TAKEAWAYS
Although taking a company public is a major milestone, not all roads to a listing look the same. While the traditional path of the initial public offering (IPO) remains the gold standard, there are useful alternatives, namely, reverse takeovers (RTOs), and a solution that became available in Singapore in recent years – special purpose acquisition companies (SPACs).
Each has its advantages and disadvantages and in this article (Part 1), we will show that RTOs are typically quicker and more flexible than IPOs. Part 2 of the article will provide a checklist for companies embarking on an RTO, compare RTOs and SPACs, explain when an RTO makes the most sense, and show what type of listed companies typically makes an ideal candidate for RTOs.
So, to RTO or not to RTO? The answer is: it depends. There is no one-size-fits-all solution, and each offers a distinct pathway to go public. In today’s volatile market though, understanding the differences is more important than ever. Let us start with a deep dive into RTOs.
An RTO, also known as a backdoor listing, avoids the usual IPO fanfare. Instead of going through the lengthy and expensive IPO process, the private company’s management identifies a target public company with a smaller scale or operation, and strikes an RTO agreement with it.
From this point on, the logistics are straightforward. The public company agrees to issue new shares to the private company’s shareholders on the basis that the value of the private company is higher than the market capitalisation of the public company. This sees the private company’s shareholders secure majority voting rights in the public company.
The private company’s management team then takes the reins, with any non-core business from the public company divested – perhaps bought out by its previous management – or shuttered. Next, the companies merge or the private company becomes the subsidiary of the publicly listed company.
An RTO offers four main advantages, the first of which is speed. If the private company’s accounting records are in good order, an RTO can be completed in months, which is far quicker than an IPO. There is also no need for underwriting or extensive regulatory approval – although there is some scrutiny – which makes this attractive for companies keen to move fast.
A second advantage is cost. IPOs require underwriting fees, exchange registration fees, legal and accounting expenses, marketing roadshows and more. RTOs sidestep much of that, involve fewer intermediaries and do not require the extensive regulatory scrutiny of a public offering.
Additionally, RTOs provide greater certainty than IPOs as a successful listing is highly dependent on the performance of equity markets. Should investor sentiment sour or excess volatility kick in, an IPO could be delayed or pulled. An RTO, however, is a negotiated deal between two companies, with the private company’s valuation determined by a professional valuer. This insulates it from market movements.
Finally, an RTO, once completed, provides immediate access to capital markets. The now-public company can issue shares, raise funds and deploy its new capital for growth.
While RTOs are appealing, they do carry risks. A major challenge is that a successful RTO hinges on finding a suitable public company, which is often easier said than done. Also, a public company might be placed on the Singapore Exchange (SGX) Watch-List or have limited financial runway. While having intermediary brokers can overcome these hurdles, their involvement will increase costs.
Additionally, RTOs are scrutinised by the Monetary Authority of Singapore (MAS) as well as SGX, to prevent abuses like shell company listings and fraud. Consequently, private firms looking to use the RTO route must ensure they meet SGX’s listing criteria, including in financial and corporate governance standards. Failure to prepare well could derail the deal.
Another issue is that the existing shareholdings of the public company will be diluted when it issues new shares to the private company. Consequently, the RTO’s rationale must be compelling and articulate how the transaction will create long-term value; otherwise, shareholders might push back. An RTO is still subject to the approval of the public company’s shareholders before it can proceed.
Finally, there can be issues around the perception of RTOs and post-RTO liquidity and trading volumes. Some investors view RTOs as being less prestigious than IPOs, which can affect confidence and stock performance. Additionally, not all RTOs generate strong investor interest or much active trading – particularly if the new management’s vision is not compelling – which can lower liquidity and depress the share price.
The RTO route can indeed provide private companies with a viable route to going public, though their management must understand the complications.
In Part 2 of the article, we have a pre-RTO checklist to explain what both sets of managers should consider. We will also compare RTOs against SPACs, their trendy cousins.
Yap Wee Kee, CA (Singapore), is Partner, Capital Markets Group, KPMG in Singapore, and member, ISCA Corporate Finance Committee (CFC); and Leow Sze Bing, CA (Singapore), is Partner, Audit, KPMG in Singapore.
The ISCA CFC works closely with regulatory authorities, corporate finance and investment banking organisations to address issues relating to corporate finance.
© 2024 Institute of Singapore Chartered Accountants
