What is a Reverse Takeover?

A reverse takeover is the purchase of a publicly-traded company by a smaller private company.

How Does a Reverse Takeover Work?

In what is also called a reverse merger, a private company purchases an increasingly controlling stake in a publicly-traded company. The private company becomes intentionally absorbed into the publicly-traded one, exercising its influence from within while acquiring the other company's public listing. It is called a reverse takeover, because larger publicly-traded companies more frequently acquire smaller private companies.

To illustrate, suppose a private company, XYZ, wishes to acquire publicly-traded company ABC in order to become publicly-listed in a cost-effective way. XYZ purchases an increasing number of shares in ABC, eventually making active decisions concerning its management and output. As the de facto owner of ABC, XYZ may superimpose its own name on ABC while retaining its original public listing.

Why Does a Reverse Takeover Matter?

Though largely infrequent, RTOs are undertaken by private companies in order to become publicly traded without having to go through an initial public offering (IPO). While this move heavily reduces the costs of migrating from a private to a public listing, a reverse takeover does not generate the capital inflow characteristic of an IPO.