During good economic times, initial public offerings (IPOs) normally are able to garner a higher offer price and assured of an over subscription. However, in the current financial crisis, listing aspirants are finding it harder to obtain funding for their shares. Reverse takeovers (RTOs) were popular during 2007 to 2008. However, since the introduction of Catalist, RTOs appear to be falling in numbers. There are those who feel that the relative ease of listing on Catalist would sound the death knell for RTOs. Given a choice, which is better? An IPO or a RTO?

IPO Can Be Expensive
Private companies go through the strict and rigorous task of preparing for an IPO in order to access the capital market, unlock shareholders’ value and boost the company’s image. Listing through an IPO allows the company to sell new shares to the public, receive funding as working capital and to fund acquisition of other businesses. The amount raised can vary depending on the number of new shares and share price offered.

What many investors don’t realise is that to conduct an IPO can be quite expensive. Referring to the 2009-listed companies discussed in issue 362, Westminster Travel raised approximately $7.1m from its listing where approximately $1.7m went into listing expenses excluding vendor share sales (see table). This made up close to 24% of the total amount raised. However, this was little compared to Japan Foods Holding’s listing expenses which accounted for 48.1% of total funds raised!

When comparing the funds raised against the listing fees, it does not make sense for a company to get listed. This may differ for companies listing on the Main Board. Soon-to-be-listed Main Board company PEC is expecting to raise $25.2m from its public offering and share placement, of which approximately $4m of the gross proceeds is for listing expenses. This translates to about 16.1% of the total proceeds raised. It seems that listing is more expensive for Catalist companies than Main Board enlistees when comparing listing expenses in proportion to proceeds.

Why Do A RTO?
What we have discussed earlier is to allow investors to understand that a listing is not cheap, the final proceeds received from the listing may only be enough for the company to pay for part of its equipment costs. This is part of the reason why reverse takeovers (RTOs) occur. Some companies don’t wish to spend unnecessary money on listing expenses thus RTOs are often a much cheaper option.

A RTO route has often been regarded by market observers as an option undertaken by a “dying” listed shell company and a privately-held company looking for a backdoor listing. The shell company would acquire a large shareholding in the privately held company by issuing substantial amount of new shares as payment. In return, the shareholders of the privately held company gains majority control of the new company. Under SGX regulations, the minimum price that has to be offered for the new shares is $0.20/share.

The advantages of public trading status include savings on underwriter costs as a RTO does not require the appointment of an underwriter. Going public through a RTO allows a privately held company to become publicly held with less stock dilution than through an IPO as the company can go public without raising additional funds. It could choose to offer new shares for working capital at a later period. Some private companies also provide profit guarantees to the shell company as a pre-requisite for the number of shares issued to them, adjustable when earnings are realised.

The process for an IPO can be tedious and long. However, the availability of a listed shell company alleviates the time consuming process on the new owners since the shell company is already in compliance with the rules of the listing manual. Companies that sold their core business such as Novena Holdings and Maveric provide opportunities for RTOs while loss-making companies require a new injection of funds to re-ignite their business.

Catalist listed electronic components trader Gates Electronics has received in-principal approval from the Singapore Exchange to acquire China Dongyuan Environment in a $105m RTO deal. It will be renamed China Environment upon completion of the RTO, joining the list of S-chips in Singapore. China Dongyuan Group is a provider of waste gas treatment solutions in PRC.

Although the introduction of the Catalist has significantly trimmed down the time required for a company to get listed from the former Sesdaq period of five – six weeks, a RTO is expected to be completed in an even shorter time since most of the pre-requisites for listing are already found in the shell company. Also, a Catalist listing requires a sponsor, which some companies would want to bypass and opt to list on the Main Board instead.

Conclusion
At the end of the day, a RTO provides much more benefits than listing through an IPO. However, there may be commercial reasons for private companies to go for an IPO rather than a RTO as the latter can be rather messy if disagreements happen between the shell company and private company. Nonetheless, the jury is still out.