|
|
Subject:
Corporate Finance - Reverse Buyout
Category: Business and Money Asked by: wir-ga List Price: $25.00 |
Posted:
12 Mar 2006 20:04 PST
Expires: 11 Apr 2006 21:04 PDT Question ID: 706583 |
Hi! I am doing a thesis for my finance class on the methods that companies used to raise capital. One of the main focus is on reverse buyout. I am not familiar with this topic, so I hope there are experts that can direct me to this. I would also like to know, if you can provide solution or a reference to my following questions on reverse buyout. 1. What's its advantages and disadvantages? 2. How risky is it for Small to Medium Sized companies? 3. Interest rate is high now in the world, particulary in Southeast Asia. Is reverse buyout a good method to raise capital? 4. What are the requirements to do a reverse buyout (in detail)? 5. What kind of industries (type of business, eg. retail, banking, agriculture, mining) are feasible to do reverse buyout? 6. Examples on real business situation for reverse buyout. 7. A comparison of reverse buyout vs IPO vs bank loans vs issue bonds on the effects of? (cost vs benefit) 8. Please provide more information on reverse buyout if you have any material worth reading. Thank you very much. Your help is most appreciated. |
|
There is no answer at this time. |
|
Subject:
Re: Corporate Finance - Reverse Buyout
From: frde-ga on 13 Mar 2006 01:00 PST |
I don't think a 'reverse buyout' is primarily concerned with raising funds. Typically it is used as an inexpensive way of obtaining a stock exchange listing - you buy a 'shell' and 'reverse' your company/assets into it. Here are some examples of use of the term. http://www.princetoninfo.com/199912/91208c03.html |Senesco hopes to enhance crop quality and productivity by genetically extending the shelf-life of plants. It works with two aging (senescence) genes, one encoding DHS (deoxyhypusine synthase) that regulates gene expression and another enclosing a lipase that actually causes cell and tissue death. Initially, scientists at the University of Waterloo in Canada are working on the leaves of Arabidopsis plants and on three crops -- tomatoes, bananas, and carnations. It did a reverse buyout with a shell company to become public and had a stock split effective in October.| http://news.com.com/Hayes+does+merger,+private+placement/2100-1001_3-201940.html |The No. 2 modem maker's move to merge with a publicly traded entity is known on Wall Street as a reverse buyout, in which a company goes public by merging with another company whose shares are already publicly traded.| A company does not always want a listing in order to raise capital, normally it wants a listing to make it easier to trade its shares, this may be because owners/investors want to sell their holdings, but it can also be a mechanism for establishing a market price for shares prior to transferring them into something like a trust. In other words a way of 'lowering' the price of a holding to obtain (or transfer) tax advantages. |
Subject:
Re: Corporate Finance - Reverse Buyout
From: myoarin-ga on 13 Mar 2006 14:58 PST |
Perhaps the expression "reverse buyout" is used differently in the UK. If you scroll down on this site, you will get a brief definition: http://www.econ.uoa.gr/UA/files/39424827..pdf Wir-ga, This is a free comment, not an "answer" to your question, which only a G-A Researcher with a blue name can post. Perhaps the above site can give you a little better understanding of the subject. Personally, I think you need a book that discusses the matter, perhaps one of these: http://books.google.com/books?q=reverse+buyout&num=20&hl=en&lr=&c2coff=1&safe=off&sa=N&tab=wp Good luck. |
Subject:
Re: Corporate Finance - Reverse Buyout
From: frde-ga on 13 Mar 2006 23:55 PST |
@MyOarin I can't seem to get at that PDF - Explorer does not recognize it and Netscape loads Acrobat and says 'the file is damaged' Any chance of a brief synopsis I also can't get at the main site, it looks as if it belongs to the Dept of Economics University of Athens (just a guess). I'm also curious, because the UK meaning ties up with the two snips that I quoted, both from the USA - one from Princeton. |
Subject:
Re: Corporate Finance - Reverse Buyout
From: myoarin-ga on 14 Mar 2006 04:23 PST |
HI Frde, Sure. The site is from the Univ. of Athens in Greece: "3. Buyout: A group of individuals purchases the shares and takes ownership and control of a firm paying in cash. - In most cases, the required cash is raised by issuing debt (junk bonds). For this reason these transaction are often called leveraged buyouts (LBOs). - If the group of individuals incluedes members of the target firm's management, these transactinos are often called management buyouts (MBOs). - After the transaction, the firm usally "goes private". That is, the firm's shares are no longer publicly traded. - Subsequently, some assets/divisions of the firm are sold to another firm and often the firm goes again public via an IPO [Initial Public Offer, myo]. This latter transaction is called a reverse buyout." I included the other points to put the last one in context, which is very similar to other descriptions of "reverse buyouts", in principle, reversing the earlier privatization (buyout) of a company by again taking it public. Quite simply, I do not agree with the use of the term in the Hayes article. Wir-ga, from this you can understand that a reverse buyout relates to a company - or a subsidiary of one - that has previously been publicly held. I don't know if this fits your use of the expression "Small to Medium Sized companies". Hope that helps, regards, Myoarin |
Subject:
Re: Corporate Finance - Reverse Buyout
From: frde-ga on 14 Mar 2006 05:29 PST |
Oddly Ratty, I don't quite agree with that. One of my tutors at a long esteemed place was Greek, but I'm damned if I'm going to have something I learnt well /later on/ reversed by a dubious posting from Athens. I stand my ground on the meaning of 'Reverse Buyout' - mostly I respect your experience, it kind of shows, but in this case you've not seen it. - Reverse buyouts ain't banker friendly Perhaps we'll live to fight another day - not with each other - but against the idiots. |
Subject:
Re: Corporate Finance - Reverse Buyout
From: myoarin-ga on 14 Mar 2006 17:14 PST |
I quite agree - not to fight - but I feel that I owe Wir-ga an explanation here, since we are his only respondents. Here is another site using and describing the expression (pages 2, 6): http://faculty.fuqua.duke.edu/seminarscalendar/Katz.pdf And here is another professor's power point, scroll down to pages 9-10: http://faculty.haas.berkeley.edu/hennessy/BA231web/NOTES21.pdf Of course, you are right that reverse buyouts are not banker friendly, since successful ones will bring in capital and allow the company to reduce debt. Cheers, Ratty (aka Myoarin) |
Subject:
Re: Corporate Finance - Reverse Buyout
From: frde-ga on 14 Mar 2006 19:05 PST |
@MyOarin Having had a bit of time to think about this, and having metabolized the vino, I think that University of Athens site is just plain wrong, and the fault is down to the author not being a native English speaker. You obviously cut and pasted the quote. Your spelling is impeccable. Also it is not unusual for academic economists to be blissfully unaware of the real world, something that I and a few others found highly amusing at college. Sharon Katz appreciates the difference between a 'Reverse Buyout' and an MBO :- |I begin this study by exploring evidence of earnings management in the transition between public and private via reverse buyout (private to public) and ?going private? (public to private) transactions, such as leveraged buyouts (LBOs) and management buyouts (MBOs).| Hennessy just uses the term 'Reverse Buyout' |? Management Buyout (MBO): LBO undertaken by target management. Frequently the buyers go private implying the firm ceases to exist as a publicly traded corporation. After management (hopefully) implements reforms, the firm is often taken public in a Reverse Buyout. ? Example: Eckerd Corporation (drugstore chain) received hostile takeover bid in 1985. MBO took place in 1986. RBO in 1993.| So what really happened to Eckherd .... http://www2.eckerd.com/content.asp?content=company/about/timeline&cookie%5Ftest=1 |1993 Eckerd reaches an agreement with Chemical Bank Corp and NationsBank that will cut the company's interest cost by $30 million per year. Frank Newman joins Eckerd as president and chief operating officer. Eckerd Corporation goes public with a listing on the New York Stock Exchange.| Interestingly, no mention of the way in which it got its listing but ... |1997 Eckerd begins the conversion of Thrift Drug outlets (which were previously owned by corporate parent J.C. Penney Co.)| Ho, hum, so it floated, but got a 'corporate parent' between 1993 and 1997. In the UK we would normally say a firm 'Floats', in the USA one would say makes an 'IPO' - a 'Reverse Buyout' is a cheap (and unsensational) way of obtaining a listing through the back door. 'Reverse Buyouts' are certainly not 'Merchant Banker Friendly' as they reduce the need for advizors and underwriters. My suspicion is that Wir-ga's tutor was being a bit tricky, a devious assignment. |
Subject:
Re: Corporate Finance - Reverse Buyout
From: wir-ga on 14 Mar 2006 22:50 PST |
First of all, I want to thank all of you who have provided useful links, and comments on the reverse buyout topic. I have read the PDF files and your comments. Thanks to that, I have a better idea what "reverse buyout" is. However, I am still unaware of its mechanism of raising capital and the risks involved. According http://www.shellstockreview.com/, we buy cheap shell stocks from shell corporation that has idle business operations but still maintain its SEC filings. Later, we use this shell company to form new entity and sell shares to the public. Of course, the acquirer's business has to be in great market demand, therefore its shares will rise after it does reverse buyout. Otherwise, it's a loss (the cost of shell stocks). The following is a quote from the website: for your information too, hope this helps ^^ WHAT IS A SHELL STOCK? Basically, a Shell Stock is a public company that no longer has any business! It retains its capital structure and SEC reporting status with the intention to "reverse merge" into a non-public company with an on-going business. This merger creates a new company that is both public and generating revenues. Why would a private company with an on-going business want to reverse merge into a Shell Stock? The goal of the private company is to become a public company. There are many benefits in becoming a public company. The traditional method of becoming a public company, via an IPO (initial public offering) can be very expensive and time consuming. Becoming public via a reverse merger is less expensive and much quicker. SHELL STOCK STOCK STRATEGY Most investors buy Shell Stocks when there are rumors of a potential reverse merger. They become impatient when the reverse merger does not happen and sell . . . usually at a loss. My question is that: 1. How risky is it for a firm to do reverse buyout, focusing on SME (Small & Medium Enterprise)? One of the aim of the thesis is to discuss the risks associated with reverse buyout compared to conventional IPO or bank loans. 2. Usually, the underwriters and I-Banking firms do promote or market IPO shares and therefore increases the popularity and drive market demand for the IPO shares. One of you mentioned that reverse buyout do not require underwriters from I-banking firms. I understand this part. But will it reduce its chance of gaining good price of its shares without the underwriter? 3. Any other comments would be most welcome. Thank you. Meanwhile, I will keep researching on reverse buyout and I will post new information. |
Subject:
Re: Corporate Finance - Reverse Buyout
From: frde-ga on 15 Mar 2006 05:24 PST |
@Wir-ga You have found some useful information on Shell stocks. 1) How risky ? Basically it is a zero risk option (unless one does something really stupid). It is just a mechanism for obtaining a listing - nothing to do with raising funds (eg: IPO or bank loans) Once you have the listing you might issue more stock, but that is purely optional. 2) If you have no intention of raising capital then there is no worry about hype or lack of it - and the price of the shares is what you want them to be, or rather you can make them what you want, as you own them. There is an interesting angle to consider for large organizations. Tracker funds have to buy your shares (or derivatives to emulate a shareholding) and since the shares will not be very liquid it could force their price up. As I mentioned earlier, a high share price is not always desirable, a high price only matters if you plan on selling the shares, but if you want to 'transfer' them, a low price is often advantageous. The only downside is that it makes your company's history look rather 'sharp', but that has not worried WPP (Martin Sorrell's advertizing giant) which he created out of a shell. |
Subject:
Re: Corporate Finance - Reverse Buyout
From: myoarin-ga on 15 Mar 2006 19:53 PST |
"Clunk" The penny dropped finally, and I see Fred's (and Wir's) inclusion of shell companies. :-) Carry on. Myoarin |
Subject:
Re: Corporate Finance - Reverse Buyout
From: wir-ga on 16 Mar 2006 07:47 PST |
Hi Myoarin, Based on your last comment, you seem to know a lot about Shell companies on reverse buyout. Mind if you can share some of your knowledge with us here? I am sure all of us can benefit. Anyone is welcome to post comments too. My deadline is in 10 days time...still struggling to finish my paper :) Appreciate your help... |
Subject:
Re: Corporate Finance - Reverse Buyout
From: myoarin-ga on 16 Mar 2006 14:27 PST |
Sorry, Wir-ga, I guess I was too cryptic. I finally had recognized how Frde-ga's comments had a bearing on reverse buyouts. The little I seem to have learned from this is that it is apparently cheaper and maybe quicker to buy a shell company, merging your private existing company with it, and initiate and IPO, than to change the corporate structure of your company to that of one that can initiate an IPO. But I will defer entirely to Frde on this. Regards, Myoarin |
Subject:
Re: Corporate Finance - Reverse Buyout
From: wir-ga on 16 Mar 2006 19:08 PST |
Yes, indeed both you and Frde-ga have provided me with some useful insights. I am sure i can make full use of it. Thanks again :) |
Subject:
Re: Corporate Finance - Reverse Buyout
From: frde-ga on 17 Mar 2006 00:56 PST |
@MyOarin Good to see we are on the same wavelength @Wir I assume that someone set you this assignment - in which case you need to work out the type of answer that they /want/ to see. My guess is that it goes along the lines of : 1) Reasons for getting a listing (not necessarily to raise capital for the company - or even to raise cash for anything). 2) Methods of getting a listing, pros and cons of both. - note that an 'IPO' can involve no 'public offering' a simple share placement can suffice. 3) Minor digression on raising finance from bank, bonds etc - disadvantages of share dilution 4) Minor digression on reasons for selling a money making machine - generally the three D's - Death, Divorce, Disease - and I'm not joking 5) Wad out the thesis with technical details on how to reverse into a shell and obtain a listing via IPO 6) Sling in case studies of companies that have done reverse buyouts We have Eckerd, probably WPP - there is an amusing tale about James Goldsmith who borrowed from a French Bank and used the funds to buy it out, eg: a 'reverse takeover' - a variation on the theme. Ditto Alves Reis and his attempt to buy the Bank of Portugal - an interesting historical event. Neither are really 'reverse buyouts' - more cases of the tail taking over the dog. Somewhere in there you can insert a strict definition of a 'reverse buyout', contrasting it with things that look similar but are really opportunistic takeovers. Note that the vehicle need not be a total 'shell', also that 'shells' can be used for kicking off a business as well as obtaining a listing for an existing private business. 7) Dig out a few incorrect descriptions, present them for amusement value. 8) Wrap up with, 'classical reverse buyouts' are a little understood mechanism, possibly because it is not in the interests of ... to publicize or promote them. Incidentally I was at a flotation party a bit over a year ago, for a company I knew well, one question I asked the guy behind it (who had done a GBP 1 billion flotation a few years earlier) was why he had not reversed this one into a shell. From watching later share movements I saw why - they wanted to look squeaky clean ... Best of Luck. |
If you feel that you have found inappropriate content, please let us know by emailing us at answers-support@google.com with the question ID listed above. Thank you. |
Search Google Answers for |
Google Home - Answers FAQ - Terms of Service - Privacy Policy |