What Is a Reverse Acquisition?

A reverse acquisition is a process that makes it possible for a buyer such as a private company to acquire a publicly traded company and systematically restructure the combined entity so that the management tasks transfer to the newly acquired company. The result of this type of approach is that the private company is now part of an umbrella organization that is traded publicly, without the need to go through the expense associated with becoming publicly traded and having to launch an initial public offering or IPO. Considered less involved and simpler, the reverse acquisition is usually in compliance with governmental regulations that have to do with the purchase of businesses and the ensuing corporate reorganization that can occur.

The process of a reverse acquisition essentially involves the private company that is buying the public trading company to allow itself to be absorbed into the new business entity under the auspices of the acquired company. It is in this sense that the acquisition creates a reverse that is not found with other types of company buyouts. Instead of the acquired company being considered a subsidiary of the purchased business, the entity is restructured so that the acquired company has more or less the status of a parent. In this manner, the buyer can make use of the acquired company’s public trading in the marketplace.

There are several benefits associated with the strategy of a reverse acquisition. Generally, the process from making the initial offer to completing the transaction and subsequent reorganization requires less time than attempting to take a private company public and prepare an acceptable IPO. By using this approach, it is possible to begin publicly trading sooner, which in turn means creating a steady flow of investment income into the new entity in a shorter period of time. That income can then be used for a number of different tasks, including moving the new entity into new markets or helping to cover the costs of new product development.

Expense is also often a factor when evaluating the benefits of a reverse acquisition. Over the long term, the amount of money invested in the approach can compare favorably with the costs of preparing a private company to go public. Assuming that the reverse acquisition accomplished the goal of creating a company that is capable of capturing a larger market share than the two companies could manage on their own, the expenses can be offset in a short period of time, making it possible for everyone associated with the acquisition to profit from the strategy.