A reverse takeover lets a private company gain a public listing by combining with a company that is already listed, rather than through an IPO. We recently advised on a transaction of this type involving a Swedish listed company on the Nordic Growth Market, due to be announced in the coming weeks. The owners we see choosing this route usually share two concerns. They do not want the cost and exposure of a full IPO, and they are unsure how much financing they can raise for a listing.

The appeal is speed, cost and certainty. A reverse takeover typically completes in three to six months, where an IPO can take a year or more, at lower cost and with less dilution. Because the deal sits between two companies rather than on a roadshow, it depends far less on market sentiment, and it separates going public from raising money, so a company unsure of its funding can list first and raise capital later.

However, there are some drawbacks. Without an underwriter running a full public vetting, investors do more of their own work and institutional demand can be harder to win. The listed company can carry legacy problems, from litigation to weak controls, which the enlarged group inherits. Liquidity is not guaranteed, especially where the shares were struggling to trade before the deal.

Regulation still applies during this process, and differs between exchanges. In the case of the Nordic Growth Market, after a letter of intent and a sale agreement, the exchange places the shares under observation and reviews the combined group as a new listing, assessing an information memorandum within about 20 working days where the papers are complete, before shareholders approve the close. Financing is key, since a company without established earnings must show how it is funded for its first twelve months of trading.

The success record for reverse takeovers is mixed. Research from the Journal of Corporate Finance finds these companies underperform fresh IPOs in the US, while UK research from the London Stock Exchange finds reverse takeovers perform similarly to IPOs. We expect interest to hold while the IPO market stays quiet, though the route suits specific situations rather than every company.

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