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Q: Corporate Finance - Reverse Buyout ( No Answer,   14 Comments )
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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.
Answer  
There is no answer at this time.

Comments  
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.

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