White Knights or Machiavellians? Understanding the motivation for reverse takeovers in Singapore and Thailand
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White Knights or Machiavellians? Understanding the motivation for reverse takeovers in Singapore and Thailand Pantisa Pavabutr1
© Springer Science+Business Media, LLC, part of Springer Nature 2019
Abstract This paper analyzes 47 reverse takeovers (RTOs), in which privately held firms acquire public firms to obtain listing status in Singapore and Thailand between 2007 and 2015. Unlike U.S. RTOs in prior studies, these transactions cannot be regarded as short-cuts to bypass listing rules since merged firms must meet the same minimum listing requirement as firms listing with IPOs. Rather, private firms treat RTOs as an opportunity to become public firms without immediate dilution by acquiring smaller firms at bargain prices. By examining shareholder circulars and analysis of transaction characteristics, we find that co-parties tend to cite growth from business diversification as their motivation for RTOs. Distressed public firms more frequently emphasize the motivation to reorganize and revive by merging with stronger private firms. Analysis of return and financial accounting performance shows that the merged firms experience improved growth and generate positive wealth impact; thus, offering opportunity for incumbent shareholders of public firms to recover some of their investment value. Keywords Reverse takeovers · Back-door listings · Emerging markets · Bootstrapping JEL Classification G14 · G34
1 Introduction Equity markets have both an allocation and monitoring role. The challenge for regulators is striking a delicate balance between overseeing transparency and fair rules governing listings for efficient allocation of resources and protection of investors without delineating potential firms from entering organized Stock Exchanges. The dual paths to listing can be direct through an initial public offering (IPO) or indirect through a reverse takeover (RTO). An IPO is traditionally seen as a young company with full listing qualifications coming of age and offering shares to the public. An RTO is the process whereby a private company
* Pantisa Pavabutr [email protected] 1
Thammasat Business School, Thammasat University, 2 Prachan Rd., Bangkok 10200, Thailand
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acquires a controlling stake in a public company in order to obtain listing status. In doing so, an RTO allows a private firm to list and seek out growth opportunities by merging with a public firm without too much dilution and vulnerability to market conditions. However, anecdotal and some selected empirical evidence suggest a dark side to RTOs as they are often referred to as “back-door listings” with transactions associated with opaque firms wanting to bypass stringent listing rules or methods in which holding companies of shell firms try to get rid of non-performing assets by passing them along to uninformed investors (Adjei et al. 2008; Floros and Shastri 2009). Other authors argue that the drawbacks of RTOs are that their speed and cost saving benefits are often overestimated even with on-going trends towa
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