Description
In business, a takeover is the purchase of one company (the target) by another (the acquirer, or bidder).
JÖNKÖPING INTERNATIONAL BUSINESS SCHOOL
JÖNKÖPING UNIVERSITY
R everse Take over
A Back Door to the market
Bachelor Thesis in Business Administration Authors: Håkan Fältmars Joel Svensson Martin Thorstensson Gunnar Wramsby December 2007
Tutor: Jönköping
JÖNKÖPING INTERNATIONAL BUSINESS SCHOOL
JÖNKÖPING UNIVERSITY
Omvän da Förvärv
Köksvägen till börsen
Kandidatuppsats inom Företagsekonomi Författare: Håkan Fältmars Joel Svensson Martin Thorstensson
Handledare: Gunnar Wramsby Jönköping December 2007
Acknowledgements
We would like to thank all our interviewees for their contribution to this study. Their experience of the financial market and knowledge about reverse takeovers has made it possible for us to conduct this research. We would also like to thank our tutor Gunnar Wramsby at JIBS and the students that during the seminars have given us guidance and feedback.
Bachelor Thesis in Business Administration
Title: Authors: Tutor: Jönköping Subject Terms: Reverse Takeover Håkan Fältmars, Joel Svensson, Martin Thorstensson Gunnar Wramsby December 2007 Acquisition, Going Public, Merger, Reverse Takeover
Abstract
The access of capital and the high market growth has resulted in an increase in the quantity of companies going public in Sweden. Most companies go through with the initial public offering (IPO) process, but there has been an increase of companies that choose to go public through an alternative method. A reverse takeover is an alternative going public transaction that has been more common and accepted over the recent years in Sweden. The going public process is reverse compared with an IPO and the method is known as the “back-door” to the market. The purpose of this report is to analyze reverse takeover on the Swedish stock exchange as an alternative to the traditional IPO, with focus on the factors behind the transaction. Through an inductive approach, data has been collected from interviews with representatives of financial advisory companies with experience of reverse takeovers. The aim was to clarify which factors that affects companies when they carry out a reverse takeover. A deductive approach has then been carried out, to provide the research with quantitative data that can act as a complement to the qualitative data. This data has been collected through a statistical analyse of reverse takeovers on the Swedish stock exchange. A reverse takeover is a faster process than an IPO. The main reason for the shorter listing process is that a reverse takeover is a transaction between two companies and the IPO is a transaction between one company and the public. Many of the reverse takeover transactions in Sweden were done to take advantages of the loss carry forwards in the public company, which provides a possibility to reduce tax payments and go public at the same time. The publicity is lower for a reverse takeover than for an IPO, which makes it possible for the private company to take the back door to the capital market and in some way ignore the current market condition because the transaction is not depending on the demand for the company stock. A recognized pattern on the financial market is that reverse takeovers are carried out more frequently after a market crash. This agrees with what we have seen in Sweden, since private companies started to go public through reverse takeovers after the IT-crash. The reverse takeover transaction can be viewed as a financial trend in today?s Sweden. A few companies in Sweden have been harmed of the reverse listing process, as they have not been able to live up to the requirements from the stock exchange after they were listed. Planning and due diligence is important to be able to minimize risks when going public through a reverse takeover. The due diligence is even more important for reverse takeovers than for other transactions, since the business agreements are generally with companies that have a history of weak performance.
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Kandidatuppsats inom Finansiering
Titel: Författare: Handledare: Jönköping Ämnesord: Omvända Förvärv Håkan Fältmars, Joel Svensson, Martin Thorstensson Gunnar Wramsby December 2007 Förvärv, Börsnotering, Omvänt Förvärv, Sammanslagning
Sammanfattning
Ett gynnsamt börsklimat och möjligheten att få tillgång till externt kapital har resulterat i en tillväxt av börsnoterade företag i Sverige. Den vanligaste börsnoteringen är den traditionella ”initial public offering” (IPO) processen, men det har skett en ökning av företag som noteras via alternativa metoder. Ett omvänt förvärv är en alternativ börsnoterings process som har blivit mer vanlig och accepterad de senaste åren i Sverige. Noteringsprocessen är omvänd jämfört med en IPO och har därför blivit känd i Sverige som ”köksvägen” till börsen. Uppsatsen behandlar omvända förvärv på Stockholmsbörsen med ett syfte att analysera den alternativa börsnoteringen samt faktorerna som ligger bakom beslutet att genomföra ett omvänt förvärv istället för en traditionell börsnotering. Genom en induktiv ansats, har data samlats in genom kvalitativa intervjuer med utvalda personer ur företag som har agerat finansiell rådgivare vid omvända förvärv. Intervjuernas syfte har varit att förklara vilka faktorer som påverkar företag att genomföra ett omvänt förvärv. Genom en deduktiv ansats, har sedan studien kompletterats med kvantitativ data ifrån en statistisk undersökning av omvända förvärv genomförda i Sverige. Ett omvänt förvärv erbjuder en snabbare noteringsprocess för det privata företaget i förhållande till en IPO. Anledningen till varför ett omvänt förvärv är snabbare är för att det är en transaktion mellan två företaget, medan en IPO är ett erbjudande till allmänheten. Motivet bakom många omvända förvärv i Sverige har varit möjligheten att både börsnoteras och samtidigt utnyttja skalbolagets underskottsavdrag, vilket ger framtida skattefördelar. Publiciteten kring omvända förvärv är lägre än för en IPO eftersom företaget inte behöver informera allmänheten, vilket gör det möjligt för ett privat företag att ta ”köksvägen” till börsen. Omvända förvärv genomförs oftast efter en sättning i marknaden. Svenska företag började utnyttja omvända förvärv som en noteringstransaktion efter IT-bubblan, eftersom det fanns många IT-bolag som upplevde svåra tider på börsen och var mer än villiga att ingå ett avtal för ett omvänt förvärv. Största riskerna med ett omvänt förvärv är relaterade till den omvända noteringsprocessen. En del Svenska företag har haft svårt att klara börsens krav och regler efter ett omvänt förvärv, vilket har resulterat i att de inte har lämnat observationslistan. Planering och Due Diligence är viktiga faktorer för att minimera riskerna, eftersom det privata företaget ingår avtal med i de flesta fall ett börsnoterat företag med dåliga resultat och historik.
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Table of Contents
1 Introduction ............................................................................... 1
1.1 1.2 1.3 2.1 2.2 2.3 2.4 2.4.1 2.4.2 2.5 2.6 3.1 3.1.1 3.1.2 3.2 3.2.1 3.3 3.3.1 3.3.2 3.3.3 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.7.1 4.7.2 4.7.3 Background ............................................................................................1 Problem Discussion ................................................................................2 Purpose ..................................................................................................3 Research approach ................................................................................3 Research Method ...................................................................................3 Data Collection .......................................................................................4 Sample selection ....................................................................................4 Interviews ...............................................................................................4 Statistical research .................................................................................6 Theory Selection.....................................................................................6 Validity and Reliability.............................................................................6 Going Public ...........................................................................................8 Access to the Capital Market ..................................................................8 Obstacles for Going Public .....................................................................9 Merger and Acquisition ......................................................................... 10 Motives ................................................................................................. 10 Reverse Takeover ................................................................................ 12 Low Quality Firms Use Reverse Takeovers ......................................... 12 The Importance of Reverse Takeovers ................................................ 13 Future Development of Reverse Takeover Firms ................................. 14 Transaction structure ............................................................................ 15 Motives ................................................................................................. 15 Potential risks ....................................................................................... 17 Manage risks ........................................................................................ 19 The public company ............................................................................. 19 The private company ............................................................................ 20 Reverse Takeovers in the Swedish Capital Market .............................. 20 Sample ................................................................................................. 20 Profitability ............................................................................................ 20 Industry................................................................................................. 21
2 Method ....................................................................................... 3
3 Frame of Reference .................................................................. 8
4 Empirical Findings .................................................................. 15
5 Analysis ................................................................................... 23 6 Conclusion and Discussion ................................................... 27
6.1 6.2 6.3 6.4 Conclusion............................................................................................ 27 Reflections............................................................................................ 29 Critique of Chosen Method ................................................................... 29 Further research ................................................................................... 30
References ................................................................................... 31
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Appendices
Appendix 1 Definitions Appendix 2 Questionnarie: Omvända Förvärv Appendix 3 Reverse Takeover Sample
Figures
Figure 1: Theories of Merger Motives (Trautwein, 1990) .................................. 10 Figure 2: Public Company (Industry) ................................................................. 21 Figure 3: Private Company (Industry) ............................................................... 22
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1
1.1
Introduction
Background
The access of capital and the high market growth that has flourished over the recent years has been the source to an increase in the quantity of companies going public. Year 2006 was a record year of newly listed companies on the Nordic Stock Exchange. There were 57 new companies in 2006 and in 2007 it is already over 60 companies that have been listed on the OMX and First North. This piece of information provides an attractive area of study and much research has been done about the initial public offering (IPO) process, which is the most common course of action when going public. (Dagens Nyheter, 2007) Studies with focus on different aspects of the IPO process have been made. Ritter (1998) turns attention on direct and indirect costs of an IPO, while Chemmanur and Fulghieri (1999) reflect on the question when it is time for a company to go public. The IPO process is however not the only way to enter the stock market for a private company, there are other alternatives. Balder, Din Bostad and 24H poker are all fairly new companies on the Swedish Stock Exchange, but they did not go the traditional way. Instead these companies chose a reverse takeover, an alternative method of going public. A reverse takeover is performed in the following way; a public company acquires a private company through non-cash issue directed to the owners of the private company. The private company will then become majority owner in the public company through the shares. The result is subsequently that the private company acquires the public company and takes over the listing place. “The traditional way for a company who want to get listed is both tough and time consuming. A faster way is to buy the majority of votes in a public company and then gradually remold the organization to its own.” (Österlind, 2007) In the beginning of the 21st century, when many listed companies experienced tough times, the interest around reverse takeover started in Sweden. Private companies started to identify public shell companies as potential target for a reverse takeover. The only thing of value left in the shell companies was the listing place, organisational number and owners of share capital. (Östlund, 2007) Few studies have been made about reverse takeovers and the factors behind the transaction. Earlier a reverse takeover has been seen as a controversial transaction but during the last couple of years the process has gained more acceptances in the financial market as an alternative to the traditional IPO. (Aydogdu et al. 2005). In the United States and other financially strong countries, the reverse takeover method is starting to get well known. Companies use it to a greater extent to go public and a few studies have been made in the United States. In Sweden, there has been a discussion about the rules and tax consequences, but no focus on the fundamental factors behind the transaction. The lack of studies about reverse takeovers in Sweden together with the fact that Swedish companies actually use the technique to go public provides a new area of research and this has been the authors? motivation when writing this bachelor thesis.
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1.2
Problem Discussion
The numbers of companies that consider the possibility to go public through a reverse takeover have increased during the last couple of years. The most common opinion is that a reverse takeover is quicker than an IPO. Going public through an IPO can be a time consuming process. The process takes generally between six months and eighteen months, from the first day the company obtains an underwriter to the day the share will be listed. (Gleason et al. 2005b) “A reverse merger is far simpler. A company identifies a shell stock, pays what is usually a modest fee and suddenly, it is listed.” (Hennessey 2003) Apart from time, the cost saving factor is a vital reason and according to Adjei, Cyree and Walker (2007) companies with poor performance, relatively small turnover and short history, prefers reverse takeovers to IPOs. What factors can be important for the company when it decides to go public through a reverse takeover?
Earlier studies show that one out of four reverse takeovers, the public and private firms operate in the same industry. Potential synergies are usually the motive of targeting a company in the same industry (Jensen, 1984). However, there are also a number of companies that carry out a reverse takeover with companies from different sectors. Can specific trends be associated with reverse takeovers?
For companies that go through with a reverse takeover it is crucial with a precise analysis of all possible risks. “If you decide to do a reverse merger with a weaker company, you better be pretty sure that you are willing to take the time to analyze the problems you are about to receive and work them out. It's a fast way to grow, but it takes a big, big effort to replace your program with their program.” (Prewitt, 1994) A common belief on reverse takeover is that it involves considerable risks and does not generate any long term profit for the shareholders. One of the characteristics of reverse takeover firms is the high volatility and low liquidity in the stock, which reduces the shareholder value. However, shareholders can benefit from a reverse takeover. If a private company decides to enter the market through a reverse takeover it can create value for the public company, which had been lost without the transaction. (Gleason et al, 2005a) “Thus, while reverse mergers provide an alternative means of going public and may reduce some of the agency costs of distress, they do seem to involve considerable risk and often fail to generate long-term wealth for the shareholders of the post-event firm.” (K. Gleason, L. Rosenthal and R. Wiggins III, 2005a). Can specific risks be identified when going public trough a reverse takeover?
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1.3
Purpose
The purpose of this report is to analyze reverse takeover on the Swedish stock exchange as an alternative to the traditional IPO, with focus on the factors behind the transaction.
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Method
The following chapter describes the research method in this thesis. For the purpose of the report, the most suitable method is a mixed designed research that combines both qualitative and quantitative data. Interviews with representatives of the financial market provides an insight into how the reverse takeovers and other transactions are carried out, while a statistical analysis can identify what has been done over the past years on the stock exchange. By combining a qualitative and a quantitative method, the report can recognize and describe how-, why- and what-questions for the reader. A glossary which explains keywords is provided in appendix 1.
2.1
Research approach
The authors have chosen to make use of a combination of deductive and inductive research, since it is the most suitable approach for the purpose of the report. “Not only is it perfectly possible to combine deduction and induction within the same piece of research, but also in our experience it is often advantageous to do so.” (Saunders et al, 2003) The deductive approach is the most common one in scientific research; it generally tries to provide data for or against a theory. The inductive approach on the other hand attempts to provide information to develop new hypothesis or theory (Denzin & Lincoln, 1994). The purpose with an inductive approach is to get an understanding of the nature of the problem and analyzing the data to create new theory. The outline has a deductive perspective, were a theoretical framework is defined and then used in the analysis. However, this is a relatively new research topic in Sweden with little existing literature, which makes the work more inductively with an aim of generating and analyzing new data. Neither approach are better than the other, by using both approaches in the research, it is possible to get an objective outcome and understanding of subjectively determined knowledge (Saunders et al, 2003).
2.2
Research Method
Qualitative research focuses on analyzing data such as objects, pictures and words. Analyzing words can for example be based on an interview, as in this report (Saunders et al, 2003). The qualitative method is chosen because it gives an accurate view of the actual situation on the market and exposes details that cannot be found in financial statements or reports. The method gives the possibility to focus on the fundamental factors behind the figures and gives the research valid ground for the analysis. This also suits the purpose of this paper because it gives a view of the circumstances and it is more likely to find suitable information by this method. The qualitative research is the main method of this study since it explains the how and why questions of the reverse takeover as well as the obtained information from the interviews makes it possible to analyze processes and patterns of the reverse takeover transactions in
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Sweden. Furthermore, by interviewing representatives from different financial institutions both a narrative description and comparison can be made to understand the specific situation and factors related to a reverse takeover. The quantitative method is based on analyzing numerical data, for example a questionnaire or a statistical research used to collect numerical data (Saunders et al, 2003). In this report a statistical analysis has been used as a complement to the qualitative method, to give as accurate view of the market conditions as possible. The data put together by the quantitative method is past data from the Swedish financial market and gives the report the background that the qualitative approach can not cover. Researchers use the technique that combines qualitative and quantitative data to a greater extent since it is an alternative of expanding the scope and improving the analytic power of the study. It is important that each data set remains analytically separate trough the research, it is only in the final analyze were the result of both the qualitative data and quantitative data are combined (Caracelli & Greene, 1993).
2.3
Data Collection
There are two types of accessible data for this kind of research, primary data and secondary data. In primary data collection, the data is collected through questioners, interviews, surveys and other types of methods that gather knowledge. The data is for that reason generally based upon words or text. The primary data should be unique for the specific research and answer the purpose of the report. With primary data the data is collected for the problem and do not need any adaptation before being used. Secondary data is data that has already been collected with an aim to answer a different purpose. The data is in general collected from statistical reports, books and previous academic reports. (Saunders et al, 2003) This research is based on primary data. The primary data is collected trough both a qualitative and quantitative method to give the most precise answers as possible. Due to the fact that there has been very little research done in this field, secondary data are hard to find and may not cover the whole picture. The data has therefore been collected through interviews and a statistical analysis designed to fully meet the purpose of the research. The research questions have been the foundation for the shape of the primary data.
2.4
2.4.1
Sample selection
Interviews
The qualitative data in this report has been collected through in-depth interviews with financial advisors with knowledge of performing reverse takeovers. The selected group of people is representatives belonging to the corporate finance section of highly respected firms, which have experience of creating value for their clients by constructing different going public transactions. The companies that have been listed through a reverse takeover have not been interviewed because they do not have the same knowledge, experience and overall insight within the financial market, as the financial advisors. The participants received the questions by e-mail before the interview to be aware of the report?s purpose as well as getting time to prepare. After that a telephone interview followed, with focus up on the questions to ensure that the same general information is col-
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lected from each interviewee. Even if the interview were of a general guide approach with focus on collecting the same information from each interviewee, it still allowed a degree of freedom and adaptability in gathering the valuable information from the interview. All the interviews were analyzed and then written into a summary. The interviewed participants are presented below: Catella Corporate Finance is a subsidiary of Catella AB, which initiates in transactions linked to the stock market, such as right issues and listing processes. They take also part in takeovers, acquisitions and obtaining investment capital for both private and public companies. Catella Corporate Finance has been seen as an institution of reverse takeovers in Sweden and has been the advisor for companies such as Klövern AB, Fastighets AB Balder, Din Bostad Sverige AB that has been listed through a reverse takeover. The authors interviewed Johan Malmberg, who is the Head of Catella Corporate Finance. He has an essential experience of financial advisory as well as he has been active in reverse takeover transactions. (Catella, 2007) Mangold Fondkommission AB is an independent security firm. Their corporate finance division offer financial advisory related to takeovers, acquisitions and obtaining investment capital for their clients as well as being a Certified Advisor on the First North. Advisory related to owner- and capital structure and strategic development are as well services they provide for their clients. The authors interviewed Per-Anders Tammerlöv, who is the CEO of Mangold Fondkommission AB. Per-Anders Tammerlöv have great knowledge of reverse takeover transactions and has been involved in several listing processes. (Mangold, 2007) Evli Bank is an independent investment bank with companies and institutional investors as clients. The investment bank has offices in both the Nordic region and in the Baltic region. The corporate finance division at Evli provides advisory within takeover and acquisitions, initial public offering, private placements and other capital market transactions. The authors interviewed Staffan Bernstein, Head of Equity Capital Market at Evli in Stockholm. He has vital experience of financial advisory as well as experience of reverse takeovers. (Evli, 2007) STRICT is a financial advisor dividend into three main areas of business, STRICT Corporate Finance, STRICT Equity and Reverse takeovers. The corporate finance department deals with classic financial advisory and the equity department invest in potential growth companies. The reverse takeover section is focused on giving a going public candidate an alternative to the more traditional listing process by executing reverse takeovers and create the possibility to take the back-door to the market and offer the company and good shareholder spread. The authors interviewed Mats Löfgren who is the founder and chairman of the board and of STRICT and CEO of STRICT Corporate Finance. Löfgren has been involved as an advisor in several reverse takeovers during the last couple of years and has 20 years of experience in investment banking. (Strict, 2007)
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2.4.2
Statistical research
To identify what has happened concerning reverse takeovers on the stock exchange a statistical analysis has been done of quantitative data. The analyse gives a good view of the past transactions and gives the research a solid background and complement to the interviews. The sample consists of 20 reverse takeovers, taken place on the Swedish stock exchange between 2001 and 2007. The data gathering has been performed by an analysis of companies that have changed their names on the stock exchange to identify the reverse takeovers. After identifying the reverse takeovers, the transactions were analysed separately with focus on profitability and what industry they operated in. The result was then put together in to an excel document to get an overview of the situation and calculate the average profit and an indication of the industry distribution.
2.5
Theory Selection
The theories which have been used to analyse the data collected include merger and acquisition theories, IPO theories, and reverse takeover theories. The difficulty with the theories is that there has been little previous research done on the topic of reverse takeover and by that the theory base is limited. The theories which are presented in this report?s theoretical framework have been collected through the Jönköping University Library and through internet databases containing economic articles such as Jstore.com, ebsco.com, and ssrn.com. The key terms used when finding the theories is Reverse Takeover, Acquisition, Going Public, Merger and Merger Motive. The parameters needed for conducting the research for the correct theories have already been stated previous in this report and have been followed in order to find the theories used in this research (Bell, 1999). The theories needed in the research include material concerning the underlying motive, why the company are interested in conducting a takeover, the decision on why to go public and theory on why companies use a reverse takeover to go public. The theory concerning the reverse takeover is based on research conducted in the US. This theory is used because there has not been any extensive research of this subject in Europe. Theories based on European or even Scandinavian research would have been optimal, since this report examines the Swedish market. Due to the fact that the regulatory framework in the US and Europe may be affecting the validity of the theories. Theories about why companies want to go public instead of staying private are used to analyse factors and motives. This theories are not specifically adapted to reverse takeovers but on the going public as a whole.
2.6
Validity and Reliability
The purpose with collecting primary data by using a combination of both qualitative and quantitative method is to achieve a valid and reliable research. Telephone interviews were conducted since it provided most advantages related to the circumstances as well as it was the most acceptable method for the interviewees. By conducting telephone interviews, the authors could achieve access to essential sources of information as well as speed. This was demanded by the interviewees since they are business leaders with a busy time schedule. The interviewer and the interviewees talked with each other before the interview, which made it possible for both parts to prepare. The choice of sending the questions by e-mail
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prior the interview promotes validity and reliability, since the interviewee can consider the information and assemble organizational documentation from their files (Saunders et al, 2003). A concern related to telephone interviews is that it lacks personal contact as in faceto-face interviews. In this situation, it is harder for the interviewer to establishing trust and the interviewee may by less willing of answering sensitive questions (Saunders et al, 2003). The sample size is constantly an issue which affects the validity and reliability. With four interviews in the research, it is possible to discuss if it is enough to present a reliable result. The four interviewees have been active advisors of reverse takeovers in Sweden and can therefore provide the researchers with knowledge from a professional perspective. The outcome of the interview may provide a partial picture of the subject, since the organization that the interviewees work for has a positive or a negative attitude against the research topic (Saunders et al, 2003). The information may as well be too sensitive or they are empowered to talk about it. Therefore, has the intention been to construct objective questions that answer general factors, not specific cases. The interviewees are independent from each other in order for the researchers to gain an impartial result. The primary data collected trough a quantitative method, are independent to any organization and can for that reason act as a complement to the interview and reduce the bias. The data are obtained from 20 reverse takeover transactions in Sweden and the size of the statistical data can be a subject of discussion. With a size of 20 transactions, it is possible to analyze up to date information, while a larger sample size provides older information and can cause misinterpretation as well as harm the validity and reliability.
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3
Frame of Reference
There is limited research done within reverse takeovers. However, research and theories about mergers and acquisition and going public in general can in some way be helpful. The frame of reference contains the theories which are needed to analyze the empirical findings. They are divided in three parts. The first part will explain the process of an IPO and the decision to go public or stay private. The second part consists of the general merger- and acquisition-motives theory which will help us understand and link together the first part with the last part. The third and last section explains research and theories about reverse takeovers.
3.1
3.1.1
Going Public
Access to the Capital Market
Ritter and Welsh (2002) argues that the main motive for companies to go public, is the desire to raise equity capital for the firm and to create a public market in which the founders and other shareholders can convert some of their wealth into cash at a future date. Nonfinancial reasons only play a minor role when taking the decision to enter a public market. Ritter and Welsh (2002) also found evidence that signifies the importance of both favorable market conditions and that the firms have reached a certain stage in their life cycle to go public. Maksimovic and Pegaret (2001) focus more on going public as a strategy to add value to the firm. The decision to trade the share on a public market may encourage more trust in the firm from investors, creditors, suppliers and customers. They also point out that being the first public traded company in an industry can provide a first-mover advantage. Another perspective is to view the going public process as an exit strategy for the entrepreneur or the venture capitalist. Zingales (1995) argues that it is much easier for a potential acquirer to spot a potential takeover target when it is public and the entrepreneur can sell the company for a higher value compared to a private sale. Brau et al. (2003) follows the same path, but implies that the owner objectives of going public through an IPO is both to retain control of the company and sell shares to increase personal wealth. Pagano et al. (1998) studies strengthen the view of an IPO as a stage in the sale of a company. His facts demonstrate that in the three years after an IPO the earnings of the controlling group is larger than average. According to Pagano et al. (1998) there is a difference between the nature of the companies that goes public in Europe and in the United Sates. In Europe the companies are usually more mature and have a motive of paying down debts rather than financing growth, while a public listing in the United States is viewed more as an ability to raise capital for investments and growth. These intensions may be the consequence of an average age of 40 years of the firms going public in Continental Europe (Rydqvist and Högholm, 1995), in contrast to the United Stats where many startup companies finance their growth by going public. Pagano et al. (1998) also distinguish between independent companies going public and carve-outs. While independent companies? main target with an IPO is to rebalance their accounts after a period of high investments and expansion, carve-outs want to maximize the earnings from selling shares in a subsidiary. A major benefit of going public according to Pagano et al. (1998) is the opportunity for companies to access cheap capital. When it is time to enter the stock exchange, the interest
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rate on short-term credit falls and the numbers of banks willing to lend money will rise. After the IPO, the firms can reduce the concentration of their borrowing and borrow money from a larger pool of banks. The enhanced public information linked with the listing and stronger bargaining power in relation to banks generally results in a reduction in the cost of bank credits. Shares that are traded on a public stock exchange are cheaper than those that are traded of private companies, which have made it possible for small shareholders to trade on a short notice. This affects the diversification of initial shareholders and the liquidity of the companies stocks and may as well be the base of the going public decision making. The companies which choose the motive of diversification to go public are as well more risky according to Pagano (1993). The Clustering of IPO?s are something very common according to Ljungqvist (1995). If there is a positive stock market valuation of companies in the same industry, than it is more likely to experience further IPO?s from the specific industry. However, the clustering of IPO?s may be reflected from both industries with good opportunities of development and owners attempt to make use of a miss-pricing in the sector. (Pagano et al, 1998) 3.1.2 Obstacles for Going Public
A factor that may influence companies to stay private is disclosure rules from the stock exchange. Companies are forced to unveil information that may be crucial for their competitive advantage, such as ongoing research and development (R&D). They also expose them for close inspection from tax authorities, which reduces the possibility of tax avoidance compared to private companies. Besides this, there are significant costs of going public. The direct costs are the underwriting fees and registration fees and then there are yearly costs in terms of certification, auditing, stock exchange fees et cetera. These costs may be an obstacle for smaller companies to go public since most of the costs do not increase proportionally with the size of the IPO. Although, the opportunity to access an alternative source of finance to banks more often overcome the costs aspects for companies with huge current and future investments. (Pagano et al, 1998) According to Gleason et al. (2005b) going public through an IPO can be a time consuming process. The process takes generally between six months and a year and a half, from the first day the company obtains an underwriter to the day the share will be listed. It is a complex route that involves prospectus, legal counsel, registration statement with the Securities and Exchange Commission and reviews to be accepted. Studies have shown that the IPO process can be financially costly and sensitive to change in industry as well as in market conditions. If the timing of the IPO is not right, the IPO may be delayed or even cancelled.
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3.2
3.2.1
Merger and Acquisition
Motives
There are extensive studies conducted that shows that mergers in general are greeted positively by the stock-market. Although, all of the gains are reaped by the shareholders of the targeted company while the shareholders of the bidders receive nothing. (Jensen, 1984) The efficiency theory is the theory most commonly used by companies when the management argues for and against the decision to acquire a company. They want to improve their business with help of the synergetic effects which is created through an acquisition according to the efficiency theory. The theory which is the most reliable, on the other hand, is the empire-building theory. The managers have other goals with the merger or acquisition then the company?s shareholders. (Trautwein, 1990) This has shown to have a large impact on the merger and acquisition decision. (Ravenscraft and Scherer, 1987) The acquisition does not have to be a rational and well planned decision from the targeting company. (Power, 1983)
Net Gains through synergies Merger as rational choice Merger benefits bidder?s shareholders Wealth transfers from customers Wealth transfers from target?s shareholders Net gains through private information Merger benefits managers Merger as process outcome Merger as macroeconomic phenomenon
Figure 1: Theories of Merger Motives (Trautwein, 1990)
Efficiency theory Monopoly theory
Raider theory Valuation theory Empire-building theory Process theory Disturbance theory
Within the field of motives for mergers and acquisition there are seven different theories to be found. (Trautwein, 1990) The efficiency theory is based on the view that mergers are planned to achieve synergies and that there are three different kinds of synergies. It is argued that a large part of the mergers are undertaken with the motive to create synergies. (Jensen, 1984) The first synergy is the lower cost of capital, and goes under the name financial synergies. This can be achieved in three ways, either to invest in business which is not related to what the bidder is doing, or invest to increase the size of the company and by that get access to
10
cheaper capital. The third alternative is to create an internal market which will thrive on superior information and by that be more successful in capital allocation. Operational synergies are founded on the view that winnings can be gained from combining operations of traditional separate units such as sales force or knowledge transfers. This may lower the cost of the business units which is involved in the operation. The transaction cost is also proved to be lower in a large company then in smaller firms (Coase 1937). Managerial synergies are found when the bidder?s managers posses a superior planning and monitoring ability then the target?s management and by that be able to increase the target?s perfo rmance. If the capital market is efficient then the efficiency theory can be held, but if one regards financial statements to be more reliable then stock market prices, the efficiency theory can be rejected. (Trautwein, 1990) The efficient market hypothesis (EMH) implies that share price mirrors all the information available on the market. (Fama, 1991) The foundation behind the monopoly theory is that the mergers are planned to gain market power. To be able to hit the target the mergers have to be in the form of a horizontal acquisition. One of the benefits with the monopoly theory is that it open up for the company to cross-subsidize their products. They can use profit from a market where they have a high market share and use it in an other market where they want to expand. It will also help to limit the competition in more then one market. Jensen (1984) argue that the monopoly theory do not work with the argument that the stock price should rise with a merger announcement and drop if the merger is challenged or cancelled. It is shown that the stock price does not drop at the latter events and by that the monopoly theory can be rejected. (Trautwein, 1990) The valuation theory is based on that the managers that perform the merger have better information about the value of the target firm then the stock market. The valuation theory strives on that the information that is available for the public is reflected in the stock price. If the bidder owns some knowledge about the company it should be revealed after the bid which will leave the bidder in a winner?s s-curve situation. The big difference between the valuation theory and the other theories is that it recognizes the role which uncertainty plays in strategic decisions such as mergers. (Trautwein, 1990) The empire-building theory is based on Baumal?s (1959) model which shows that separation of ownership and control of the company creates a free-rider problem. In this theory the merger is planned and executed by the managers of the firm to create value for them instead of the shareholders of the firm. Black (1989) shows in his study that managers overpay for the target?s shares, because they are overly optimistic and their interest are different from the shareholders interest. This is known as the overpayment hypothesis. Walsh (1988) report shows that companies with high merger activity have a higher executive turnover than non-merging companies. It has been proved that empire-building aspects has some to do with merger decisions and by that this theory is given the most credit of the merger motive theories. (Trautwein, 1990) The process theory originates from the literature of strategic decisions. The decision is not based on rational choices but as an outcome of processes such as the decision process. The theory argues that individuals are limited when it comes to information processing and by that some simplifications have to be used in the decision process. Researchers such as Power (1983) have shown in his study that many acquisitions are not a rational decision; there is lack in the planning of the acquisition. (Trautwein, 1990)
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The raider theory focuses on wealth transfers; the “Raider” is a person whom causes wealth transfers from the targeted company and by that, from its shareholders. In a successful bid the raider pays other stockholders a premium to become the controlling stockholders of the company. The problem with the raider theory is that research has shown that the targeted company?s shareholders in general gain from the acquisition which has been previously pointed out by Jensen (1984). Gorth (1969) argues that when there are disturbance in the economy, as in the 70?s during the oil crises, there are an increase in mergers and acquisitions. In 1987 we could se an increase in mergers and acquisition as well due to the economic disturbance in the American finance market. The disturbance causes changes in expectations and the uncertainty level increases. Eis (1970) argues that this results in a merger wave. These merger waves could be observed during the oil crisis in the 70?s but a counterexample is the merger wave during the 60?s where no economic disturbance can be seen. (Trautwein, 1990)
3.3
3.3.1
Reverse Takeover
Low Quality Firms Use Reverse Takeovers
Adjei, Cyree and Walker (2007) describe reverse takeovers as a “back-door” to the market. They focus on analyzing the private companies that choose to go public by using the reverse takeover method. The data is collected from IPOs and reverse takeovers done on New York Stock Exchange (NYSE) and NASDAQ in 2000-2002. A common perception about reverse takeover is that companies use the method as an IPO alternative, and do so because the companies do not fulfill the requirements for a regular IPO. The result from the study by Adjei, Cyree and Walker (2007) indicates that the above statement is not completely correct. Only 1,4 percent of the reverse takeover firms did not meet the initial listing requirements for both NYSE and NASDAQ. “The low proportions of reverse merger firms that are unable to list indicate that the inability to list is not a driving force in choosing this method of going public.” (Adjei et al, 2007) Their research also examines the post performance and features of the private firms that use the reverse takeover method. The result shows that a company with poor performance, relatively small turnover and short history, prefers reverse takeovers compared to IPO?s. This support the general picture of the reverse takeover, low quality companies choose the reverse takeover to go public and high quality companies choose the IPO method. Adjei, Cyree and Walker (2007) conclude that the determinants of reverse takeovers for listing differ on NYSE versus NASDAQ. The reverse takeovers on NYSE are determined by the performance and the firm size, whiles on NASDAQ the reverse takeovers transactions are determined by operating history, performance and firm size. As discussed above the general view of reverse takeover is that low quality companies use the method to get a quick listing, which should not have been possible by a regular IPO. Researchers have found some interesting results that confirm the general view. The study examined the ex-post survival data for reverse takeovers and compared the data to the expost survival data for IPOs during the same time. After three years 42,7 percent of the re-
12
verse takeovers were delisted and only 27 percent of the IPOs were delisted. (Adjei et al, 2007) The high percentage of delisting companies in the reverse takeover sample can be explained, according to Adjei, Cyree and Walker (2007), by the lack of underwriters. “Reverse mergers do not have underwriters and hence do not get the support in the aftermarket following the issue.” (Adjei et al, 2007) The conclusion of the study is that private investors should be very careful when they invest in a company that used reverse takeovers to go public. The companies are in general young and have lower performance compared to the IPO?s, which can lead to delisting and a bad investment for the private investor. The same can also be said about the investors in the firms that choose the reverse takeover as a way to get their company listed. A strict examination of the shell company and their performance before the takeover can be crucial for the future performance of the new company. (Adjei et al, 2007) 3.3.2 The Importance of Reverse Takeovers
The research conducted by Gleason, Rosenthal and Wiggins III (2005) analyses 121 reverse takeovers in the US from 1987 to 2001 and point?s outs some of the characteristics for both the public firm and the private firm. According to the study 27 percent of the public and private firms operate in the same industry when the reverse takeover takes place. This can be explained by potential synergies that can be made after the takeover. But the study also points out that 15 percent of the reverse takeovers moved to another industry after listing. (Gleason et al, 2005a) The shareholders in the public firms can benefit from the announcement of a reverse takeover. In poorly performing public firms the reverse takeover can offer the shareholders an opportunity to increase their wealth, which they may not have without the reverse takeover with the private firm. The gain can be significant upon announcement, but in the long term perspective the increase in shareholder value is little or none. (Gleason et al, 2005a) The conclusion is that revere takeovers are important for the financial market and the investors. The method gives under performing companies the possibility to go public without the high cost associated with a more regular listing method such as the IPO. Through a reverse takeover, the private firm can decrease the listing costs and the temporary uncertainties inherent in the IPO-process, and avoid the regulatory inspections also involved in the IPO process. (Gleason et al, 2005a) “Thus, while reverse mergers provide an alternative means of going public and may reduce some of the agency costs of distress, they do seem to involve considerable risk and often fail to generate long-term wealth for the shareholders of the post-event firm.” (Gleason et al, 2005a)
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3.3.3
Future Development of Reverse Takeover Firms
Gleason, Jain and Rosenthal (2005) compare reverse takeovers and self-underwritten IPO?s with regular underwritten IPOs. The result show that reverse takeovers have significantly lower return on asset (ROA) in the year the transaction is performed compared to a regular IPO. The return on equity (ROE) shows however no difference between firms that use the reverse takeover method compared to firms in similar industry that use the IPO to go public. (Gleason et al, 2005b) The balance sheet can also differ between reverse takeover firms and IPO firms. The balance sheet?s liquidity for a firm that uses a reverse takeover is significantly lower than for the IPO firm. This can increase the likelihood for financial distress and greater financial leverage in the future. (Gleason et al, 2005b) The future development for the firm can also depend on what method they choose. Two years after going public, the firms that were listed through a reverse takeover are less profitable in terms of ROA. The balance sheet liquidity is lower and the same reflects the priceto-sales ratio development for the reverse takeover firms. One notation can however be made, the financial leverage, ROE and price-to-book ratio are no different than the IPO firms after a two year period. (Gleason et al, 2005b) Gleason, Jain and Rosenthal (2005) also examine the stock market performance after the reverse takeover. The comparison between IPO firms and reverse takeover firms shows that reverse takeover firms are characterized by higher share price volatility and a significantly lower liquidity. The institutional ownership in an IPO firm can sometimes be quite high but differs between firms and industries. However, in reverse takeover firms the level of institution ownership is in general low. (Gleason et al, 2005b)
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4
Empirical Findings
The empirical findings are based on telephone interviews and a sample of reverse takeovers conducted by the authors. The interviewees have in general been of similar opinion and provided similar information regarding reverse takeovers. The interviewees that have emphasized a certain topic have been the one which the authors have chosen to refer to in order to avoid duplicating information.
4.1
Transaction structure
The structure of a reverse takeover can differ from case to case. When analyzing the reverse takeovers taken place at OMX Stockholm, there are some variations but the overall picture shows more similarities than differences. According to Per-Anders Tammerlöv, Mangold Fondkommission, the most common structure is that a small listed company buys a larger private company and pays with new issued shares. Using the shares, the private company´s shareholders will become the majority owner of the listed company and the private company will be listed on the stock exchange. The transaction is a non-cash transaction and the payment consists only by shares in the listed company. (P. A. Tammerlöv, personal communication 2007-11-09) Johan Malmberg, Catella Corporate Finance, state that there is times when the business activity of the public company is transferred to a new established subsidiary. The shares of the new company will then be offered to the owners, according to Lex ASEA, and in the most cases be listed on a smaller exchange or the same exchange list as the original company. After the removal of the business activity the only value left of the empty shell is the listing place, which can be used by a private company to go public. During the same period as the non-cash transaction is taking place the public company can also attract new capital by using a new right issue. (J. Malmberg, personal communication 2007-11-13)
4.2
Motives
A reverse takeover is a method companies use to go public and can be seen as an alternative to the more common listing method, an IPO. Both methods have pros and cons, but some motives why companies choose a revere takeover to go public instead of an IPO can be found. One fundamental motive why companies choose reverse takeover is the fact that the transaction can be carried out without any publicity until the deal is 100 percent done. A reverse takeover does not have the same obligation to share information as an IPO has. When the media get the knowledge of a reverse takeover through a press release, the transaction is already finished. The two companies and their advisors can work undisturbed with the deal and if the deal somehow does not carry out, the media or the public is without knowing and no damage is caused to the company. (P. A. Tammerlöv, personal communication 2007-11-09) Tammerlöv stresses that an IPO is more dependent on the publicity around the transaction. An offer to the public has to be promoted by the media to get as many as possible to sign up for the offer and buy shares in the company. If for some reason the offer turns out to not be fully covered, the IPO has to be stopped and drawn back and the company can not go public. This can be devastating for the company; bad publicity and loss of potential
15
investor are only some of the consequences caused by a failed IPO. A reverse takeover can be carried out without the publicity and therefore the consequences of failed IPO are fare worse than the consequences of a failed reverse takeover. (P. A. Tammerlöv, personal communication 2007-11-09) Another motive for choosing a reverse takeover as a method to go public can be the hard competition at the stock exchange. For example there are as many as 18 real estate companies listed at OMX Stockholm. If a new real estate company tries to go public it can be hard to attract investors if the new company does not have a unique profile. The reverse takeover method can then be the only option for the private company without a unique profile to go public. If the company chooses to go public through an IPO the company needs to have a unique profile to attract new investors and to able to list the company?s share. This problem can then be solved by a reverse takeover which is common when listing companies in industries like production or real-estate. (P. A. Tammerlöv, personal communication 2007-11-09) According to Malmberg, the time factor is an important underlying motive when creating a reverse takeover transaction. An IPO demands at least audited financial reports over six months and a listing process which usually takes nine to twelve months. A reverse takeover could provide a faster introduction to the stock market. If there is an agreement on both sides, the company can call for an extra shareholder?s meeting, which takes four weeks. A fter that the issue should be registered at the Swedish Companies Registration Office and reviewed by the Swedish Financial Supervisory Authority, which could take two to three months. When the private company is listed through a reverse takeover the shares are listed on the observation list until all the auditing is done and all the requirements from the stock exchange are met. The fact that the auditing is executed after the stock is listed is the most conclusive detail that makes the reverse takeover method faster than a regular listing process. The average time period for a reverse takeover is three months, which is shorter than a regular listing process. Even if Malmberg emphasis the time factor as the main motive behind a reverse takeover, he also points out that the possibilities to make use of the listed company?s loss carry forward could be a reason of carry out the transaction. The use of loss carry forward is highly regulated, therefore should companies employ a forecast that is driven by tax planning. (J. Malmberg, personal communication 2007-11-13) The loss carry forwards can provide tax advantages, but should not be viewed as a main motive to get listed trough a reverse takeover. (M. Löfgren, personal communication 200711-26) Mats Löfgren, Strict, has the same opinion about the time factor as a main motive to carry out a reverse takeover, but takes another perspective. The private company can concentrate on the daily business and do not have to set aside time for meeting potential investors and trying to obtain capital. As a result, the company?s business activity is not harmed while the listing process is carried out. (M. Löfgren, personal communication 2007-11-26) It is hard to find any specific cost advantages for a reverse takeover compared to other going public alternatives, example an IPO. The method can be seen as a transaction with less complexity than an IPO and therefore the cost can be reduced. This can create a small cost advantage when it comes to the advisory fees and management time for the reverse takeover. In an IPO process the company receives new capital to fund future expansion and costs and the advisory fee is based upon the amount of new capital the company rece-
16
ives. In a reverse takeover the company does not receive any new capital and can therefore overlook the advisors percentage fee. (P. A. Tammerlöv, personal communication 2007-1109) A reverse takeover can be beneficial for both the private and the public company. The private company wants a trouble-free access to the capital market for future expansion or the ability for the investors to get a price of their investment. The public company is often performing badly and the shareholders can then take advantage of the private company?s performance and hopefully see their investment increase in value. Even if the public company gets benefits from a reverse takeover, the initiative to the transaction is most often taken by the private company. According to Staffan Bernstein, Evli Bank, most of the initiatives for the reverse takeover transactions are taken by an investment bank or other advisors to the private company, which sees an opportunity to list a private company through a reverse takeover and at the same time increase the value for the shareholders in a poorly performing public company. (S. Bernstein, personal communication 2007-11-20) According to Löfgren, both private and public companies are just as active to take the first initiative to make a reverse takeover. Private companies are aware of the advantages that a reverse takeover provides, while public companies with bad performance over a longer time period sees it as an opportunity to turn the negativity around. (M. Löfgren, personal communication 2007-11-26) Stock exchanges and market places have different regulations when it comes to the minimum amount of shareholders in a company, the company should have on average 200-300 shareholders depending on the regulations on the specific stock exchange. However, a large shareholder base should not only be viewed as a demand from the stock exchange; instead it is a primary factor when companies choose to go public through a reverse takeover. (M. Löfgren, personal communication 2007-11-26)
4.3
Potential risks
Buying another company can sometimes generate risks for both the shareholders in the buying company and the acquired company. During the preparations for the reverse takeover the two companies? advisors analyze potential risks and tries to minimize them by an accurate due diligence. The due diligence process analyses the performances and the economic situation for the company, and are used to reveal unforeseen difficulties. Tammerlöv stresses that problems may occur during the change between the old and the new management. During this period most of the potential risk is generated. Unforeseen cost can come up and it has to be settled who is responsible for the costs, the old or the new management. Example of costs that can generate problem is costs for extra audit or advisory. The old management can also have a performance based incentive program which the new management can have some problems handling. (P. A. Tammerlöv, personal communication 2007-11-09) One of the most substantial risks is the possibility that new creditors may occur when the new company is created by the reverse takeover. Most of the listed companies in a reverse takeover is performing badly and has none or very little profit. When the new company is created through a reverse takeover and new capital is transferred to the company old creditors may see their chance to get their money back, which they before the reverse takeover had seen as a credit loss. These creditors are impossible for the new company to take into account because they are not there when the due diligence is done. If the public company
17
shifts out the business activity to a new established subsidiary it is important that these responsibilities follow in to the subsidiary. Malmberg argues that in order to minimize risks and upcoming difficulties it is crucial to carry out a due diligence that covers tax, legal and financial aspects. (J. Malmberg, personal communication 2007-11-13) As discussed above, publicity can be seen as something positive but less publicity can also have a negative effect on a reverse takeover. The media focus more on IPO?s, which results in low public awareness about the current reverse takeover as well as potential investors do not have sufficient knowledge about the company. The costs of a reverse takeover vary from case to case and it is not possible to give a straight answer of which transaction that provides the lowest costs of an IPO and a reverse takeover. (P. A. Tammerlöv, personal communication 2007-11-09) A reverse takeover is often performed with the impression that it is a shorter and less complex process than an IPO. In most of the reverse takeovers the stock exchange requires less of the company that is planning to enter the market, for example the audit and information to the market is not as regulated as for an IPO. However, in some cases the stock exchange can require more extensive information about the reverse takeover like the process for a regular going public transaction. When performing an IPO the stock exchange requires that the company should notify the market by using a prospectus with all the essential information about the company, such as financial history, owner structure and other vital information about the company. This is not a requirement for a reverse takeover, instead the company can go public without making a prospectus and notify the market about the transaction using a press release. (S. Bernstein, personal communication 2007-11-20) According to Bernstein, the stock exchange can in some cases require a prospectus for the reverse takeover. This will then slow down the going public process for the company performing the reverse takeover. The result can then be that a company that are planning to get a fast access to the market by a reverse takeover, ends up with almost the same process as for an IPO with the longer time period and the higher requirements from the stock exchange. The reason why the stock exchange can call for extra information is that in some cases the reverse takeover will change the business for the listed company in such way that the stock exchange views the reverse takeover as a completely new company on the stock exchange, and therefore the new company should meet the same requirements as all the other going pubic candidates. Bernstein emphasizes the importance of an open dialog with the stock exchange to prevent this kind of implications when the main focus is to get listed as fast as possible. (S. Bernstein, personal communication 2007-11-20)
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4.4
Manage risks
To reduce the potential risks some actions can be made. Tammerlöv emphasizes the importance of an accurate and precise due diligence. The due diligence process can if it is done right minimize, but not eliminate, the risk that are associated with a reverse takeover. The sales and purchase agreement is also one of the most important parts of the process to minimize the risk. The agreement has to be well formulated to avoid questions of which part that should be responsible for the costs that are involved in the transaction. If the agreement is formulated properly the unforeseen costs like extra audit and advisory and the risks associated with them can be reduced. (P. A. Tammerlöv, personal communication 2007-11-09) It is of great importance to analyze the balance sheet before the reverse takeover is carried out. A good thing is to have a dialogue with the Swedish Tax Agency before and during the process, to be shore that no indistinct problems come up later on. (M. Löfgren, personal communication 2007-11-26)
4.5
The public company
If one analyses the reverse takeovers that have occurred on the OMX Stockholm, some characteristics can be found concerning the listed company in the transaction. The listed company can be seen as small, both in turnover and in market capitalization. According to Tammerlöv the optimal listed company for a reverse takeover has a market capitalization of about 10 million Swedish kronor (SEK). He also emphasizes the importance of a small firm with little or none ongoing business. This makes the transformation to the new company much less complex than if the company had a large market capitalization and a lot of ongoing business to take in to consideration. (P. A. Tammerlöv, personal communication 2007-11-09) The shareholder base should in the optimal case consist of a few big owners. If the listed company is controlled by a few majority owners it is much easier to control the shareholder´s meeting and vote in favor for the transaction, this minimizes the risk of not completing the transaction. But on the other hand if the listed company is owned by a large shareholder base consisted of a large number of small owners, the private company can get a good spread with high liquidity in the new stock. A large shareholder base can be favorable as previously mentioned due to good liquidity but can be costly for the company when it comes to handling costs. (J. Malmberg, personal communication 2007-11-13) The listed company´s balance sheet is also of great importance. The optimal structure contains large loss carry forward which can be used to reduce the tax payment in the private company. Tammerlöv imply that it is common for large real estate companies to use a reverse takeover to go public and also reduce the tax payment which creates substantial value for the shareholder. (P. A. Tammerlöv, personal communication 2007-11-09) Public IT-companies have been suitable companies to perform a reverse takeover with, since they generally did huge losses after the IT-bubble. A reverse takeover can provide a second opportunity for the shareholders of the public company to regain some of the investment as well as the newly listed company can make use of the loss carry forward to balance the taxes of the profit. (J. Malmberg, personal communication 2007-11-13)
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4.6
The private company
According to Malmberg the reverse takeover should contain a profitable private company to fully satisfy all the involved parts. The profitable private company should be seen as a positive influence for the shareholders in the listed company and the loss carry forward should work as a tax reduction for the private company. Real estate companies have over the years had a special fondness for the reverse takeover transaction and Catella has been involved when Din Bostad, Klövern and Balder have been taking the back door to the stock exchange. Companies belonging to the manufacturing industry usually have the same characteristics as real estate companies, but manufacturing companies have preferred to go the traditional way in Sweden. (J. Malmberg, personal communication 2007-11-13) Löfgren argues that it is difficult to observe trends in specific industries, since the concept of reverse takeover is relatively new in Sweden. Instead, the reverse takeover itself should be seen as a trend, as people are more aware of the subject, newspapers writes more about it and the most important; companies are carrying out reverse takeovers more frequently today. Reverse takeovers were carried out as early as in 1987 after the market crash in the US, so worldwide is it not a new method to go public. This condition was repeated in Sweden after the IT-bubble and it is possible to say that after a crash there are many suitable shell-companies for a reverse takeovers. (M. Löfgren, personal communication 2007-11-26) A reverse takeovers could be a suitable transaction for any company as long as the company can prove a sufficient turnover, which also should be a guideline for all companies who consider going public. (M. Löfgren, personal communication 2007-11-26)
4.7
4.7.1
Reverse Takeovers in the Swedish Capital Market
Sample
The sample consists of reverse takeovers which have taken place on the Swedish financial market between the years 2001 to 2007. Most of the reverse takeovers have been taken place between small cap companies. This resulted in that small market places such as First North and NGM Equity been included in the sample, not only the Large-, Mid- and smallcap at OMX. If one should exclude the small exchanges the sample should not give an accurate view of the market. All together the sample consists of 20 reverse takeovers form all years and all stock exchanges, with information from both the private and the public company involved in the transaction. (See Appendix 3) 4.7.2 Profitability
When looking at the sample with focus on profitability, a pattern can be seen both in the private company and the public company. At first a majority of the public companies had negative profitability and very little or none on-going-business. The average profit for the 20 public companies in the sample was -7.6 million SEK. The most profitable company in the sample had a profit of 0.7 million SEK. The figures are based on the annual profit before the reverse takeover. (See Appendix 3) The private companies show another picture then the one for the public companies. A greater part of the private companies show a positive profit before the transaction. The average profit for the companies was 11.3 million SEK and the highest profit for one com-
20
pany was 120 million SEK. The numbers however are in some cases estimated numbers due to the fact that some of the companies have no background history because they are newly established companies. (See Appendix 3) 4.7.3 Industry
The sample shows an interesting pattern when looking at which industry they operate in. Of the public companies in the sample, 55 percent of them where operating in the information technology sector. In comparison to the five percent which operated in the production industry. (See Appendix 3) As previous discussed the optimal public company should have very little or no ongoing business and can be seen as an empty shell. Many IT companies grew at high speed during the golden IT era at the end of the 1990?s, and attracted a lot of investors to invest in their spectacular expectations. After the crash in the beginning of the 2000 many of the companies were unlisted from the stock exchange but some of them stayed listed. The companies that remained listed have little or no ongoing business. This phenomenon can be seen in the sample of the reverse takeovers where many of the old IT companies is used as a “back-door” to the market. The figure bellow illustrates the different industries for the public companies in the sample (Figure 2: Public Company).
Figure 2: Public Company (Industry)
When looking at the private companies in the sample, similarities between them can easily be found. Around 20 percent of the companies were operating in the real estate sector, but only 15 percent in the information technology sector. As argued before, companies that choose this type of transaction to go public are often profitable and have a business that can take advantage of the loss carry forward in the public companies. This is well illustrated in the sample, where the real estate companies can easily take advantages of the opportunity to reduce profit, and thereby the tax payments, by the loss carry forward in the public companies. The figure bellow illustrates the different industries for the private companies in the sample (Figure 3: Private Company).
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Figure 3: Private Company (Industry)
The sample of the revere takeovers taken place at OMX, First North and NGM Equity gives a good picture of the market as a whole. It is easy to see patterns and similarities between the reverse takeovers and analyze the situation. (See Appendix 3)
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5
Analysis
One part of the theoretical framework points out that going public can be a time consuming process (Gleason et al, 2005b). The term „going public? usually refers to the traditional way of getting listed, which is the IPO process. In Sweden the time for doing an IPO takes around nine to twelve months. The reverse takeover provides an alternative way of going public as well as the process is much more time efficient. Companies that transform their organisation from private to public through a reverse takeover transaction are able to reduce time, as this alternative transaction is carried out in a different way. After analysing the conditions on the Swedish financial market it was shown that a reverse takeover takes about three to six months. This can be explained by lower requirement from the stock exchange when it comes to financial history, auditing requirements and information given to the public in the form of a prospectus. Many of the requirements that follow by being a publicly traded company are fulfilled after the company is listed through a reverse takeover. There are not only positive aspects with a reverse process. When companies are listed through a reverse takeover, they get listed on the observation list until they meet the stock exchange?s requirements, which can create problems for companies. There are a few exa mples in the past of companies that have not left the observation list, since they do not live up to the requirements. The risk with staying on the observation list is that fewer people are interested in investing in the share due to higher risk. There is also a possibility that the company get de-listed from the stock exchange (Adjei et al, 2007). All the interviewees in this report have the same general opinion regarding the time factor; it is the main motive for going public through a reverse takeover. However, a reverse takeover does not obtain any external capital which is common when performing an IPO. This is important to take into consideration when comparing the two methods of going public. Companies that go through with a reverse takeover usually carry out a new right issue after they have been listed on a public market, while an IPO execute the new right issue during the listing process. From a capital obtaining perspective there is a slighter time difference between the two methods, since a reverse takeover is just a halfway point if there is a need of raising capital. A reverse takeover makes it possible for the private company to focus on their daily operations, while an IPO requires much more involvement and for that reason makes it a time consuming process. Even if the private company has a financial advisor, who does the main work in the listing process, it is not possible to ignore the fact that the management need to spend a substantial part of their time assisting the financial advisors. As a result, the daily operations at the company may suffer. It is for that reason understandable that the time factor affects the company?s costs, since a time consuming process generates higher costs for the company than a short listing process. A quicker access to the capital market can also be beneficial for the investors in the private company. Many of the private companies have shareholders that invest with the goal of selling their part of the company when it has reached a certain maturity. Listing a company could be one option for the investors to exit the company and to convert their personal wealth into cash, which according to Ritter and Welsh (2002) is one of the motives of going public. This could be done by an IPO or a reverse takeover. As mentioned before, a reverse takeover is quicker and they can transform their investment to a liquid asset and invest their money in a new project within a shorter time period.
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A quick and trouble-free takeover with a private company can be beneficial for the shareholders in the public company. The shareholders in a bad performing public company are often displeased with their investment and the reverse takeover can be viewed as the last resort to retrieve some of their invested capital (Gleason et al, 2005a). In many takeovers and acquisitions, one of the involved companies? shareholders can be against the transa ction. However, in a reverse takeover transaction both the public and the private company?s shareholders are usually positive to the transaction. The shareholders in the public company look upon the reverse takeover as a rescue from a bad investment and the shareholder in the private company view the reverse takeover as an opportunity to increase their wealth by getting a tradable asset. This makes it easier to smooth out the transaction process and make it as quick as possible. It is still important to be aware of that there is a possibility that the shareholders of the public company just want to recoup their investment into to cash. This provides a more negative picture of the reverse takeover transaction. If shareholders constantly sell their shares, there may be a significant downward pressure on the company?s stock. This could lead to a negative development for the trading activity as well as the investors may see the stock as unattractive, which can have an effect on the stock?s value. It is important that the board of directors of the private company does not get carried away, while concentrating on a quick entry on the market through a reverse takeover. Studies have shown that many acquisitions are not rational and that there is a lack of planning (Power, 1983). This could be a reality for companies that use a reverse takeover, as they make use of a method that is not the common one and a possible reason for choosing the reverse takeover transaction could be to save time, which effects the planning of the takeover. There are examples of unsuccessful reverse takeovers in the past, where there have been a lack of planning, forecast and due diligence and problems have therefore occurred at a later stage when the companies are already listed. In all capital market transactions a due diligence process is an essential part to ensure the quality of the transaction. Even if the private company are focusing on a quick listing process, it is still essential to not neglect the importance of the due diligence before the takeover. The time saved should not be saved by reducing the analysis and preparation before the reverse takeover. To make sure that the transaction is a rational choice a lot of information is needed before the reverse takeover (Power, 1983). As discussed before, if rushing through the due diligence process there is a risk that the decision to go through with the takeover may not be a rational decision. By analysing reverse takeovers made in Sweden, it is possible to see a repeated pattern of the public companies; they have in general a history of weak financial performance. This makes a due diligence in a reverse takeover even more important to minimize the risks of any unpleasant surprises such as old creditors wanting their money from the newly formed company. To prevent old creditors to put claim on the new company, a subsidiary can be created. By transferring all the liabilities and business activity to the subsidiary the problem with new unknown creditors will be limited to the subsidiary. The only remaining value of the listed company will then be a name and a listing place. This kind of method is recommended by some of the interviewees, to avoid potential problems in the future. The old saying that “time is money” is appropriate when talking about the cost aspect of reverse takeover. As discussed before, with an IPO the CEO and other executive officers of the company have to use a lot of their time to meet investors that are willing to invest in the company. This is costly for the company because their executive officers have to spend their time on the road and promote the IPO to attract capital instead of working within the company. A general belief when talking about reverse takeovers is that it provides cost ad-
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vantages in lower advisory fees compared with an IPO. However, the reason why the advisory fees are higher in an IPO process is because it raises new capital which is needed for the listing candidate and the advisors take a percentage fee of the capital raised. During the 20th century, takeover and acquisition waves have been found after economic disturbance in the financial market (Gorth, 1969). After the IT-crash which occurred in the beginning of the 21st century there was an increase of reverse takeovers. As a result of the crash, there were many shell companies which could be found on the stock exchange which were suitable for a reverse takeover transaction. The companies had large loss carry forward after a lot of investments but without any profit. This suited the private companies which wanted to enter the stock market with help of a reverse takeover. A common belief is that the companies which go public through a reverse takeover are low quality companies, which do not meet the requirements needed for a regular listing process. This has been proved wrong both in the theory and in the sample in this report. In that sample the most profitable companies are the real estate companies. The real estate companies with high profit are the ones that gain the most by using a reverse takeover instead of an IPO due to the loss carry forward. If the loss carry forward is one of the main motives for the company to go public through a reverse takeover it is very important to have an accurate valuation of the loss carry forward. Publicity is usually an important part when going public, both to attract new investors to the company and to promote the company itself. Publicity can also harm a company that is planning on going public. In case of sudden change of the market condition the listing process can be cancelled if to few investors have signed up for the share. This could be devastating for the company because it indicates that the stock is not attractive enough for the investors and the company may have problem with raising new funds in the future. When doing a reverse takeover the amount of publicity is low, as the transaction is between two companies and that the process can be hidden from the public until it is done. This can be viewed as an advantage if the reverse takeover would fail, since no one outside the company receive information about the failed takeover and therefore it does not harm the company. The low publicity can as well bring a negative side to the reverse takeover transaction. During an IPO the company set up road shows to attract capital. This road show does not only attract capital for the IPO, it is also an opportunity to inform the market about their company, product and business as a whole, which can generate future income. A reverse takeover is carried out in a different way and does not need the road shows, which makes it harder for companies that use this alternative transaction to promote their concept to the market. This could cause future problems partly for future income and future development of the stock. Maksimovic and Pegaret (2001) points out that a decision to trade the share on a public market may encourage more trust in the firm from investors and customers. However, when a company makes a reverse takeover, there is a risk that the stakeholders might be uncertain about the company?s trust. The empirical study shows that a reverse takeover can be as good as an IPO, if the transaction and conditions suits the company. It is still important to be aware of that the stakeholders might not have the same knowledge of these financial transactions and to use an alternative method that is known in media as the “back door” to the stock exchange could be viewed as a controversial decision and therefore harm the company?s image. The board of the company should inform their stakeholders and provide them with a background to their decision, in order to avoid these kinds of problems and to add trust to their company.
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One factor which could be decisive if a company should go public through a reverse takeover could be the private company?s lack of a unique profile. For instance, if there is a large concentration of companies within a specific sector that are already listed on the stock market, it could be hard to do a new entry within that sector. There is always a risk associated to invest in an IPO, the investor does not know how the market is going to respond to the new company. The investors usually choose to invest in the shares which impose the lowest risk as possible and therefore a unique profile or a new concept is needed to attract the investors when going through with an IPO. For those companies, without a unique profile, which want to enter the public capital market can make use of the back door to the market. This could be the answer to why many companies in the sample are real estate companies. There are already many real estate companies listed on the Swedish stock exchange and it could be hard for the new companies to attract investors for their IPO. There are many examples of real estate companies that have gone public through a reverse takeover over the years. It is possible to argue that this reality agrees with the theory that indicates that if there is a positive market reaction of a specific industry, then companies belonging to this industry often follow the same route (Ljungqvist, 1995). The empirical study reveals that manufacturing companies are as suitable for a reverse takeover as real estate companies, but there is no experience in this industry of going public through a reverse takeover. This could have caused a skeptical point of view against the reverse takeover transaction and no companies are willing to take the risk of being the first mover. An opposite situation has arisen in the real estate industry, where companies have carried out this alternative process as well as the outcome has been favorable. Private real estate companies and public IT-companies have in many cases created a reverse takeover together, as they have been suitable for each other. The effect of this is that a clustering of reverse takeover transactions has been created in these specific industries. The efficiency theory points out that a main reason for making a takeover is to find operational synergies between the two companies (Jensen, 1984). The study made in the U.S. show that one third of the companies that perform a reverse takeover do it within the same industry to gain potential synergies (Gleason et al, 2005a). This has generally not been a main motive for reverse takeovers on the Swedish stock exchange. Instead, private companies search for public companies that more or less looks like a shell, have an organization that are easy to transform and has a loss carry forward from past failures, as in the case of private companies taking over IT-companies in Sweden. Adjei, Cyree and Walker (2007) analyzed the reverse takeover method on the New York Stock Exchange (NYSE) and NASDAQ in 2000-2002. The outcome showed that companies that use this alterative way were less profitable than companies that chose to go public through an IPO and that they generally were bad performer. Reverse takeover transactions in Sweden demonstrate a different picture of the characteristics of the companies that go through with a reverse takeover. One of the most common and significant motive of the reverse takeover is to be able to use the loss carry forward from the shell company, to get tax reduction. This implies that the company must at least show some kind of profitability to get value of the loss carry forwards. The reason why Swedish companies that carry out a reverse takeover are generally more profitable than the American companies could have a relationship with the nature of companies that goes public in Europe and in the US. In Europe companies are usually more mature, while in the US there are many start-ups that are using a reverse takeover to reach a market listing (Pagano et al, 1998).
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6
6.1
Conclusion and Discussion
Conclusion
The time aspect is one of the most essential factors when discussing reverse takeovers. In this report we argue that a reverse takeovers is a faster process than an IPO, the private company can acquire a listing spot at a stock exchange fairly quick and take advantage of the capital market. It takes almost half the time period to go public through a reverse takeover compared to the listing process for an IPO. There are two main reasons for the shorter listing process, the first is that a reverse takeover is a transaction between two companies and the IPO is a transaction between one company and the public. The second reason is that reverse takeovers also face lower requirements from the stock exchange. The time factor is with no doubt a vital part when deciding to go public through a reverse takeover. A shorter time period can also lower the cost for the private company when deciding to go public. By decreasing the time period, the advisory fees get lower and the private company?s management team can focus on increasing the revenue for the company instea d of spending time on the listing process. However, the lower cost is not a main factor when deciding to go public through a reverse takeover but should be seen as a positive feature for the reverse takeover. Many of the reverse takeover transactions in Sweden were done to take advantages of the loss carry forward in the public company. The possibility to reduce tax payments and go public at the same time can we see as another main factor why companies choose to use the reverse takeover technique when going public. We believe that the loss carry forward in poorly performing shell companies at the stock exchange is one of the reasons why so many of the private companies have a quite large profit when they decide to do a reverse takeover. If the company does not show any profit the loss carry forward is useless and one of the factors that are decisive for making a reverse takeover is then vanished. As stated before a reverse takeover is a transaction between two companies and the information about the transaction has to be published only when the deal is done. This exposes another factor behind the choice to go public through a reverse takeover, the low publicity during the process. A private company can go public without the risk of having to stop the listing process before the company is listed. By taking the back door to the capital market the private company can in some way ignore the current market condition because the transaction is not depending on the demand for the company?s stock. This makes a reverse takeover a good alternative for companies without a unique profile. If performing an IPO the company will be compared to other already listed companies with the same profile and because it is common to see a new company as a high risk alternative, the company can then have a problem to attract enough investors to sign up for the IPO. A recognized pattern on the financial market is that reverse takeovers are carried out more frequently after a market crash. A huge downfall on the market provides a favourable condition for reverse takeovers, as there are several companies that have the characteristics that resemble a shell and for that reason makes them suitable for a reverse takeover transaction. This agrees with what we have seen in Sweden, since private companies started to go public through reverse takeovers after the IT-crash. Many IT-companies experienced huge losses and did never recover after the crash, which made them suitable object for a reverse takeover transaction. It is therefore understandable why there have been a large quantity of public IT-companies involved in reverse takeovers in Sweden. We have seen a
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different outcome for the private companies that carry out a reverse takeover. There has been a wide spread between the industries, but it has been noticeable that the quantity of real estate companies has increased in the recent years and we believe that this proportion will increase even more in the future. The empirical findings also show that reverse takeovers are most frequently used by profitable private companies in Sweden, which look for a less time consuming process than an IPO. The reason why many profitable private companies and underperforming public companies have carried out a reverse takeover together is because they are each other?s contrast and the effects of the takeover are beneficial for both sides as they can take advantage of the losses, profits and shareholder base from both companies. The reverse takeover transaction is still a new financial technique in Sweden and there will be clearer trends in the future. We consider the reverse takeover transaction itself as a financial trend in Sweden. A trend is usually known as a general movement on the market, either an increase or a decrease and the quantity of companies which have used the reverse takeover transaction to go public have increased during the 21st century. Our impression is that going public through a reverse takeover can still be viewed as a controversial decision, since it is an alternative method to the IPO. We believe that this will change, since more financial advisory companies are specializing on the reverse takeover, which will result in more of their clients going public through this transaction in the future. Media in Sweden have never focused as much on reverse takeovers as it does today, which will affect the awareness and knowledge about the transaction in the future. We believe that the loss carry forward should be a secondary motive for going public through a reverse takeover, since the loss carry forward is difficult to evaluate and set a precise value of. Companies which have focused too much of getting tax advantages from the loss carry forward have in many cases run into future problems since they have estimated an incorrect profit. It is also important to reflect on the reverse process that the reverse takeover provides. A few companies in Sweden have been harmed of the reverse listing process, as they have not been able to live up to the requirements from the stock exchange after they were listed on the observation list. This has resulted in a much longer time period on the observation list or even a de-listing from the stock exchange. Some companies that have performed a successful reverse takeover process have still found it difficult to establish a sufficient trading activity in the stock. The shareholders of the public companies has usually been positive to a reverse takeover transaction, as they want to recoup as much of their investments as possible. This creates a downward pressure on the company?s stock, since the selling side will be much bigger than the buying side. We believe that planning and a careful due diligence process is the only method to minimize risks when going public through a reverse takeover. The due diligence is even more important for reverse takeovers than for other transactions, since the business agreements are in general with companies that have a history of weak performance.
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6.2
Reflections
The authors found inspiration to this thesis when reading the Swedish business press. Several articles have been written about reverse takeovers during the last couple of years, but the articles have almost exclusively seen reverse takeovers as something controversial or negative. The reverse takeover between Daydream and 24hPoker has received a lot of attention in the business press and enlighten the importance of accurate planning and valuation during a reverse takeover. The authors found the subject very interesting and wanted to analyze the factors behind a reverse takeover and why private companies decide to go public using this alternative compared to the regular IPO process. In the beginning of the work with this thesis the authors found out that very little research has been done within the subject reverse takeovers or alternative ways to go public. The little research that has been done is basically based on the US market and the performance of the stock after the reverse takeover, but no research about the factors or motives behind a reverse takeover. The authors believe that as a result of a more frequent usage of reverse takeovers as an alternative more research will be produced to fully analyze the phenomenon. During the work with this thesis the authors have reflected over a growing acceptance and positive view of reverse takeovers. The perspective has changed from a controversial alternative for bad performing companies to enter the stock exchange to an accepted alternative for well performing companies to get a quick access to the capital market as well as taking advantage of lower tax payments or other structural advantages associated with a reverse takeover. The authors believe that reverse takeovers will become more and more accepted as an alternative to the regular listing process and can in the future be seen as a cleaning act to get rid of bad performing shell companies at the stock exchange, and give new and better performing companies the possibility to take advantage of the capital market.
6.3
Critique of Chosen Method
After the research have been conducted the authors of this report realised that the method of research could have been done with more accuracy. To have a higher reliability in the sample it could have been an alternative to increase the number of companies involved in reverse takeovers by looking at smaller market places such as Aktietorget. The sample have the span from 2001 to 2007 with help of companies from Aktietorget the sample could have been more up to date compared to the current sample in this report. Even though Aktietorget is a rather small market place, it is still quite active when it comes to reverse takeovers performed. There could also have been the alternative to do a case study. The case study of companies which are performing a reverse takeover or has performed a reverse takeover would help the researcher to gain insight in how a reverse takeover affects the involved parties. The authors of this report decided to talk with the people with the greatest knowledge of reverse takeovers to be able to create an overall image of how the reverse takeover is conduced. A case study would have given the authors the possibility to gather information from the stakeholders within the firm through interviews done with shareholders, board of directors and employees in the firm.
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6.4
Further research
When finalizing the thesis the author became aware of that the researched subject can be analyzed from different angles to get broader perspective of reverse takeovers. It could be of interest to analyze reverse takeovers from a shareholder?s point of view, can a shareholder in a bad performing company receive greater value if the company is merging with a private company? And if that is the case, can an investor systematically invest in bad shell companies on the stock exchange and hope for a reverse takeover with a better performing private company? This approach focuses more on the development of the stock price after a reverse takeover and can then bee compared with previous research about the stock price after a reverse takeover done in the US. Another further research approach of interest is gather empirical findings from the private companies? shareholder, board of directors and management to analyze reverse takeovers from another perspective than this thesis. Finally, this thesis could be used as a basis for a comparison between Sweden and other countries such as the US or other European countries, with focus on the factors behind reverse takeovers and the risks associated with the transaction.
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Appendix 1:
Definitions
Due diligence process
The name of the process where lawyers and accountants go through the books of a company to reassure that the potential buyers know everything worth knowing about the firm, liabilities et cetera. This is an important process med prior to an acquisition. Occur when a company decide to introduce a subsidiary or division into the stock market with help of an IPO. First North is an alternative marketplace for small growth companies. First North is a part of OMX Nordic Exchange. (omxgroup.com, 2007-11-27) A company?s entry on the stock market and its first sale of stock to the wider public. Lex ASEA is the general term on the Swedish tax regulation which can be found in chapter 42 16-16a §§ in the Swedish Income Taxation Law. Lex ASEA regulates the main company?s dealing out stocks from the subsidiary to the main companies owners. By that the taxation can be postponed until the receiver of the subsidies stocks decide to sell off his part. (Skatteverket.se, 2007-11-27) Losses which can be used as a tax shield to reduce the taxable income in future years. The value of the shares of a listed company. Calculated by taking the shares times the current share price. This as a way of measuring the size of a company. A discounted offer to buy new shares made to the shareholders of a listed firm. Nordic Growth Market (NGM) is an Exchange under the supervision of the Swedish Financial Supervisory Authority. NGM offers listing and trading on the NGM Equity list and trading in derivatives on the Nordic Derivatives Exchange (NDX). (ngm.se, 2007-11-26) OMX Nordic Exchange serves as a central gateway to the Nordic and Baltic financial markets. Companies on the Nordic Exchange are divided into three segments: Large Cap, Mid Cap and Small Cap. Nordic companies with a market value over one billion euro are presented within the Nordic Large Cap segment. Companies with a market value between 150 million and 1 billion euro are contained within the Mid Cap segment, while companies with a market value below 150 million euro are contained in the Small Cap segment. The segments are revised every six months, on 1 January and 1 July, based on the weighted average price for May and November. (omxgroup.com, 2007-11-27) A document which contains the companies business, financial his-
Carve-outs First North
Initial Public Offering (IPO) Lex ASEA
Loss carry forward Market capitalization
New rights issue NGM Equity
OMX (Nordic Exchange)
Prospectus
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tory, performance, and capital structure. This document has to be published prior to issuing shares to the public. Reverse Takeover A public company acquires a private company through non-cash issue directed to the owners of the private company. The private company will then become majority owner in public company through the shares. The result is subsequently that the private company acquires the public company, and takes over the listing place. In this report reverse takeover refers to the transaction also known as reverse acquisition, reverse transaction and reverse merger. A contract that reassure that the buyer purchase and the seller sell a product or service, which protect the interest of both parties before the deal is closed. A company with no business activity or assets. It exists only as a name and a place on the stock exchange.
Sales and Purchase Agreement (SPA) Shell company
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Appendix 2:
Questionnarie - Omvända Förvärv
1. Hur ser transaktionsstrukturen vanligtvis ut vid ett omvänt förvärv?
2. Vad kan gå fel vid ett omvänt förvärv?
3. Vilka aspekter bör man lägga extra fokus på för att minimera potentiella risker?
4. Går det att utläsa några specifika motiv till att företagen väljer att notera sig genom ett omvänt förvärv, jämfört med en IPO?
5. Vilka fördelar resp. nackdelar finns det med en notering via ett omvänt förvärv?
6. Hur skiljer sig noteringsprocessen vid ett omvänt förvärv i jämförelse med en IPO?
7. Hur skiljer sig kostnaderna vid en notering genom ett omvänt förvärv jämfört med en IPO?
8. Hur lång tid tar ett omvänt förvärv att genomföra?
9. Vilken typ av bolag är lämpade för att noteras genom ett omvänt förvärv? (Ägarstruktur, Omsättning, Bransch, etc.)
10. Hur ska det optimala noterade bolaget (börsplatsen) se ut, för att genomföra ett lyckat omvänt förvärv?
11. Går det att utläsa trender/mönster inom omvända förvärv? (Vilka bolag är aktiva just nu, etc.)
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Appendix 3:
Reverse Takeover Sample
38
doc_604613186.pdf
In business, a takeover is the purchase of one company (the target) by another (the acquirer, or bidder).
JÖNKÖPING INTERNATIONAL BUSINESS SCHOOL
JÖNKÖPING UNIVERSITY
R everse Take over
A Back Door to the market
Bachelor Thesis in Business Administration Authors: Håkan Fältmars Joel Svensson Martin Thorstensson Gunnar Wramsby December 2007
Tutor: Jönköping
JÖNKÖPING INTERNATIONAL BUSINESS SCHOOL
JÖNKÖPING UNIVERSITY
Omvän da Förvärv
Köksvägen till börsen
Kandidatuppsats inom Företagsekonomi Författare: Håkan Fältmars Joel Svensson Martin Thorstensson
Handledare: Gunnar Wramsby Jönköping December 2007
Acknowledgements
We would like to thank all our interviewees for their contribution to this study. Their experience of the financial market and knowledge about reverse takeovers has made it possible for us to conduct this research. We would also like to thank our tutor Gunnar Wramsby at JIBS and the students that during the seminars have given us guidance and feedback.
Bachelor Thesis in Business Administration
Title: Authors: Tutor: Jönköping Subject Terms: Reverse Takeover Håkan Fältmars, Joel Svensson, Martin Thorstensson Gunnar Wramsby December 2007 Acquisition, Going Public, Merger, Reverse Takeover
Abstract
The access of capital and the high market growth has resulted in an increase in the quantity of companies going public in Sweden. Most companies go through with the initial public offering (IPO) process, but there has been an increase of companies that choose to go public through an alternative method. A reverse takeover is an alternative going public transaction that has been more common and accepted over the recent years in Sweden. The going public process is reverse compared with an IPO and the method is known as the “back-door” to the market. The purpose of this report is to analyze reverse takeover on the Swedish stock exchange as an alternative to the traditional IPO, with focus on the factors behind the transaction. Through an inductive approach, data has been collected from interviews with representatives of financial advisory companies with experience of reverse takeovers. The aim was to clarify which factors that affects companies when they carry out a reverse takeover. A deductive approach has then been carried out, to provide the research with quantitative data that can act as a complement to the qualitative data. This data has been collected through a statistical analyse of reverse takeovers on the Swedish stock exchange. A reverse takeover is a faster process than an IPO. The main reason for the shorter listing process is that a reverse takeover is a transaction between two companies and the IPO is a transaction between one company and the public. Many of the reverse takeover transactions in Sweden were done to take advantages of the loss carry forwards in the public company, which provides a possibility to reduce tax payments and go public at the same time. The publicity is lower for a reverse takeover than for an IPO, which makes it possible for the private company to take the back door to the capital market and in some way ignore the current market condition because the transaction is not depending on the demand for the company stock. A recognized pattern on the financial market is that reverse takeovers are carried out more frequently after a market crash. This agrees with what we have seen in Sweden, since private companies started to go public through reverse takeovers after the IT-crash. The reverse takeover transaction can be viewed as a financial trend in today?s Sweden. A few companies in Sweden have been harmed of the reverse listing process, as they have not been able to live up to the requirements from the stock exchange after they were listed. Planning and due diligence is important to be able to minimize risks when going public through a reverse takeover. The due diligence is even more important for reverse takeovers than for other transactions, since the business agreements are generally with companies that have a history of weak performance.
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Kandidatuppsats inom Finansiering
Titel: Författare: Handledare: Jönköping Ämnesord: Omvända Förvärv Håkan Fältmars, Joel Svensson, Martin Thorstensson Gunnar Wramsby December 2007 Förvärv, Börsnotering, Omvänt Förvärv, Sammanslagning
Sammanfattning
Ett gynnsamt börsklimat och möjligheten att få tillgång till externt kapital har resulterat i en tillväxt av börsnoterade företag i Sverige. Den vanligaste börsnoteringen är den traditionella ”initial public offering” (IPO) processen, men det har skett en ökning av företag som noteras via alternativa metoder. Ett omvänt förvärv är en alternativ börsnoterings process som har blivit mer vanlig och accepterad de senaste åren i Sverige. Noteringsprocessen är omvänd jämfört med en IPO och har därför blivit känd i Sverige som ”köksvägen” till börsen. Uppsatsen behandlar omvända förvärv på Stockholmsbörsen med ett syfte att analysera den alternativa börsnoteringen samt faktorerna som ligger bakom beslutet att genomföra ett omvänt förvärv istället för en traditionell börsnotering. Genom en induktiv ansats, har data samlats in genom kvalitativa intervjuer med utvalda personer ur företag som har agerat finansiell rådgivare vid omvända förvärv. Intervjuernas syfte har varit att förklara vilka faktorer som påverkar företag att genomföra ett omvänt förvärv. Genom en deduktiv ansats, har sedan studien kompletterats med kvantitativ data ifrån en statistisk undersökning av omvända förvärv genomförda i Sverige. Ett omvänt förvärv erbjuder en snabbare noteringsprocess för det privata företaget i förhållande till en IPO. Anledningen till varför ett omvänt förvärv är snabbare är för att det är en transaktion mellan två företaget, medan en IPO är ett erbjudande till allmänheten. Motivet bakom många omvända förvärv i Sverige har varit möjligheten att både börsnoteras och samtidigt utnyttja skalbolagets underskottsavdrag, vilket ger framtida skattefördelar. Publiciteten kring omvända förvärv är lägre än för en IPO eftersom företaget inte behöver informera allmänheten, vilket gör det möjligt för ett privat företag att ta ”köksvägen” till börsen. Omvända förvärv genomförs oftast efter en sättning i marknaden. Svenska företag började utnyttja omvända förvärv som en noteringstransaktion efter IT-bubblan, eftersom det fanns många IT-bolag som upplevde svåra tider på börsen och var mer än villiga att ingå ett avtal för ett omvänt förvärv. Största riskerna med ett omvänt förvärv är relaterade till den omvända noteringsprocessen. En del Svenska företag har haft svårt att klara börsens krav och regler efter ett omvänt förvärv, vilket har resulterat i att de inte har lämnat observationslistan. Planering och Due Diligence är viktiga faktorer för att minimera riskerna, eftersom det privata företaget ingår avtal med i de flesta fall ett börsnoterat företag med dåliga resultat och historik.
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Table of Contents
1 Introduction ............................................................................... 1
1.1 1.2 1.3 2.1 2.2 2.3 2.4 2.4.1 2.4.2 2.5 2.6 3.1 3.1.1 3.1.2 3.2 3.2.1 3.3 3.3.1 3.3.2 3.3.3 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.7.1 4.7.2 4.7.3 Background ............................................................................................1 Problem Discussion ................................................................................2 Purpose ..................................................................................................3 Research approach ................................................................................3 Research Method ...................................................................................3 Data Collection .......................................................................................4 Sample selection ....................................................................................4 Interviews ...............................................................................................4 Statistical research .................................................................................6 Theory Selection.....................................................................................6 Validity and Reliability.............................................................................6 Going Public ...........................................................................................8 Access to the Capital Market ..................................................................8 Obstacles for Going Public .....................................................................9 Merger and Acquisition ......................................................................... 10 Motives ................................................................................................. 10 Reverse Takeover ................................................................................ 12 Low Quality Firms Use Reverse Takeovers ......................................... 12 The Importance of Reverse Takeovers ................................................ 13 Future Development of Reverse Takeover Firms ................................. 14 Transaction structure ............................................................................ 15 Motives ................................................................................................. 15 Potential risks ....................................................................................... 17 Manage risks ........................................................................................ 19 The public company ............................................................................. 19 The private company ............................................................................ 20 Reverse Takeovers in the Swedish Capital Market .............................. 20 Sample ................................................................................................. 20 Profitability ............................................................................................ 20 Industry................................................................................................. 21
2 Method ....................................................................................... 3
3 Frame of Reference .................................................................. 8
4 Empirical Findings .................................................................. 15
5 Analysis ................................................................................... 23 6 Conclusion and Discussion ................................................... 27
6.1 6.2 6.3 6.4 Conclusion............................................................................................ 27 Reflections............................................................................................ 29 Critique of Chosen Method ................................................................... 29 Further research ................................................................................... 30
References ................................................................................... 31
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Appendices
Appendix 1 Definitions Appendix 2 Questionnarie: Omvända Förvärv Appendix 3 Reverse Takeover Sample
Figures
Figure 1: Theories of Merger Motives (Trautwein, 1990) .................................. 10 Figure 2: Public Company (Industry) ................................................................. 21 Figure 3: Private Company (Industry) ............................................................... 22
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1
1.1
Introduction
Background
The access of capital and the high market growth that has flourished over the recent years has been the source to an increase in the quantity of companies going public. Year 2006 was a record year of newly listed companies on the Nordic Stock Exchange. There were 57 new companies in 2006 and in 2007 it is already over 60 companies that have been listed on the OMX and First North. This piece of information provides an attractive area of study and much research has been done about the initial public offering (IPO) process, which is the most common course of action when going public. (Dagens Nyheter, 2007) Studies with focus on different aspects of the IPO process have been made. Ritter (1998) turns attention on direct and indirect costs of an IPO, while Chemmanur and Fulghieri (1999) reflect on the question when it is time for a company to go public. The IPO process is however not the only way to enter the stock market for a private company, there are other alternatives. Balder, Din Bostad and 24H poker are all fairly new companies on the Swedish Stock Exchange, but they did not go the traditional way. Instead these companies chose a reverse takeover, an alternative method of going public. A reverse takeover is performed in the following way; a public company acquires a private company through non-cash issue directed to the owners of the private company. The private company will then become majority owner in the public company through the shares. The result is subsequently that the private company acquires the public company and takes over the listing place. “The traditional way for a company who want to get listed is both tough and time consuming. A faster way is to buy the majority of votes in a public company and then gradually remold the organization to its own.” (Österlind, 2007) In the beginning of the 21st century, when many listed companies experienced tough times, the interest around reverse takeover started in Sweden. Private companies started to identify public shell companies as potential target for a reverse takeover. The only thing of value left in the shell companies was the listing place, organisational number and owners of share capital. (Östlund, 2007) Few studies have been made about reverse takeovers and the factors behind the transaction. Earlier a reverse takeover has been seen as a controversial transaction but during the last couple of years the process has gained more acceptances in the financial market as an alternative to the traditional IPO. (Aydogdu et al. 2005). In the United States and other financially strong countries, the reverse takeover method is starting to get well known. Companies use it to a greater extent to go public and a few studies have been made in the United States. In Sweden, there has been a discussion about the rules and tax consequences, but no focus on the fundamental factors behind the transaction. The lack of studies about reverse takeovers in Sweden together with the fact that Swedish companies actually use the technique to go public provides a new area of research and this has been the authors? motivation when writing this bachelor thesis.
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1.2
Problem Discussion
The numbers of companies that consider the possibility to go public through a reverse takeover have increased during the last couple of years. The most common opinion is that a reverse takeover is quicker than an IPO. Going public through an IPO can be a time consuming process. The process takes generally between six months and eighteen months, from the first day the company obtains an underwriter to the day the share will be listed. (Gleason et al. 2005b) “A reverse merger is far simpler. A company identifies a shell stock, pays what is usually a modest fee and suddenly, it is listed.” (Hennessey 2003) Apart from time, the cost saving factor is a vital reason and according to Adjei, Cyree and Walker (2007) companies with poor performance, relatively small turnover and short history, prefers reverse takeovers to IPOs. What factors can be important for the company when it decides to go public through a reverse takeover?
Earlier studies show that one out of four reverse takeovers, the public and private firms operate in the same industry. Potential synergies are usually the motive of targeting a company in the same industry (Jensen, 1984). However, there are also a number of companies that carry out a reverse takeover with companies from different sectors. Can specific trends be associated with reverse takeovers?
For companies that go through with a reverse takeover it is crucial with a precise analysis of all possible risks. “If you decide to do a reverse merger with a weaker company, you better be pretty sure that you are willing to take the time to analyze the problems you are about to receive and work them out. It's a fast way to grow, but it takes a big, big effort to replace your program with their program.” (Prewitt, 1994) A common belief on reverse takeover is that it involves considerable risks and does not generate any long term profit for the shareholders. One of the characteristics of reverse takeover firms is the high volatility and low liquidity in the stock, which reduces the shareholder value. However, shareholders can benefit from a reverse takeover. If a private company decides to enter the market through a reverse takeover it can create value for the public company, which had been lost without the transaction. (Gleason et al, 2005a) “Thus, while reverse mergers provide an alternative means of going public and may reduce some of the agency costs of distress, they do seem to involve considerable risk and often fail to generate long-term wealth for the shareholders of the post-event firm.” (K. Gleason, L. Rosenthal and R. Wiggins III, 2005a). Can specific risks be identified when going public trough a reverse takeover?
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1.3
Purpose
The purpose of this report is to analyze reverse takeover on the Swedish stock exchange as an alternative to the traditional IPO, with focus on the factors behind the transaction.
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Method
The following chapter describes the research method in this thesis. For the purpose of the report, the most suitable method is a mixed designed research that combines both qualitative and quantitative data. Interviews with representatives of the financial market provides an insight into how the reverse takeovers and other transactions are carried out, while a statistical analysis can identify what has been done over the past years on the stock exchange. By combining a qualitative and a quantitative method, the report can recognize and describe how-, why- and what-questions for the reader. A glossary which explains keywords is provided in appendix 1.
2.1
Research approach
The authors have chosen to make use of a combination of deductive and inductive research, since it is the most suitable approach for the purpose of the report. “Not only is it perfectly possible to combine deduction and induction within the same piece of research, but also in our experience it is often advantageous to do so.” (Saunders et al, 2003) The deductive approach is the most common one in scientific research; it generally tries to provide data for or against a theory. The inductive approach on the other hand attempts to provide information to develop new hypothesis or theory (Denzin & Lincoln, 1994). The purpose with an inductive approach is to get an understanding of the nature of the problem and analyzing the data to create new theory. The outline has a deductive perspective, were a theoretical framework is defined and then used in the analysis. However, this is a relatively new research topic in Sweden with little existing literature, which makes the work more inductively with an aim of generating and analyzing new data. Neither approach are better than the other, by using both approaches in the research, it is possible to get an objective outcome and understanding of subjectively determined knowledge (Saunders et al, 2003).
2.2
Research Method
Qualitative research focuses on analyzing data such as objects, pictures and words. Analyzing words can for example be based on an interview, as in this report (Saunders et al, 2003). The qualitative method is chosen because it gives an accurate view of the actual situation on the market and exposes details that cannot be found in financial statements or reports. The method gives the possibility to focus on the fundamental factors behind the figures and gives the research valid ground for the analysis. This also suits the purpose of this paper because it gives a view of the circumstances and it is more likely to find suitable information by this method. The qualitative research is the main method of this study since it explains the how and why questions of the reverse takeover as well as the obtained information from the interviews makes it possible to analyze processes and patterns of the reverse takeover transactions in
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Sweden. Furthermore, by interviewing representatives from different financial institutions both a narrative description and comparison can be made to understand the specific situation and factors related to a reverse takeover. The quantitative method is based on analyzing numerical data, for example a questionnaire or a statistical research used to collect numerical data (Saunders et al, 2003). In this report a statistical analysis has been used as a complement to the qualitative method, to give as accurate view of the market conditions as possible. The data put together by the quantitative method is past data from the Swedish financial market and gives the report the background that the qualitative approach can not cover. Researchers use the technique that combines qualitative and quantitative data to a greater extent since it is an alternative of expanding the scope and improving the analytic power of the study. It is important that each data set remains analytically separate trough the research, it is only in the final analyze were the result of both the qualitative data and quantitative data are combined (Caracelli & Greene, 1993).
2.3
Data Collection
There are two types of accessible data for this kind of research, primary data and secondary data. In primary data collection, the data is collected through questioners, interviews, surveys and other types of methods that gather knowledge. The data is for that reason generally based upon words or text. The primary data should be unique for the specific research and answer the purpose of the report. With primary data the data is collected for the problem and do not need any adaptation before being used. Secondary data is data that has already been collected with an aim to answer a different purpose. The data is in general collected from statistical reports, books and previous academic reports. (Saunders et al, 2003) This research is based on primary data. The primary data is collected trough both a qualitative and quantitative method to give the most precise answers as possible. Due to the fact that there has been very little research done in this field, secondary data are hard to find and may not cover the whole picture. The data has therefore been collected through interviews and a statistical analysis designed to fully meet the purpose of the research. The research questions have been the foundation for the shape of the primary data.
2.4
2.4.1
Sample selection
Interviews
The qualitative data in this report has been collected through in-depth interviews with financial advisors with knowledge of performing reverse takeovers. The selected group of people is representatives belonging to the corporate finance section of highly respected firms, which have experience of creating value for their clients by constructing different going public transactions. The companies that have been listed through a reverse takeover have not been interviewed because they do not have the same knowledge, experience and overall insight within the financial market, as the financial advisors. The participants received the questions by e-mail before the interview to be aware of the report?s purpose as well as getting time to prepare. After that a telephone interview followed, with focus up on the questions to ensure that the same general information is col-
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lected from each interviewee. Even if the interview were of a general guide approach with focus on collecting the same information from each interviewee, it still allowed a degree of freedom and adaptability in gathering the valuable information from the interview. All the interviews were analyzed and then written into a summary. The interviewed participants are presented below: Catella Corporate Finance is a subsidiary of Catella AB, which initiates in transactions linked to the stock market, such as right issues and listing processes. They take also part in takeovers, acquisitions and obtaining investment capital for both private and public companies. Catella Corporate Finance has been seen as an institution of reverse takeovers in Sweden and has been the advisor for companies such as Klövern AB, Fastighets AB Balder, Din Bostad Sverige AB that has been listed through a reverse takeover. The authors interviewed Johan Malmberg, who is the Head of Catella Corporate Finance. He has an essential experience of financial advisory as well as he has been active in reverse takeover transactions. (Catella, 2007) Mangold Fondkommission AB is an independent security firm. Their corporate finance division offer financial advisory related to takeovers, acquisitions and obtaining investment capital for their clients as well as being a Certified Advisor on the First North. Advisory related to owner- and capital structure and strategic development are as well services they provide for their clients. The authors interviewed Per-Anders Tammerlöv, who is the CEO of Mangold Fondkommission AB. Per-Anders Tammerlöv have great knowledge of reverse takeover transactions and has been involved in several listing processes. (Mangold, 2007) Evli Bank is an independent investment bank with companies and institutional investors as clients. The investment bank has offices in both the Nordic region and in the Baltic region. The corporate finance division at Evli provides advisory within takeover and acquisitions, initial public offering, private placements and other capital market transactions. The authors interviewed Staffan Bernstein, Head of Equity Capital Market at Evli in Stockholm. He has vital experience of financial advisory as well as experience of reverse takeovers. (Evli, 2007) STRICT is a financial advisor dividend into three main areas of business, STRICT Corporate Finance, STRICT Equity and Reverse takeovers. The corporate finance department deals with classic financial advisory and the equity department invest in potential growth companies. The reverse takeover section is focused on giving a going public candidate an alternative to the more traditional listing process by executing reverse takeovers and create the possibility to take the back-door to the market and offer the company and good shareholder spread. The authors interviewed Mats Löfgren who is the founder and chairman of the board and of STRICT and CEO of STRICT Corporate Finance. Löfgren has been involved as an advisor in several reverse takeovers during the last couple of years and has 20 years of experience in investment banking. (Strict, 2007)
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2.4.2
Statistical research
To identify what has happened concerning reverse takeovers on the stock exchange a statistical analysis has been done of quantitative data. The analyse gives a good view of the past transactions and gives the research a solid background and complement to the interviews. The sample consists of 20 reverse takeovers, taken place on the Swedish stock exchange between 2001 and 2007. The data gathering has been performed by an analysis of companies that have changed their names on the stock exchange to identify the reverse takeovers. After identifying the reverse takeovers, the transactions were analysed separately with focus on profitability and what industry they operated in. The result was then put together in to an excel document to get an overview of the situation and calculate the average profit and an indication of the industry distribution.
2.5
Theory Selection
The theories which have been used to analyse the data collected include merger and acquisition theories, IPO theories, and reverse takeover theories. The difficulty with the theories is that there has been little previous research done on the topic of reverse takeover and by that the theory base is limited. The theories which are presented in this report?s theoretical framework have been collected through the Jönköping University Library and through internet databases containing economic articles such as Jstore.com, ebsco.com, and ssrn.com. The key terms used when finding the theories is Reverse Takeover, Acquisition, Going Public, Merger and Merger Motive. The parameters needed for conducting the research for the correct theories have already been stated previous in this report and have been followed in order to find the theories used in this research (Bell, 1999). The theories needed in the research include material concerning the underlying motive, why the company are interested in conducting a takeover, the decision on why to go public and theory on why companies use a reverse takeover to go public. The theory concerning the reverse takeover is based on research conducted in the US. This theory is used because there has not been any extensive research of this subject in Europe. Theories based on European or even Scandinavian research would have been optimal, since this report examines the Swedish market. Due to the fact that the regulatory framework in the US and Europe may be affecting the validity of the theories. Theories about why companies want to go public instead of staying private are used to analyse factors and motives. This theories are not specifically adapted to reverse takeovers but on the going public as a whole.
2.6
Validity and Reliability
The purpose with collecting primary data by using a combination of both qualitative and quantitative method is to achieve a valid and reliable research. Telephone interviews were conducted since it provided most advantages related to the circumstances as well as it was the most acceptable method for the interviewees. By conducting telephone interviews, the authors could achieve access to essential sources of information as well as speed. This was demanded by the interviewees since they are business leaders with a busy time schedule. The interviewer and the interviewees talked with each other before the interview, which made it possible for both parts to prepare. The choice of sending the questions by e-mail
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prior the interview promotes validity and reliability, since the interviewee can consider the information and assemble organizational documentation from their files (Saunders et al, 2003). A concern related to telephone interviews is that it lacks personal contact as in faceto-face interviews. In this situation, it is harder for the interviewer to establishing trust and the interviewee may by less willing of answering sensitive questions (Saunders et al, 2003). The sample size is constantly an issue which affects the validity and reliability. With four interviews in the research, it is possible to discuss if it is enough to present a reliable result. The four interviewees have been active advisors of reverse takeovers in Sweden and can therefore provide the researchers with knowledge from a professional perspective. The outcome of the interview may provide a partial picture of the subject, since the organization that the interviewees work for has a positive or a negative attitude against the research topic (Saunders et al, 2003). The information may as well be too sensitive or they are empowered to talk about it. Therefore, has the intention been to construct objective questions that answer general factors, not specific cases. The interviewees are independent from each other in order for the researchers to gain an impartial result. The primary data collected trough a quantitative method, are independent to any organization and can for that reason act as a complement to the interview and reduce the bias. The data are obtained from 20 reverse takeover transactions in Sweden and the size of the statistical data can be a subject of discussion. With a size of 20 transactions, it is possible to analyze up to date information, while a larger sample size provides older information and can cause misinterpretation as well as harm the validity and reliability.
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3
Frame of Reference
There is limited research done within reverse takeovers. However, research and theories about mergers and acquisition and going public in general can in some way be helpful. The frame of reference contains the theories which are needed to analyze the empirical findings. They are divided in three parts. The first part will explain the process of an IPO and the decision to go public or stay private. The second part consists of the general merger- and acquisition-motives theory which will help us understand and link together the first part with the last part. The third and last section explains research and theories about reverse takeovers.
3.1
3.1.1
Going Public
Access to the Capital Market
Ritter and Welsh (2002) argues that the main motive for companies to go public, is the desire to raise equity capital for the firm and to create a public market in which the founders and other shareholders can convert some of their wealth into cash at a future date. Nonfinancial reasons only play a minor role when taking the decision to enter a public market. Ritter and Welsh (2002) also found evidence that signifies the importance of both favorable market conditions and that the firms have reached a certain stage in their life cycle to go public. Maksimovic and Pegaret (2001) focus more on going public as a strategy to add value to the firm. The decision to trade the share on a public market may encourage more trust in the firm from investors, creditors, suppliers and customers. They also point out that being the first public traded company in an industry can provide a first-mover advantage. Another perspective is to view the going public process as an exit strategy for the entrepreneur or the venture capitalist. Zingales (1995) argues that it is much easier for a potential acquirer to spot a potential takeover target when it is public and the entrepreneur can sell the company for a higher value compared to a private sale. Brau et al. (2003) follows the same path, but implies that the owner objectives of going public through an IPO is both to retain control of the company and sell shares to increase personal wealth. Pagano et al. (1998) studies strengthen the view of an IPO as a stage in the sale of a company. His facts demonstrate that in the three years after an IPO the earnings of the controlling group is larger than average. According to Pagano et al. (1998) there is a difference between the nature of the companies that goes public in Europe and in the United Sates. In Europe the companies are usually more mature and have a motive of paying down debts rather than financing growth, while a public listing in the United States is viewed more as an ability to raise capital for investments and growth. These intensions may be the consequence of an average age of 40 years of the firms going public in Continental Europe (Rydqvist and Högholm, 1995), in contrast to the United Stats where many startup companies finance their growth by going public. Pagano et al. (1998) also distinguish between independent companies going public and carve-outs. While independent companies? main target with an IPO is to rebalance their accounts after a period of high investments and expansion, carve-outs want to maximize the earnings from selling shares in a subsidiary. A major benefit of going public according to Pagano et al. (1998) is the opportunity for companies to access cheap capital. When it is time to enter the stock exchange, the interest
8
rate on short-term credit falls and the numbers of banks willing to lend money will rise. After the IPO, the firms can reduce the concentration of their borrowing and borrow money from a larger pool of banks. The enhanced public information linked with the listing and stronger bargaining power in relation to banks generally results in a reduction in the cost of bank credits. Shares that are traded on a public stock exchange are cheaper than those that are traded of private companies, which have made it possible for small shareholders to trade on a short notice. This affects the diversification of initial shareholders and the liquidity of the companies stocks and may as well be the base of the going public decision making. The companies which choose the motive of diversification to go public are as well more risky according to Pagano (1993). The Clustering of IPO?s are something very common according to Ljungqvist (1995). If there is a positive stock market valuation of companies in the same industry, than it is more likely to experience further IPO?s from the specific industry. However, the clustering of IPO?s may be reflected from both industries with good opportunities of development and owners attempt to make use of a miss-pricing in the sector. (Pagano et al, 1998) 3.1.2 Obstacles for Going Public
A factor that may influence companies to stay private is disclosure rules from the stock exchange. Companies are forced to unveil information that may be crucial for their competitive advantage, such as ongoing research and development (R&D). They also expose them for close inspection from tax authorities, which reduces the possibility of tax avoidance compared to private companies. Besides this, there are significant costs of going public. The direct costs are the underwriting fees and registration fees and then there are yearly costs in terms of certification, auditing, stock exchange fees et cetera. These costs may be an obstacle for smaller companies to go public since most of the costs do not increase proportionally with the size of the IPO. Although, the opportunity to access an alternative source of finance to banks more often overcome the costs aspects for companies with huge current and future investments. (Pagano et al, 1998) According to Gleason et al. (2005b) going public through an IPO can be a time consuming process. The process takes generally between six months and a year and a half, from the first day the company obtains an underwriter to the day the share will be listed. It is a complex route that involves prospectus, legal counsel, registration statement with the Securities and Exchange Commission and reviews to be accepted. Studies have shown that the IPO process can be financially costly and sensitive to change in industry as well as in market conditions. If the timing of the IPO is not right, the IPO may be delayed or even cancelled.
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3.2
3.2.1
Merger and Acquisition
Motives
There are extensive studies conducted that shows that mergers in general are greeted positively by the stock-market. Although, all of the gains are reaped by the shareholders of the targeted company while the shareholders of the bidders receive nothing. (Jensen, 1984) The efficiency theory is the theory most commonly used by companies when the management argues for and against the decision to acquire a company. They want to improve their business with help of the synergetic effects which is created through an acquisition according to the efficiency theory. The theory which is the most reliable, on the other hand, is the empire-building theory. The managers have other goals with the merger or acquisition then the company?s shareholders. (Trautwein, 1990) This has shown to have a large impact on the merger and acquisition decision. (Ravenscraft and Scherer, 1987) The acquisition does not have to be a rational and well planned decision from the targeting company. (Power, 1983)
Net Gains through synergies Merger as rational choice Merger benefits bidder?s shareholders Wealth transfers from customers Wealth transfers from target?s shareholders Net gains through private information Merger benefits managers Merger as process outcome Merger as macroeconomic phenomenon
Figure 1: Theories of Merger Motives (Trautwein, 1990)
Efficiency theory Monopoly theory
Raider theory Valuation theory Empire-building theory Process theory Disturbance theory
Within the field of motives for mergers and acquisition there are seven different theories to be found. (Trautwein, 1990) The efficiency theory is based on the view that mergers are planned to achieve synergies and that there are three different kinds of synergies. It is argued that a large part of the mergers are undertaken with the motive to create synergies. (Jensen, 1984) The first synergy is the lower cost of capital, and goes under the name financial synergies. This can be achieved in three ways, either to invest in business which is not related to what the bidder is doing, or invest to increase the size of the company and by that get access to
10
cheaper capital. The third alternative is to create an internal market which will thrive on superior information and by that be more successful in capital allocation. Operational synergies are founded on the view that winnings can be gained from combining operations of traditional separate units such as sales force or knowledge transfers. This may lower the cost of the business units which is involved in the operation. The transaction cost is also proved to be lower in a large company then in smaller firms (Coase 1937). Managerial synergies are found when the bidder?s managers posses a superior planning and monitoring ability then the target?s management and by that be able to increase the target?s perfo rmance. If the capital market is efficient then the efficiency theory can be held, but if one regards financial statements to be more reliable then stock market prices, the efficiency theory can be rejected. (Trautwein, 1990) The efficient market hypothesis (EMH) implies that share price mirrors all the information available on the market. (Fama, 1991) The foundation behind the monopoly theory is that the mergers are planned to gain market power. To be able to hit the target the mergers have to be in the form of a horizontal acquisition. One of the benefits with the monopoly theory is that it open up for the company to cross-subsidize their products. They can use profit from a market where they have a high market share and use it in an other market where they want to expand. It will also help to limit the competition in more then one market. Jensen (1984) argue that the monopoly theory do not work with the argument that the stock price should rise with a merger announcement and drop if the merger is challenged or cancelled. It is shown that the stock price does not drop at the latter events and by that the monopoly theory can be rejected. (Trautwein, 1990) The valuation theory is based on that the managers that perform the merger have better information about the value of the target firm then the stock market. The valuation theory strives on that the information that is available for the public is reflected in the stock price. If the bidder owns some knowledge about the company it should be revealed after the bid which will leave the bidder in a winner?s s-curve situation. The big difference between the valuation theory and the other theories is that it recognizes the role which uncertainty plays in strategic decisions such as mergers. (Trautwein, 1990) The empire-building theory is based on Baumal?s (1959) model which shows that separation of ownership and control of the company creates a free-rider problem. In this theory the merger is planned and executed by the managers of the firm to create value for them instead of the shareholders of the firm. Black (1989) shows in his study that managers overpay for the target?s shares, because they are overly optimistic and their interest are different from the shareholders interest. This is known as the overpayment hypothesis. Walsh (1988) report shows that companies with high merger activity have a higher executive turnover than non-merging companies. It has been proved that empire-building aspects has some to do with merger decisions and by that this theory is given the most credit of the merger motive theories. (Trautwein, 1990) The process theory originates from the literature of strategic decisions. The decision is not based on rational choices but as an outcome of processes such as the decision process. The theory argues that individuals are limited when it comes to information processing and by that some simplifications have to be used in the decision process. Researchers such as Power (1983) have shown in his study that many acquisitions are not a rational decision; there is lack in the planning of the acquisition. (Trautwein, 1990)
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The raider theory focuses on wealth transfers; the “Raider” is a person whom causes wealth transfers from the targeted company and by that, from its shareholders. In a successful bid the raider pays other stockholders a premium to become the controlling stockholders of the company. The problem with the raider theory is that research has shown that the targeted company?s shareholders in general gain from the acquisition which has been previously pointed out by Jensen (1984). Gorth (1969) argues that when there are disturbance in the economy, as in the 70?s during the oil crises, there are an increase in mergers and acquisitions. In 1987 we could se an increase in mergers and acquisition as well due to the economic disturbance in the American finance market. The disturbance causes changes in expectations and the uncertainty level increases. Eis (1970) argues that this results in a merger wave. These merger waves could be observed during the oil crisis in the 70?s but a counterexample is the merger wave during the 60?s where no economic disturbance can be seen. (Trautwein, 1990)
3.3
3.3.1
Reverse Takeover
Low Quality Firms Use Reverse Takeovers
Adjei, Cyree and Walker (2007) describe reverse takeovers as a “back-door” to the market. They focus on analyzing the private companies that choose to go public by using the reverse takeover method. The data is collected from IPOs and reverse takeovers done on New York Stock Exchange (NYSE) and NASDAQ in 2000-2002. A common perception about reverse takeover is that companies use the method as an IPO alternative, and do so because the companies do not fulfill the requirements for a regular IPO. The result from the study by Adjei, Cyree and Walker (2007) indicates that the above statement is not completely correct. Only 1,4 percent of the reverse takeover firms did not meet the initial listing requirements for both NYSE and NASDAQ. “The low proportions of reverse merger firms that are unable to list indicate that the inability to list is not a driving force in choosing this method of going public.” (Adjei et al, 2007) Their research also examines the post performance and features of the private firms that use the reverse takeover method. The result shows that a company with poor performance, relatively small turnover and short history, prefers reverse takeovers compared to IPO?s. This support the general picture of the reverse takeover, low quality companies choose the reverse takeover to go public and high quality companies choose the IPO method. Adjei, Cyree and Walker (2007) conclude that the determinants of reverse takeovers for listing differ on NYSE versus NASDAQ. The reverse takeovers on NYSE are determined by the performance and the firm size, whiles on NASDAQ the reverse takeovers transactions are determined by operating history, performance and firm size. As discussed above the general view of reverse takeover is that low quality companies use the method to get a quick listing, which should not have been possible by a regular IPO. Researchers have found some interesting results that confirm the general view. The study examined the ex-post survival data for reverse takeovers and compared the data to the expost survival data for IPOs during the same time. After three years 42,7 percent of the re-
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verse takeovers were delisted and only 27 percent of the IPOs were delisted. (Adjei et al, 2007) The high percentage of delisting companies in the reverse takeover sample can be explained, according to Adjei, Cyree and Walker (2007), by the lack of underwriters. “Reverse mergers do not have underwriters and hence do not get the support in the aftermarket following the issue.” (Adjei et al, 2007) The conclusion of the study is that private investors should be very careful when they invest in a company that used reverse takeovers to go public. The companies are in general young and have lower performance compared to the IPO?s, which can lead to delisting and a bad investment for the private investor. The same can also be said about the investors in the firms that choose the reverse takeover as a way to get their company listed. A strict examination of the shell company and their performance before the takeover can be crucial for the future performance of the new company. (Adjei et al, 2007) 3.3.2 The Importance of Reverse Takeovers
The research conducted by Gleason, Rosenthal and Wiggins III (2005) analyses 121 reverse takeovers in the US from 1987 to 2001 and point?s outs some of the characteristics for both the public firm and the private firm. According to the study 27 percent of the public and private firms operate in the same industry when the reverse takeover takes place. This can be explained by potential synergies that can be made after the takeover. But the study also points out that 15 percent of the reverse takeovers moved to another industry after listing. (Gleason et al, 2005a) The shareholders in the public firms can benefit from the announcement of a reverse takeover. In poorly performing public firms the reverse takeover can offer the shareholders an opportunity to increase their wealth, which they may not have without the reverse takeover with the private firm. The gain can be significant upon announcement, but in the long term perspective the increase in shareholder value is little or none. (Gleason et al, 2005a) The conclusion is that revere takeovers are important for the financial market and the investors. The method gives under performing companies the possibility to go public without the high cost associated with a more regular listing method such as the IPO. Through a reverse takeover, the private firm can decrease the listing costs and the temporary uncertainties inherent in the IPO-process, and avoid the regulatory inspections also involved in the IPO process. (Gleason et al, 2005a) “Thus, while reverse mergers provide an alternative means of going public and may reduce some of the agency costs of distress, they do seem to involve considerable risk and often fail to generate long-term wealth for the shareholders of the post-event firm.” (Gleason et al, 2005a)
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3.3.3
Future Development of Reverse Takeover Firms
Gleason, Jain and Rosenthal (2005) compare reverse takeovers and self-underwritten IPO?s with regular underwritten IPOs. The result show that reverse takeovers have significantly lower return on asset (ROA) in the year the transaction is performed compared to a regular IPO. The return on equity (ROE) shows however no difference between firms that use the reverse takeover method compared to firms in similar industry that use the IPO to go public. (Gleason et al, 2005b) The balance sheet can also differ between reverse takeover firms and IPO firms. The balance sheet?s liquidity for a firm that uses a reverse takeover is significantly lower than for the IPO firm. This can increase the likelihood for financial distress and greater financial leverage in the future. (Gleason et al, 2005b) The future development for the firm can also depend on what method they choose. Two years after going public, the firms that were listed through a reverse takeover are less profitable in terms of ROA. The balance sheet liquidity is lower and the same reflects the priceto-sales ratio development for the reverse takeover firms. One notation can however be made, the financial leverage, ROE and price-to-book ratio are no different than the IPO firms after a two year period. (Gleason et al, 2005b) Gleason, Jain and Rosenthal (2005) also examine the stock market performance after the reverse takeover. The comparison between IPO firms and reverse takeover firms shows that reverse takeover firms are characterized by higher share price volatility and a significantly lower liquidity. The institutional ownership in an IPO firm can sometimes be quite high but differs between firms and industries. However, in reverse takeover firms the level of institution ownership is in general low. (Gleason et al, 2005b)
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4
Empirical Findings
The empirical findings are based on telephone interviews and a sample of reverse takeovers conducted by the authors. The interviewees have in general been of similar opinion and provided similar information regarding reverse takeovers. The interviewees that have emphasized a certain topic have been the one which the authors have chosen to refer to in order to avoid duplicating information.
4.1
Transaction structure
The structure of a reverse takeover can differ from case to case. When analyzing the reverse takeovers taken place at OMX Stockholm, there are some variations but the overall picture shows more similarities than differences. According to Per-Anders Tammerlöv, Mangold Fondkommission, the most common structure is that a small listed company buys a larger private company and pays with new issued shares. Using the shares, the private company´s shareholders will become the majority owner of the listed company and the private company will be listed on the stock exchange. The transaction is a non-cash transaction and the payment consists only by shares in the listed company. (P. A. Tammerlöv, personal communication 2007-11-09) Johan Malmberg, Catella Corporate Finance, state that there is times when the business activity of the public company is transferred to a new established subsidiary. The shares of the new company will then be offered to the owners, according to Lex ASEA, and in the most cases be listed on a smaller exchange or the same exchange list as the original company. After the removal of the business activity the only value left of the empty shell is the listing place, which can be used by a private company to go public. During the same period as the non-cash transaction is taking place the public company can also attract new capital by using a new right issue. (J. Malmberg, personal communication 2007-11-13)
4.2
Motives
A reverse takeover is a method companies use to go public and can be seen as an alternative to the more common listing method, an IPO. Both methods have pros and cons, but some motives why companies choose a revere takeover to go public instead of an IPO can be found. One fundamental motive why companies choose reverse takeover is the fact that the transaction can be carried out without any publicity until the deal is 100 percent done. A reverse takeover does not have the same obligation to share information as an IPO has. When the media get the knowledge of a reverse takeover through a press release, the transaction is already finished. The two companies and their advisors can work undisturbed with the deal and if the deal somehow does not carry out, the media or the public is without knowing and no damage is caused to the company. (P. A. Tammerlöv, personal communication 2007-11-09) Tammerlöv stresses that an IPO is more dependent on the publicity around the transaction. An offer to the public has to be promoted by the media to get as many as possible to sign up for the offer and buy shares in the company. If for some reason the offer turns out to not be fully covered, the IPO has to be stopped and drawn back and the company can not go public. This can be devastating for the company; bad publicity and loss of potential
15
investor are only some of the consequences caused by a failed IPO. A reverse takeover can be carried out without the publicity and therefore the consequences of failed IPO are fare worse than the consequences of a failed reverse takeover. (P. A. Tammerlöv, personal communication 2007-11-09) Another motive for choosing a reverse takeover as a method to go public can be the hard competition at the stock exchange. For example there are as many as 18 real estate companies listed at OMX Stockholm. If a new real estate company tries to go public it can be hard to attract investors if the new company does not have a unique profile. The reverse takeover method can then be the only option for the private company without a unique profile to go public. If the company chooses to go public through an IPO the company needs to have a unique profile to attract new investors and to able to list the company?s share. This problem can then be solved by a reverse takeover which is common when listing companies in industries like production or real-estate. (P. A. Tammerlöv, personal communication 2007-11-09) According to Malmberg, the time factor is an important underlying motive when creating a reverse takeover transaction. An IPO demands at least audited financial reports over six months and a listing process which usually takes nine to twelve months. A reverse takeover could provide a faster introduction to the stock market. If there is an agreement on both sides, the company can call for an extra shareholder?s meeting, which takes four weeks. A fter that the issue should be registered at the Swedish Companies Registration Office and reviewed by the Swedish Financial Supervisory Authority, which could take two to three months. When the private company is listed through a reverse takeover the shares are listed on the observation list until all the auditing is done and all the requirements from the stock exchange are met. The fact that the auditing is executed after the stock is listed is the most conclusive detail that makes the reverse takeover method faster than a regular listing process. The average time period for a reverse takeover is three months, which is shorter than a regular listing process. Even if Malmberg emphasis the time factor as the main motive behind a reverse takeover, he also points out that the possibilities to make use of the listed company?s loss carry forward could be a reason of carry out the transaction. The use of loss carry forward is highly regulated, therefore should companies employ a forecast that is driven by tax planning. (J. Malmberg, personal communication 2007-11-13) The loss carry forwards can provide tax advantages, but should not be viewed as a main motive to get listed trough a reverse takeover. (M. Löfgren, personal communication 200711-26) Mats Löfgren, Strict, has the same opinion about the time factor as a main motive to carry out a reverse takeover, but takes another perspective. The private company can concentrate on the daily business and do not have to set aside time for meeting potential investors and trying to obtain capital. As a result, the company?s business activity is not harmed while the listing process is carried out. (M. Löfgren, personal communication 2007-11-26) It is hard to find any specific cost advantages for a reverse takeover compared to other going public alternatives, example an IPO. The method can be seen as a transaction with less complexity than an IPO and therefore the cost can be reduced. This can create a small cost advantage when it comes to the advisory fees and management time for the reverse takeover. In an IPO process the company receives new capital to fund future expansion and costs and the advisory fee is based upon the amount of new capital the company rece-
16
ives. In a reverse takeover the company does not receive any new capital and can therefore overlook the advisors percentage fee. (P. A. Tammerlöv, personal communication 2007-1109) A reverse takeover can be beneficial for both the private and the public company. The private company wants a trouble-free access to the capital market for future expansion or the ability for the investors to get a price of their investment. The public company is often performing badly and the shareholders can then take advantage of the private company?s performance and hopefully see their investment increase in value. Even if the public company gets benefits from a reverse takeover, the initiative to the transaction is most often taken by the private company. According to Staffan Bernstein, Evli Bank, most of the initiatives for the reverse takeover transactions are taken by an investment bank or other advisors to the private company, which sees an opportunity to list a private company through a reverse takeover and at the same time increase the value for the shareholders in a poorly performing public company. (S. Bernstein, personal communication 2007-11-20) According to Löfgren, both private and public companies are just as active to take the first initiative to make a reverse takeover. Private companies are aware of the advantages that a reverse takeover provides, while public companies with bad performance over a longer time period sees it as an opportunity to turn the negativity around. (M. Löfgren, personal communication 2007-11-26) Stock exchanges and market places have different regulations when it comes to the minimum amount of shareholders in a company, the company should have on average 200-300 shareholders depending on the regulations on the specific stock exchange. However, a large shareholder base should not only be viewed as a demand from the stock exchange; instead it is a primary factor when companies choose to go public through a reverse takeover. (M. Löfgren, personal communication 2007-11-26)
4.3
Potential risks
Buying another company can sometimes generate risks for both the shareholders in the buying company and the acquired company. During the preparations for the reverse takeover the two companies? advisors analyze potential risks and tries to minimize them by an accurate due diligence. The due diligence process analyses the performances and the economic situation for the company, and are used to reveal unforeseen difficulties. Tammerlöv stresses that problems may occur during the change between the old and the new management. During this period most of the potential risk is generated. Unforeseen cost can come up and it has to be settled who is responsible for the costs, the old or the new management. Example of costs that can generate problem is costs for extra audit or advisory. The old management can also have a performance based incentive program which the new management can have some problems handling. (P. A. Tammerlöv, personal communication 2007-11-09) One of the most substantial risks is the possibility that new creditors may occur when the new company is created by the reverse takeover. Most of the listed companies in a reverse takeover is performing badly and has none or very little profit. When the new company is created through a reverse takeover and new capital is transferred to the company old creditors may see their chance to get their money back, which they before the reverse takeover had seen as a credit loss. These creditors are impossible for the new company to take into account because they are not there when the due diligence is done. If the public company
17
shifts out the business activity to a new established subsidiary it is important that these responsibilities follow in to the subsidiary. Malmberg argues that in order to minimize risks and upcoming difficulties it is crucial to carry out a due diligence that covers tax, legal and financial aspects. (J. Malmberg, personal communication 2007-11-13) As discussed above, publicity can be seen as something positive but less publicity can also have a negative effect on a reverse takeover. The media focus more on IPO?s, which results in low public awareness about the current reverse takeover as well as potential investors do not have sufficient knowledge about the company. The costs of a reverse takeover vary from case to case and it is not possible to give a straight answer of which transaction that provides the lowest costs of an IPO and a reverse takeover. (P. A. Tammerlöv, personal communication 2007-11-09) A reverse takeover is often performed with the impression that it is a shorter and less complex process than an IPO. In most of the reverse takeovers the stock exchange requires less of the company that is planning to enter the market, for example the audit and information to the market is not as regulated as for an IPO. However, in some cases the stock exchange can require more extensive information about the reverse takeover like the process for a regular going public transaction. When performing an IPO the stock exchange requires that the company should notify the market by using a prospectus with all the essential information about the company, such as financial history, owner structure and other vital information about the company. This is not a requirement for a reverse takeover, instead the company can go public without making a prospectus and notify the market about the transaction using a press release. (S. Bernstein, personal communication 2007-11-20) According to Bernstein, the stock exchange can in some cases require a prospectus for the reverse takeover. This will then slow down the going public process for the company performing the reverse takeover. The result can then be that a company that are planning to get a fast access to the market by a reverse takeover, ends up with almost the same process as for an IPO with the longer time period and the higher requirements from the stock exchange. The reason why the stock exchange can call for extra information is that in some cases the reverse takeover will change the business for the listed company in such way that the stock exchange views the reverse takeover as a completely new company on the stock exchange, and therefore the new company should meet the same requirements as all the other going pubic candidates. Bernstein emphasizes the importance of an open dialog with the stock exchange to prevent this kind of implications when the main focus is to get listed as fast as possible. (S. Bernstein, personal communication 2007-11-20)
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4.4
Manage risks
To reduce the potential risks some actions can be made. Tammerlöv emphasizes the importance of an accurate and precise due diligence. The due diligence process can if it is done right minimize, but not eliminate, the risk that are associated with a reverse takeover. The sales and purchase agreement is also one of the most important parts of the process to minimize the risk. The agreement has to be well formulated to avoid questions of which part that should be responsible for the costs that are involved in the transaction. If the agreement is formulated properly the unforeseen costs like extra audit and advisory and the risks associated with them can be reduced. (P. A. Tammerlöv, personal communication 2007-11-09) It is of great importance to analyze the balance sheet before the reverse takeover is carried out. A good thing is to have a dialogue with the Swedish Tax Agency before and during the process, to be shore that no indistinct problems come up later on. (M. Löfgren, personal communication 2007-11-26)
4.5
The public company
If one analyses the reverse takeovers that have occurred on the OMX Stockholm, some characteristics can be found concerning the listed company in the transaction. The listed company can be seen as small, both in turnover and in market capitalization. According to Tammerlöv the optimal listed company for a reverse takeover has a market capitalization of about 10 million Swedish kronor (SEK). He also emphasizes the importance of a small firm with little or none ongoing business. This makes the transformation to the new company much less complex than if the company had a large market capitalization and a lot of ongoing business to take in to consideration. (P. A. Tammerlöv, personal communication 2007-11-09) The shareholder base should in the optimal case consist of a few big owners. If the listed company is controlled by a few majority owners it is much easier to control the shareholder´s meeting and vote in favor for the transaction, this minimizes the risk of not completing the transaction. But on the other hand if the listed company is owned by a large shareholder base consisted of a large number of small owners, the private company can get a good spread with high liquidity in the new stock. A large shareholder base can be favorable as previously mentioned due to good liquidity but can be costly for the company when it comes to handling costs. (J. Malmberg, personal communication 2007-11-13) The listed company´s balance sheet is also of great importance. The optimal structure contains large loss carry forward which can be used to reduce the tax payment in the private company. Tammerlöv imply that it is common for large real estate companies to use a reverse takeover to go public and also reduce the tax payment which creates substantial value for the shareholder. (P. A. Tammerlöv, personal communication 2007-11-09) Public IT-companies have been suitable companies to perform a reverse takeover with, since they generally did huge losses after the IT-bubble. A reverse takeover can provide a second opportunity for the shareholders of the public company to regain some of the investment as well as the newly listed company can make use of the loss carry forward to balance the taxes of the profit. (J. Malmberg, personal communication 2007-11-13)
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4.6
The private company
According to Malmberg the reverse takeover should contain a profitable private company to fully satisfy all the involved parts. The profitable private company should be seen as a positive influence for the shareholders in the listed company and the loss carry forward should work as a tax reduction for the private company. Real estate companies have over the years had a special fondness for the reverse takeover transaction and Catella has been involved when Din Bostad, Klövern and Balder have been taking the back door to the stock exchange. Companies belonging to the manufacturing industry usually have the same characteristics as real estate companies, but manufacturing companies have preferred to go the traditional way in Sweden. (J. Malmberg, personal communication 2007-11-13) Löfgren argues that it is difficult to observe trends in specific industries, since the concept of reverse takeover is relatively new in Sweden. Instead, the reverse takeover itself should be seen as a trend, as people are more aware of the subject, newspapers writes more about it and the most important; companies are carrying out reverse takeovers more frequently today. Reverse takeovers were carried out as early as in 1987 after the market crash in the US, so worldwide is it not a new method to go public. This condition was repeated in Sweden after the IT-bubble and it is possible to say that after a crash there are many suitable shell-companies for a reverse takeovers. (M. Löfgren, personal communication 2007-11-26) A reverse takeovers could be a suitable transaction for any company as long as the company can prove a sufficient turnover, which also should be a guideline for all companies who consider going public. (M. Löfgren, personal communication 2007-11-26)
4.7
4.7.1
Reverse Takeovers in the Swedish Capital Market
Sample
The sample consists of reverse takeovers which have taken place on the Swedish financial market between the years 2001 to 2007. Most of the reverse takeovers have been taken place between small cap companies. This resulted in that small market places such as First North and NGM Equity been included in the sample, not only the Large-, Mid- and smallcap at OMX. If one should exclude the small exchanges the sample should not give an accurate view of the market. All together the sample consists of 20 reverse takeovers form all years and all stock exchanges, with information from both the private and the public company involved in the transaction. (See Appendix 3) 4.7.2 Profitability
When looking at the sample with focus on profitability, a pattern can be seen both in the private company and the public company. At first a majority of the public companies had negative profitability and very little or none on-going-business. The average profit for the 20 public companies in the sample was -7.6 million SEK. The most profitable company in the sample had a profit of 0.7 million SEK. The figures are based on the annual profit before the reverse takeover. (See Appendix 3) The private companies show another picture then the one for the public companies. A greater part of the private companies show a positive profit before the transaction. The average profit for the companies was 11.3 million SEK and the highest profit for one com-
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pany was 120 million SEK. The numbers however are in some cases estimated numbers due to the fact that some of the companies have no background history because they are newly established companies. (See Appendix 3) 4.7.3 Industry
The sample shows an interesting pattern when looking at which industry they operate in. Of the public companies in the sample, 55 percent of them where operating in the information technology sector. In comparison to the five percent which operated in the production industry. (See Appendix 3) As previous discussed the optimal public company should have very little or no ongoing business and can be seen as an empty shell. Many IT companies grew at high speed during the golden IT era at the end of the 1990?s, and attracted a lot of investors to invest in their spectacular expectations. After the crash in the beginning of the 2000 many of the companies were unlisted from the stock exchange but some of them stayed listed. The companies that remained listed have little or no ongoing business. This phenomenon can be seen in the sample of the reverse takeovers where many of the old IT companies is used as a “back-door” to the market. The figure bellow illustrates the different industries for the public companies in the sample (Figure 2: Public Company).
Figure 2: Public Company (Industry)
When looking at the private companies in the sample, similarities between them can easily be found. Around 20 percent of the companies were operating in the real estate sector, but only 15 percent in the information technology sector. As argued before, companies that choose this type of transaction to go public are often profitable and have a business that can take advantage of the loss carry forward in the public companies. This is well illustrated in the sample, where the real estate companies can easily take advantages of the opportunity to reduce profit, and thereby the tax payments, by the loss carry forward in the public companies. The figure bellow illustrates the different industries for the private companies in the sample (Figure 3: Private Company).
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Figure 3: Private Company (Industry)
The sample of the revere takeovers taken place at OMX, First North and NGM Equity gives a good picture of the market as a whole. It is easy to see patterns and similarities between the reverse takeovers and analyze the situation. (See Appendix 3)
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5
Analysis
One part of the theoretical framework points out that going public can be a time consuming process (Gleason et al, 2005b). The term „going public? usually refers to the traditional way of getting listed, which is the IPO process. In Sweden the time for doing an IPO takes around nine to twelve months. The reverse takeover provides an alternative way of going public as well as the process is much more time efficient. Companies that transform their organisation from private to public through a reverse takeover transaction are able to reduce time, as this alternative transaction is carried out in a different way. After analysing the conditions on the Swedish financial market it was shown that a reverse takeover takes about three to six months. This can be explained by lower requirement from the stock exchange when it comes to financial history, auditing requirements and information given to the public in the form of a prospectus. Many of the requirements that follow by being a publicly traded company are fulfilled after the company is listed through a reverse takeover. There are not only positive aspects with a reverse process. When companies are listed through a reverse takeover, they get listed on the observation list until they meet the stock exchange?s requirements, which can create problems for companies. There are a few exa mples in the past of companies that have not left the observation list, since they do not live up to the requirements. The risk with staying on the observation list is that fewer people are interested in investing in the share due to higher risk. There is also a possibility that the company get de-listed from the stock exchange (Adjei et al, 2007). All the interviewees in this report have the same general opinion regarding the time factor; it is the main motive for going public through a reverse takeover. However, a reverse takeover does not obtain any external capital which is common when performing an IPO. This is important to take into consideration when comparing the two methods of going public. Companies that go through with a reverse takeover usually carry out a new right issue after they have been listed on a public market, while an IPO execute the new right issue during the listing process. From a capital obtaining perspective there is a slighter time difference between the two methods, since a reverse takeover is just a halfway point if there is a need of raising capital. A reverse takeover makes it possible for the private company to focus on their daily operations, while an IPO requires much more involvement and for that reason makes it a time consuming process. Even if the private company has a financial advisor, who does the main work in the listing process, it is not possible to ignore the fact that the management need to spend a substantial part of their time assisting the financial advisors. As a result, the daily operations at the company may suffer. It is for that reason understandable that the time factor affects the company?s costs, since a time consuming process generates higher costs for the company than a short listing process. A quicker access to the capital market can also be beneficial for the investors in the private company. Many of the private companies have shareholders that invest with the goal of selling their part of the company when it has reached a certain maturity. Listing a company could be one option for the investors to exit the company and to convert their personal wealth into cash, which according to Ritter and Welsh (2002) is one of the motives of going public. This could be done by an IPO or a reverse takeover. As mentioned before, a reverse takeover is quicker and they can transform their investment to a liquid asset and invest their money in a new project within a shorter time period.
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A quick and trouble-free takeover with a private company can be beneficial for the shareholders in the public company. The shareholders in a bad performing public company are often displeased with their investment and the reverse takeover can be viewed as the last resort to retrieve some of their invested capital (Gleason et al, 2005a). In many takeovers and acquisitions, one of the involved companies? shareholders can be against the transa ction. However, in a reverse takeover transaction both the public and the private company?s shareholders are usually positive to the transaction. The shareholders in the public company look upon the reverse takeover as a rescue from a bad investment and the shareholder in the private company view the reverse takeover as an opportunity to increase their wealth by getting a tradable asset. This makes it easier to smooth out the transaction process and make it as quick as possible. It is still important to be aware of that there is a possibility that the shareholders of the public company just want to recoup their investment into to cash. This provides a more negative picture of the reverse takeover transaction. If shareholders constantly sell their shares, there may be a significant downward pressure on the company?s stock. This could lead to a negative development for the trading activity as well as the investors may see the stock as unattractive, which can have an effect on the stock?s value. It is important that the board of directors of the private company does not get carried away, while concentrating on a quick entry on the market through a reverse takeover. Studies have shown that many acquisitions are not rational and that there is a lack of planning (Power, 1983). This could be a reality for companies that use a reverse takeover, as they make use of a method that is not the common one and a possible reason for choosing the reverse takeover transaction could be to save time, which effects the planning of the takeover. There are examples of unsuccessful reverse takeovers in the past, where there have been a lack of planning, forecast and due diligence and problems have therefore occurred at a later stage when the companies are already listed. In all capital market transactions a due diligence process is an essential part to ensure the quality of the transaction. Even if the private company are focusing on a quick listing process, it is still essential to not neglect the importance of the due diligence before the takeover. The time saved should not be saved by reducing the analysis and preparation before the reverse takeover. To make sure that the transaction is a rational choice a lot of information is needed before the reverse takeover (Power, 1983). As discussed before, if rushing through the due diligence process there is a risk that the decision to go through with the takeover may not be a rational decision. By analysing reverse takeovers made in Sweden, it is possible to see a repeated pattern of the public companies; they have in general a history of weak financial performance. This makes a due diligence in a reverse takeover even more important to minimize the risks of any unpleasant surprises such as old creditors wanting their money from the newly formed company. To prevent old creditors to put claim on the new company, a subsidiary can be created. By transferring all the liabilities and business activity to the subsidiary the problem with new unknown creditors will be limited to the subsidiary. The only remaining value of the listed company will then be a name and a listing place. This kind of method is recommended by some of the interviewees, to avoid potential problems in the future. The old saying that “time is money” is appropriate when talking about the cost aspect of reverse takeover. As discussed before, with an IPO the CEO and other executive officers of the company have to use a lot of their time to meet investors that are willing to invest in the company. This is costly for the company because their executive officers have to spend their time on the road and promote the IPO to attract capital instead of working within the company. A general belief when talking about reverse takeovers is that it provides cost ad-
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vantages in lower advisory fees compared with an IPO. However, the reason why the advisory fees are higher in an IPO process is because it raises new capital which is needed for the listing candidate and the advisors take a percentage fee of the capital raised. During the 20th century, takeover and acquisition waves have been found after economic disturbance in the financial market (Gorth, 1969). After the IT-crash which occurred in the beginning of the 21st century there was an increase of reverse takeovers. As a result of the crash, there were many shell companies which could be found on the stock exchange which were suitable for a reverse takeover transaction. The companies had large loss carry forward after a lot of investments but without any profit. This suited the private companies which wanted to enter the stock market with help of a reverse takeover. A common belief is that the companies which go public through a reverse takeover are low quality companies, which do not meet the requirements needed for a regular listing process. This has been proved wrong both in the theory and in the sample in this report. In that sample the most profitable companies are the real estate companies. The real estate companies with high profit are the ones that gain the most by using a reverse takeover instead of an IPO due to the loss carry forward. If the loss carry forward is one of the main motives for the company to go public through a reverse takeover it is very important to have an accurate valuation of the loss carry forward. Publicity is usually an important part when going public, both to attract new investors to the company and to promote the company itself. Publicity can also harm a company that is planning on going public. In case of sudden change of the market condition the listing process can be cancelled if to few investors have signed up for the share. This could be devastating for the company because it indicates that the stock is not attractive enough for the investors and the company may have problem with raising new funds in the future. When doing a reverse takeover the amount of publicity is low, as the transaction is between two companies and that the process can be hidden from the public until it is done. This can be viewed as an advantage if the reverse takeover would fail, since no one outside the company receive information about the failed takeover and therefore it does not harm the company. The low publicity can as well bring a negative side to the reverse takeover transaction. During an IPO the company set up road shows to attract capital. This road show does not only attract capital for the IPO, it is also an opportunity to inform the market about their company, product and business as a whole, which can generate future income. A reverse takeover is carried out in a different way and does not need the road shows, which makes it harder for companies that use this alternative transaction to promote their concept to the market. This could cause future problems partly for future income and future development of the stock. Maksimovic and Pegaret (2001) points out that a decision to trade the share on a public market may encourage more trust in the firm from investors and customers. However, when a company makes a reverse takeover, there is a risk that the stakeholders might be uncertain about the company?s trust. The empirical study shows that a reverse takeover can be as good as an IPO, if the transaction and conditions suits the company. It is still important to be aware of that the stakeholders might not have the same knowledge of these financial transactions and to use an alternative method that is known in media as the “back door” to the stock exchange could be viewed as a controversial decision and therefore harm the company?s image. The board of the company should inform their stakeholders and provide them with a background to their decision, in order to avoid these kinds of problems and to add trust to their company.
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One factor which could be decisive if a company should go public through a reverse takeover could be the private company?s lack of a unique profile. For instance, if there is a large concentration of companies within a specific sector that are already listed on the stock market, it could be hard to do a new entry within that sector. There is always a risk associated to invest in an IPO, the investor does not know how the market is going to respond to the new company. The investors usually choose to invest in the shares which impose the lowest risk as possible and therefore a unique profile or a new concept is needed to attract the investors when going through with an IPO. For those companies, without a unique profile, which want to enter the public capital market can make use of the back door to the market. This could be the answer to why many companies in the sample are real estate companies. There are already many real estate companies listed on the Swedish stock exchange and it could be hard for the new companies to attract investors for their IPO. There are many examples of real estate companies that have gone public through a reverse takeover over the years. It is possible to argue that this reality agrees with the theory that indicates that if there is a positive market reaction of a specific industry, then companies belonging to this industry often follow the same route (Ljungqvist, 1995). The empirical study reveals that manufacturing companies are as suitable for a reverse takeover as real estate companies, but there is no experience in this industry of going public through a reverse takeover. This could have caused a skeptical point of view against the reverse takeover transaction and no companies are willing to take the risk of being the first mover. An opposite situation has arisen in the real estate industry, where companies have carried out this alternative process as well as the outcome has been favorable. Private real estate companies and public IT-companies have in many cases created a reverse takeover together, as they have been suitable for each other. The effect of this is that a clustering of reverse takeover transactions has been created in these specific industries. The efficiency theory points out that a main reason for making a takeover is to find operational synergies between the two companies (Jensen, 1984). The study made in the U.S. show that one third of the companies that perform a reverse takeover do it within the same industry to gain potential synergies (Gleason et al, 2005a). This has generally not been a main motive for reverse takeovers on the Swedish stock exchange. Instead, private companies search for public companies that more or less looks like a shell, have an organization that are easy to transform and has a loss carry forward from past failures, as in the case of private companies taking over IT-companies in Sweden. Adjei, Cyree and Walker (2007) analyzed the reverse takeover method on the New York Stock Exchange (NYSE) and NASDAQ in 2000-2002. The outcome showed that companies that use this alterative way were less profitable than companies that chose to go public through an IPO and that they generally were bad performer. Reverse takeover transactions in Sweden demonstrate a different picture of the characteristics of the companies that go through with a reverse takeover. One of the most common and significant motive of the reverse takeover is to be able to use the loss carry forward from the shell company, to get tax reduction. This implies that the company must at least show some kind of profitability to get value of the loss carry forwards. The reason why Swedish companies that carry out a reverse takeover are generally more profitable than the American companies could have a relationship with the nature of companies that goes public in Europe and in the US. In Europe companies are usually more mature, while in the US there are many start-ups that are using a reverse takeover to reach a market listing (Pagano et al, 1998).
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6
6.1
Conclusion and Discussion
Conclusion
The time aspect is one of the most essential factors when discussing reverse takeovers. In this report we argue that a reverse takeovers is a faster process than an IPO, the private company can acquire a listing spot at a stock exchange fairly quick and take advantage of the capital market. It takes almost half the time period to go public through a reverse takeover compared to the listing process for an IPO. There are two main reasons for the shorter listing process, the first is that a reverse takeover is a transaction between two companies and the IPO is a transaction between one company and the public. The second reason is that reverse takeovers also face lower requirements from the stock exchange. The time factor is with no doubt a vital part when deciding to go public through a reverse takeover. A shorter time period can also lower the cost for the private company when deciding to go public. By decreasing the time period, the advisory fees get lower and the private company?s management team can focus on increasing the revenue for the company instea d of spending time on the listing process. However, the lower cost is not a main factor when deciding to go public through a reverse takeover but should be seen as a positive feature for the reverse takeover. Many of the reverse takeover transactions in Sweden were done to take advantages of the loss carry forward in the public company. The possibility to reduce tax payments and go public at the same time can we see as another main factor why companies choose to use the reverse takeover technique when going public. We believe that the loss carry forward in poorly performing shell companies at the stock exchange is one of the reasons why so many of the private companies have a quite large profit when they decide to do a reverse takeover. If the company does not show any profit the loss carry forward is useless and one of the factors that are decisive for making a reverse takeover is then vanished. As stated before a reverse takeover is a transaction between two companies and the information about the transaction has to be published only when the deal is done. This exposes another factor behind the choice to go public through a reverse takeover, the low publicity during the process. A private company can go public without the risk of having to stop the listing process before the company is listed. By taking the back door to the capital market the private company can in some way ignore the current market condition because the transaction is not depending on the demand for the company?s stock. This makes a reverse takeover a good alternative for companies without a unique profile. If performing an IPO the company will be compared to other already listed companies with the same profile and because it is common to see a new company as a high risk alternative, the company can then have a problem to attract enough investors to sign up for the IPO. A recognized pattern on the financial market is that reverse takeovers are carried out more frequently after a market crash. A huge downfall on the market provides a favourable condition for reverse takeovers, as there are several companies that have the characteristics that resemble a shell and for that reason makes them suitable for a reverse takeover transaction. This agrees with what we have seen in Sweden, since private companies started to go public through reverse takeovers after the IT-crash. Many IT-companies experienced huge losses and did never recover after the crash, which made them suitable object for a reverse takeover transaction. It is therefore understandable why there have been a large quantity of public IT-companies involved in reverse takeovers in Sweden. We have seen a
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different outcome for the private companies that carry out a reverse takeover. There has been a wide spread between the industries, but it has been noticeable that the quantity of real estate companies has increased in the recent years and we believe that this proportion will increase even more in the future. The empirical findings also show that reverse takeovers are most frequently used by profitable private companies in Sweden, which look for a less time consuming process than an IPO. The reason why many profitable private companies and underperforming public companies have carried out a reverse takeover together is because they are each other?s contrast and the effects of the takeover are beneficial for both sides as they can take advantage of the losses, profits and shareholder base from both companies. The reverse takeover transaction is still a new financial technique in Sweden and there will be clearer trends in the future. We consider the reverse takeover transaction itself as a financial trend in Sweden. A trend is usually known as a general movement on the market, either an increase or a decrease and the quantity of companies which have used the reverse takeover transaction to go public have increased during the 21st century. Our impression is that going public through a reverse takeover can still be viewed as a controversial decision, since it is an alternative method to the IPO. We believe that this will change, since more financial advisory companies are specializing on the reverse takeover, which will result in more of their clients going public through this transaction in the future. Media in Sweden have never focused as much on reverse takeovers as it does today, which will affect the awareness and knowledge about the transaction in the future. We believe that the loss carry forward should be a secondary motive for going public through a reverse takeover, since the loss carry forward is difficult to evaluate and set a precise value of. Companies which have focused too much of getting tax advantages from the loss carry forward have in many cases run into future problems since they have estimated an incorrect profit. It is also important to reflect on the reverse process that the reverse takeover provides. A few companies in Sweden have been harmed of the reverse listing process, as they have not been able to live up to the requirements from the stock exchange after they were listed on the observation list. This has resulted in a much longer time period on the observation list or even a de-listing from the stock exchange. Some companies that have performed a successful reverse takeover process have still found it difficult to establish a sufficient trading activity in the stock. The shareholders of the public companies has usually been positive to a reverse takeover transaction, as they want to recoup as much of their investments as possible. This creates a downward pressure on the company?s stock, since the selling side will be much bigger than the buying side. We believe that planning and a careful due diligence process is the only method to minimize risks when going public through a reverse takeover. The due diligence is even more important for reverse takeovers than for other transactions, since the business agreements are in general with companies that have a history of weak performance.
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6.2
Reflections
The authors found inspiration to this thesis when reading the Swedish business press. Several articles have been written about reverse takeovers during the last couple of years, but the articles have almost exclusively seen reverse takeovers as something controversial or negative. The reverse takeover between Daydream and 24hPoker has received a lot of attention in the business press and enlighten the importance of accurate planning and valuation during a reverse takeover. The authors found the subject very interesting and wanted to analyze the factors behind a reverse takeover and why private companies decide to go public using this alternative compared to the regular IPO process. In the beginning of the work with this thesis the authors found out that very little research has been done within the subject reverse takeovers or alternative ways to go public. The little research that has been done is basically based on the US market and the performance of the stock after the reverse takeover, but no research about the factors or motives behind a reverse takeover. The authors believe that as a result of a more frequent usage of reverse takeovers as an alternative more research will be produced to fully analyze the phenomenon. During the work with this thesis the authors have reflected over a growing acceptance and positive view of reverse takeovers. The perspective has changed from a controversial alternative for bad performing companies to enter the stock exchange to an accepted alternative for well performing companies to get a quick access to the capital market as well as taking advantage of lower tax payments or other structural advantages associated with a reverse takeover. The authors believe that reverse takeovers will become more and more accepted as an alternative to the regular listing process and can in the future be seen as a cleaning act to get rid of bad performing shell companies at the stock exchange, and give new and better performing companies the possibility to take advantage of the capital market.
6.3
Critique of Chosen Method
After the research have been conducted the authors of this report realised that the method of research could have been done with more accuracy. To have a higher reliability in the sample it could have been an alternative to increase the number of companies involved in reverse takeovers by looking at smaller market places such as Aktietorget. The sample have the span from 2001 to 2007 with help of companies from Aktietorget the sample could have been more up to date compared to the current sample in this report. Even though Aktietorget is a rather small market place, it is still quite active when it comes to reverse takeovers performed. There could also have been the alternative to do a case study. The case study of companies which are performing a reverse takeover or has performed a reverse takeover would help the researcher to gain insight in how a reverse takeover affects the involved parties. The authors of this report decided to talk with the people with the greatest knowledge of reverse takeovers to be able to create an overall image of how the reverse takeover is conduced. A case study would have given the authors the possibility to gather information from the stakeholders within the firm through interviews done with shareholders, board of directors and employees in the firm.
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6.4
Further research
When finalizing the thesis the author became aware of that the researched subject can be analyzed from different angles to get broader perspective of reverse takeovers. It could be of interest to analyze reverse takeovers from a shareholder?s point of view, can a shareholder in a bad performing company receive greater value if the company is merging with a private company? And if that is the case, can an investor systematically invest in bad shell companies on the stock exchange and hope for a reverse takeover with a better performing private company? This approach focuses more on the development of the stock price after a reverse takeover and can then bee compared with previous research about the stock price after a reverse takeover done in the US. Another further research approach of interest is gather empirical findings from the private companies? shareholder, board of directors and management to analyze reverse takeovers from another perspective than this thesis. Finally, this thesis could be used as a basis for a comparison between Sweden and other countries such as the US or other European countries, with focus on the factors behind reverse takeovers and the risks associated with the transaction.
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Appendix 1:
Definitions
Due diligence process
The name of the process where lawyers and accountants go through the books of a company to reassure that the potential buyers know everything worth knowing about the firm, liabilities et cetera. This is an important process med prior to an acquisition. Occur when a company decide to introduce a subsidiary or division into the stock market with help of an IPO. First North is an alternative marketplace for small growth companies. First North is a part of OMX Nordic Exchange. (omxgroup.com, 2007-11-27) A company?s entry on the stock market and its first sale of stock to the wider public. Lex ASEA is the general term on the Swedish tax regulation which can be found in chapter 42 16-16a §§ in the Swedish Income Taxation Law. Lex ASEA regulates the main company?s dealing out stocks from the subsidiary to the main companies owners. By that the taxation can be postponed until the receiver of the subsidies stocks decide to sell off his part. (Skatteverket.se, 2007-11-27) Losses which can be used as a tax shield to reduce the taxable income in future years. The value of the shares of a listed company. Calculated by taking the shares times the current share price. This as a way of measuring the size of a company. A discounted offer to buy new shares made to the shareholders of a listed firm. Nordic Growth Market (NGM) is an Exchange under the supervision of the Swedish Financial Supervisory Authority. NGM offers listing and trading on the NGM Equity list and trading in derivatives on the Nordic Derivatives Exchange (NDX). (ngm.se, 2007-11-26) OMX Nordic Exchange serves as a central gateway to the Nordic and Baltic financial markets. Companies on the Nordic Exchange are divided into three segments: Large Cap, Mid Cap and Small Cap. Nordic companies with a market value over one billion euro are presented within the Nordic Large Cap segment. Companies with a market value between 150 million and 1 billion euro are contained within the Mid Cap segment, while companies with a market value below 150 million euro are contained in the Small Cap segment. The segments are revised every six months, on 1 January and 1 July, based on the weighted average price for May and November. (omxgroup.com, 2007-11-27) A document which contains the companies business, financial his-
Carve-outs First North
Initial Public Offering (IPO) Lex ASEA
Loss carry forward Market capitalization
New rights issue NGM Equity
OMX (Nordic Exchange)
Prospectus
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tory, performance, and capital structure. This document has to be published prior to issuing shares to the public. Reverse Takeover A public company acquires a private company through non-cash issue directed to the owners of the private company. The private company will then become majority owner in public company through the shares. The result is subsequently that the private company acquires the public company, and takes over the listing place. In this report reverse takeover refers to the transaction also known as reverse acquisition, reverse transaction and reverse merger. A contract that reassure that the buyer purchase and the seller sell a product or service, which protect the interest of both parties before the deal is closed. A company with no business activity or assets. It exists only as a name and a place on the stock exchange.
Sales and Purchase Agreement (SPA) Shell company
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Appendix 2:
Questionnarie - Omvända Förvärv
1. Hur ser transaktionsstrukturen vanligtvis ut vid ett omvänt förvärv?
2. Vad kan gå fel vid ett omvänt förvärv?
3. Vilka aspekter bör man lägga extra fokus på för att minimera potentiella risker?
4. Går det att utläsa några specifika motiv till att företagen väljer att notera sig genom ett omvänt förvärv, jämfört med en IPO?
5. Vilka fördelar resp. nackdelar finns det med en notering via ett omvänt förvärv?
6. Hur skiljer sig noteringsprocessen vid ett omvänt förvärv i jämförelse med en IPO?
7. Hur skiljer sig kostnaderna vid en notering genom ett omvänt förvärv jämfört med en IPO?
8. Hur lång tid tar ett omvänt förvärv att genomföra?
9. Vilken typ av bolag är lämpade för att noteras genom ett omvänt förvärv? (Ägarstruktur, Omsättning, Bransch, etc.)
10. Hur ska det optimala noterade bolaget (börsplatsen) se ut, för att genomföra ett lyckat omvänt förvärv?
11. Går det att utläsa trender/mönster inom omvända förvärv? (Vilka bolag är aktiva just nu, etc.)
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Appendix 3:
Reverse Takeover Sample
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doc_604613186.pdf