeovers and related‐party transactions), production of credible financial information, communications with shareholders, directors, and buy‐back of shares. Concludes that the regime is desirable, but there is need to maintain the balance between protection of investors and public without discouraging companies from going public and seeking listing.

Backing into being public: an exploratory analysis of reverse takeovers

We examine 121 reverse takeovers (RT), in which a privately held firm acquires a publicly traded firm to obtain their exchange listing. The public firms, many of which went public during the initial public offering (IPO) bubble, are generally poor performers. Their shareholders receive significant wealth gains upon announcement, suggesting that these events may provide shareholders of distressed firms a way to recover some of their investment. We observe little post-event improvement in operations or profitability, and only 46% of the sample survives two years. Thus, while reverse takeovers provide alternative means of going public, they are risky and may fail to generate long-term wealth.