Five Companies Who Used RTOs: A Case Study

Dec. 13, 2019 7:38 AM ETBerkshire Hathaway Inc. (BRK.B)
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Summary

  • What is an RTO.
  • New York Stock Exchange.
  • Berkshire Hathaway.

Reverse takeovers (RTOs) have a complicated perception, but many well-known companies have used them with great success. The reasons for using an RTO include avoiding the scrutiny from regulators and the significant time delays that are associated with an IPO (initial public offering). Here are some RTOs and how they did, which should provide a snapshot of the reasons and outcomes of these transactions.

What is an RTO?

An RTO, or reverse takeover, occurs when a private company acquires a public company. The private company then merges its operations into the public company and usually changes the name to reflect the private company—but not always. RTOs are used as a way for a private company to go public without the lengthy and expensive requirements of an IPO (initial public offering).

New York Stock Exchange

The New York Stock Exchange, or NYSE, used a reverse merger to become a public company in 2006. The NYSE acquired Archipelago Holdings for $10 billion. The company was founded in 1996, beginning as an ECN, and then becoming an exchange through the purchase of the Pacific Stock Exchange. Bringing the exchange to the U.S. and leveraging technology, they began to take customers away from both the NASDAQ and the NYSE. The NYSE still relied on the traditional pit traders as ArcaEx, as Archipelago’s exchange was then called, was taking market share away by offering faster and cheaper electronic trades.

After the reverse takeover, the ArcaEx was renamed the NYSE Arca Exchange. Soon after, the NYSE became a publicly-traded company—combining both electronic and traditional trading services. Less than a week after the acquisition, NASDAQ bought Archipelago’s competitor, Instinet.

The NYSE’s acquisition of Archipelago allowed it to take advantage of new technology while still preserving some of the traditional floor trading, which—without the acquisition—would likely have been steamrolled by having to compete with the speed and cost-effectiveness of electronic trading.

Berkshire Hathaway

Berkshire Hathaway is one of the largest companies in the world—owning such staples of the American business landscape as GEICO and Dairy Queen. While many in the public would recognize Warren Buffett as the man behind Berkshire Hathaway, few would know that this corporate behemoth was the result of an RTO.

The company began in 1888 and was started by Horatio Hathaway. It met with great success until after World War I, at which time the cotton industry started to decline. Then Seabury Stanton merged Hathaway with Berkshire Fine Spinning Associates, Inc. to bring the name Berkshire Hathaway to the world. It was not quite yet the Berkshire Hathaway we know today.

Warren Buffett, always a value investor, recognized the stock as a value after a steep downturn in the late 1950s. Buffett continued purchasing more and more of the stock, eventually reaching a stake of 49%. By the late 1960s, Buffett began to consider the textile business unprofitable and saw the insurance business as a bustling alternative. He purchased two insurance companies— National Indemnity and National Fire and Marine Insurance. The two private companies were merged into the public textile company and Buffett kept the original name.

Berkshire Hathaway held little value to Buffett by that time as a textile company, but its status as a public company was of value to him. By purchasing other companies in an industry that he did value and merging them with the public company, he was able to gain control of a public company in the insurance business.

Burger King

In 2010, Brazilian firm 3G Corporation bought Burger King for $3.6 billion. The deal took the fast food giant back into private ownership for the first time since private equity investors had taken the company public four years before.

By 2012, the company was poised once again to be a public company—this time through a reverse merger. Justice Holdings, a publicly-traded shell company, merged with Burger King—giving the fast food staple access to the stock market once again.

After going private, Burger King was able to better its finances and regain customers by selling corporately-owned stores to franchisees and overhauling the menu. Burger King was able to take a break from the Street and focus on improving their bottom line. Then the company utilized an RTO to quickly get back into the game.

ShengdaTech

After the Great Recession of 2007-2008, gutted American companies appeared desirable to Chinese companies looking to gain access to the American stock market and its vast fundraising potential. Perhaps the best-known example of this is ShengdaTech.

Zeolite Exploration Company absorbed a Chinese-owned company named Faith Bloom and subsequently filed for bankruptcy. This was after it was discovered that a large number of falsified documents were submitted as part of the deal. Many other Chinese-initiated RTOs also turned out to be fraudulent. These cases emphasize that RTOs are not a way to avoid serious financial improprieties.

Even though the scrutiny is much less than an IPO, companies who attempt to use RTOs as a vehicle to carry out fraud are likely to encounter significant issues finalizing the deal and standing up to the post-RTO scrutiny.

Diginex

Traditional regulatory institutions are typically suspicious of cryptocurrency. Diginex is a financial services company that leverages blockchain technology to make digital money more accessible. The price volatility seen in cryptocurrency markets and the potential for money laundering are enough to give any regulator pause. Diginex was able to mitigate this through an RTO.

Diginex exchanged shares with 8i Enterprises Acquisition Corporation. Diginex CEO Richard Byworth said that the deal would make his company “the first fully diversified blockchain player on NASDAQ.”

Meanwhile, Chinese crypto mining company Bitmain had been trying to go public through an IPO in 2018. That company had filed to join to the Hong Kong Stock Exchange (HKSE). The application to join the exchange lapsed in March 2019. After that apparent rejection—the company would not comment on the HKSE application—it was reported that the company had confidentially filed with the U.S. SEC (Securities and Exchange Commission) to hold an IPO.

Bitmain opened a new mining plant in Texas. Investment in the region or country is typically looked upon as a positive to regulators considering a company for public listing. However, the process will take some time and for a company like Diginex with no large footprint in the U.S., an RTO is a much faster and more realistic way of going public.

Conclusion

As seen from these case studies, there are a lot of different reasons to pursue the RTO route as opposed to the IPO path to Wall Street, or Bay Street for Canadian companies. It is not without difficulties, nor is it a blank check to avoid all responsibility to shareholders. An RTO offers a less intrusive, less time-consuming and less expensive way of going public and getting access to the prestige and capital-raising power of being a publicly-traded company.

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