What is a Backdoor Listing?

Backdoor listings usually occur as a result of a merger or acquisition of one company by another corporation. One of the defining characteristics of the backdoor listing is that one of the two companies will be listed on the stock market, while the other company is not. In effect, this process allows both companies to be listed on a stock exchange, without the formerly non-listed company having to go through the usual steps to qualify for listing. Here are some examples of how backdoor listing can occur.

One of the most common scenarios for an incidence of backdoor listing is when a company has attempted to be listed on various stock exchanges, but has not been able to meet the necessary criteria. The corporation then looks around for another company that has some connection to the business model and operations of the corporation, and that is also listed. In some cases, this may be a vendor of the corporation, or even a competitor.

Once the target is identified, the corporation takes steps to gain control of the other company, eventually creating a situation where the two companies merge into one entity. The new combined entity inherits the listings status on the various exchanges, and thus realizes the goal of being listed. In other scenarios, the two companies continue to operate independently, but are connected through a holding company. With this type of arrangement, the non-listed company gets to piggyback on the status of the listed company, and thus still reach the goal of being included on stock exchanges.

There are situations in which a listed company will act as the buyer as well. In situations of this nature, the goal is usually to increase the presence of the company on the exchange. This can be accomplished by acquiring a non-listed company and using the combined wealth of the two sets of assets, easily gain a listing for the newly acquired company without there being a need to review or evaluate anything.

The process of backdoor listing has been around for many years, and is still often used as a strategy to increase the presence of a company on a stock exchange, either by appearing as two entities, or as a newly combined entity. While some critics argue that the practice of backdoor listing is actually an incentive to encourage aggressive acquisitions, there is not much in the way of evidence that backdoor listing has increased the incidence of hostile takeovers or any type of acquisition that is not agreeable to both companies.