# Understanding Reverse Takeover (RTO): Definition and Process Explained

## What Is a Reverse Takeover (RTO)?

In a reverse takeover (RTO), a private company acquires control of a publicly-traded company, enabling it to become publicly listed more swiftly than through an [IPO](https://www.investopedia.com/terms/i/ipo.asp). Though cost-effective and quicker, this process carries its own set of risks and considerations. Understanding how an RTO unfolds can help in evaluating its potential impact on a company's financial future.

### Key Takeaways

*   Reverse takeovers (RTOs) allow private companies to become publicly traded without an initial public offering (IPO).
*   RTOs are generally faster and cheaper than IPOs but can carry more risks, particularly regarding company management and record-keeping.
*   The process involves a private company acquiring a controlling interest in a publicly traded company, which may act as a shell corporation.
*   Foreign companies may use RTOs to gain entry into the U.S. marketplace by merging with a U.S.-based public company.
*   Despite the speed and cost-effectiveness, RTOs often result in lower long-term performance compared to traditional IPOs.  
    

## Understanding the Reverse Takeover (RTO) Process

An RTO helps a private company avoid the high costs of setting up an IPO. However, a company doesn't gain funds through an RTO and must fund the transaction itself.

While not a requirement of an RTO, the name of the publicly-traded company involved is often changed as part of the process. For example, the computer company Dell ([DELL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=dell)) completed a reverse takeover of VMware tracking stock (DVMT) in December 2018 and returned to being a publicly traded company. It also changed its name to Dell Technologies.

Additionally, the corporate restructuring of one—or both—of the merging companies is adjusted to accommodate the new business design. Prior to the RTO, it is not uncommon for the publicly-traded company to have had little to no recent activity, existing as more of a [shell corporation](https://www.investopedia.com/terms/s/shellcorporation.asp). This allows the private company to shift its operations into the shell of the public entity with relative ease, all while avoiding the costs, regulatory requirements, and time constraints associated with an IPO. While a traditional IPO may require months or years to complete, an RTO may be completed in just weeks.

> **Important**
>
> For a company that wants to become publicly traded, reverse takeovers (RTOs) can be a cheaper and quicker option than an IPO. However, they tend to pose greater risks for investors.

Sometimes RTOs are referred to as the "poor man’s IPO." This is because studies have shown that companies that go public through an RTO generally have lower survival rates and performance in the long-run, compared to companies that go through a traditional IPO to become a publicly traded company.

## Key Factors and Challenges in Reverse Takeovers

Unlike conventional IPOs—which can be canceled if the equity markets are performing poorly—reverse mergers aren’t generally put on hold. Many private companies looking to complete a reverse merger have often taken a series of losses, and a percentage of the losses can be applied to future income as a tax loss carryforward.

On the flip side, reverse mergers can reveal weaknesses in the private company’s management experience and record keeping. As well, many reverse mergers fail; they end up not fulfilling the promised expectations when they eventually begin trading.

A foreign company may an RTO as a mechanism to gain entry into the U.S. marketplace. For example, if a business with operations based outside of the U.S. purchases enough shares to have a controlling interest in a U.S. company, it can move to merge the foreign-based business with the U.S.-based business.

## The Bottom Line

A reverse takeover (RTO) offers private companies a faster and often less costly route to becoming publicly traded compared to a traditional initial public offering (IPO). However, this approach comes with its challenges, including potential weaknesses in management and record-keeping, and the absence of capital raising.

While RTOs may expedite a company's entry into public markets, they can involve significant risk and lead to suboptimal long-term performance. Investors should carefully assess these risks, as RTOs can sometimes struggle to meet market expectations. Conversely, they can serve as strategic tools for foreign businesses seeking access to the U.S. marketplace, providing a backdoor entry through acquiring a public shell company.  

> **Article Sources**
>
> 1.  Dell Technologies. "[Dell Technologies Completes Class V Transaction](https://investors.delltechnologies.com/news-releases/news-release-details/dell-technologies-completes-class-v-transaction)."
>     
> 2.  Internal Revenue Service. "[Instructions for Form 1120: U.S. Corporation Income Tax Return](https://www.irs.gov/instructions/i1120#idm140697358451232)."