ACCA AFM Syllabus C. Acquisitions And Mergers - Reverse Takeovers - Notes ^{6 / 6}

is a way for private companies to go public, typically through a simpler, shorter, and less expensive process

A conventional IPO needs an investment bank, regulatory paperwork and appropriate initial pricing

Reverse mergers allow a private company to become public without raising capital, which considerably simplifies the process.

It saves time from many months to just a few weeks

The reverse merger only converts a private company into a PLC, so is less dependent on market conditions (because the company is not proposing to raise capital).

Benefits as a Public Company

1. Greater Liquidity of shares

2. Greater access to the capital markets (finance)

3. PLCs often trade at higher multiples than private companies

4. Can use company stock as the currency with which to acquire target companies

5. Use stock incentive plans in order to attract and retain employee

Disadvantages of a Reverse Merger

1. Due diligence needed on shell of the PLC company - no pending liabilities etc

2. Risk of current shareholders selling / dumping their shares on the market and the price falling

3. Will there be demand for the shares once public?

4. Inexperienced managers in regulatory and compliance requirements of a publicly-traded company.