TAKEAWAYS
In Part 1 of this article, we examined the benefits and challenges associated with reverse takeovers (RTOs). This article assesses the key elements that management at the private and public companies must consider for a successful RTO and, given that RTOs are not the only show in town, compare them with special purpose acquisition companies (SPACs).
Before commencing an RTO, both companies’ management must answer crucial questions. The first is whether the merger will generate value. Shareholders in the public company will find their stake diluted and so, must gain something in return. Those in the private company will need to consider whether to sell their stake post-RTO or continue to be a shareholder in the listed group to benefit from any upside arising from the RTO. In both cases, the private company’s management must communicate their business model and growth plans.
The second question is whether they have the right people to manage the project. An RTO is a heavy lift, requiring a dedicated team of CFO, COO, finance professionals and legal advisers. The team needs the capacity and required experience to handle the transaction while keeping the core business running smoothly.
The next step is to conduct financial, legal and tax due diligence on the proposed target. Failure here risks missing liabilities, lawsuits or other irregularities that can unravel the deal or saddle the new public entity with serious problems. Additionally, the transaction might involve financial instruments like options issued to shareholders, and their impact must be understood.
Finally, there are accounting considerations. An RTO transaction can be accounted for under Singapore Financial Reporting Standards (International) (SFRS(I)) 3 Business Combinations, or SFRS (I) 2 Share-based Payment. Which to apply depends on whether the listed company meets the definition of a business under SFRS(I) 3. Parties must also determine which entity is the accounting acquirer or acquiree, as these can differ from the legal acquirer and acquiree.
In recent years, SPACs have made headlines globally, and represent an alternative for private companies looking to list, including in Singapore, where the Singapore Exchange (SGX) introduced its SPAC listing framework in 2021.
A SPAC is a publicly listed shell company that raises money specifically to acquire or merge with a private business. It has no business operations; it is simply a pot of cash with a deadline by when it must find a target or be liquidated, with funds returned to shareholders. Merging with a SPAC means a private company can raise capital without an IPO; it will also be subjected to less onerous due diligence requirements compared to an RTO.
The approach is straightforward: the SPAC identifies a private company of interest and proposes to its shareholders that it acquire the target. If they approve, the transaction – known as a “De-SPAC” – brings the private company public. The De-SPAC has the same mechanism as an RTO, whereby the SPAC issues shares to the private company’s existing shareholders in return for acquiring it. The target company’s shareholders can access the SPAC’s funds and enjoy the benefits of being listed.
Although there is no one-size-fits-all answer to listing, RTOs shine in certain scenarios. One is during market volatility or a lack of investor confidence; an RTO can be safer, helping the private company to avoid the uncertainties and costs associated with an IPO process. An RTO approach can also be beneficial during times of economic uncertainty, when it might offer a quicker route to listed status than an IPO.
Another scenario would be if the private company finds a listed company that is inactive but without liabilities and other skeletons. The acquirer could breathe new life into the shell company and provide its public shareholders with growth opportunities. Here, publicly listed companies with limited business activities and low trading volumes and liquidity can be attractive. Their shareholders could ask management to examine potential acquisitions or an RTO to increase the value of their shareholdings.
Private firms should also be aware of market sentiment. If they are in a sector like green energy, artificial intelligence, biotech or digital healthcare – which are riding investor tailwinds – an RTO might be the quickest way to capitalise on sector-specific enthusiasm.
Lastly, venture-backed startups might find an RTO useful if they are facing a deadline to provide an exit for their private equity or venture capital investors.
In today’s unpredictable markets, private companies need flexible strategies to access capital, liquidity and visibility. RTOs provide a route to public markets that is faster and cheaper than an IPO. However, they require meticulous planning, strong governance and a compelling story. Done poorly, an RTO can prove to be a costly detour; done right, it can be a springboard to a new growth chapter.
Also read: “Alphabet Soup: IPOs, RTOs And SPACs (Part 1)”, and “Listing On SGX”, right here on CA Lab.
Yap Wee Kee, CA (Singapore), is Partner, Capital Markets Group, KPMG in Singpaore, 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.
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