Reverse Take Over

Last updated: March 22, 2024

What Does Reverse Take Over Mean?

A reverse take over (RTO) results when a buyer issues its own stock as purchase price consideration to a seller. The buyer issues so much of its own stock that the seller’s shareholders end up controlling the majority of the outstanding stock of the combined entity. The buying company can either be active or inactive (a shell company).

When the buyer is an active company, the RTO is usually conducted using a relative valuation. This means that both companies are valued using the same methodology or multiple, which then determines the value of the target company. If the target company’s value exceeds the value of the buyer (which is typically the case in an RTO), then the target company owners end up with a majority of the post-transaction shares outstanding in the combined entity, effectively rendering them in control.


Divestopedia Explains Reverse Take Over

In an RTO between a public and private company, the transaction is typically disclosed as a takeover by the public company. However, because the private company owners end up with a larger percentage of the total outstanding shares post-transaction, they essentially “own” the public company since they are in control. The takeover disclosure is often done to ensure investors do not interpret the RTO negatively, and sell off the stock.

RTO’s are great vehicles for private investors and private equity firms to monetize their investments. This is because the stock of the combined public company that is owned by the investors post-transaction is more liquid, which consequently allows for easy monetization and a valuation premium over the stock of the previously owned private company.


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