how a reverse takeover rto works
by engaging in an rto a private company can avoid the expensive fees associated with setting up an ipo however the company does not acquire any additional funds through an rto and it must have enough funds to complete the transaction on its own while not a requirement of an rto the name of the publicly traded company involved is often changed as part of the process for example the computer company dell dell completed a reverse takeover of vmware tracking stock dvmt in december 2018 and returned to being a publicly traded company it also changed its name to dell technologies 1 additionally the corporate restructuring of one or both of the merging companies is adjusted to accommodate the new business design prior to the rto it is not uncommon for the publicly traded company to have had little to no recent activity existing as more of a shell corporation this allows the private company to shift its operations into the shell of the public entity with relative ease all while avoiding the costs regulatory requirements and time constraints associated with an ipo while a traditional ipo may require months or years to complete an rto may be completed in just weeks for a company that wants to become publicly traded reverse takeovers rtos can be a cheaper and quicker option than an ipo however they tend to pose greater risks for investors sometimes rtos are referred to as the poor man s ipo this is because studies have shown that companies that go public through an rto generally have lower survival rates and performance in the long run compared to companies that go through a traditional ipo to become a publicly traded company special considerationsunlike conventional ipos which can be canceled if the equity markets are performing poorly reverse mergers aren t generally put on hold many private companies looking to complete a reverse merger have often taken a series of losses and a percentage of the losses can be applied to future income as a tax loss carryforward 2 on the flip side reverse mergers can reveal weaknesses in the private company s management experience and record keeping as well many reverse mergers fail they end up not fulfilling the promised expectations when they eventually begin trading a foreign company may an rto as a mechanism to gain entry into the u s marketplace for example if a business with operations based outside of the u s purchases enough shares to have a controlling interest in a u s company it can move to merge the foreign based business with the u s based business 