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A Comparative Analysis Between Ipos and Reverse Takeovers: Evidence from Europe Vasileios G

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A Comparative Analysis Between Ipos and Reverse Takeovers: Evidence from Europe Vasileios G A comparative analysis between IPOs and reverse takeovers: Evidence from Europe Vasileios G. Oikonomou, Antonios I. Tsianakidis Abstract The study examines a sample of 224 reverse takeovers (RTOs) that took place in Europe between 1996 and 2015 along with a matched sample of IPOs that occurred over the same period. Particularly, our study investigates whether RTOs provoke wealth effects comparable to IPOs. Employing the classical event study methodology, we find that both RTOs and IPOs exhibit comparable short-term and long-term price performance. It is also shown that RTO firms display better operating performance than their control IPO counterparts in the post-going public period. Equivalent survival rates for both groups are reported, as well. By splitting the overall population into UK and non-UK sub-samples, it seems that our results are not UK-driven but rather it is a pan-European phenomenon. In sum, reverse takeovers should offer a viable alternative to IPOs for certain types of firms. Contents Acknowledgements ............................................................................................................... 5 Abstract ................................................................................................................................. 5 Introduction ........................................................................................................................... 5 SECTION 1 .............................................................................................................................. 8 The going public decision: pros and cons .......................................................................... 8 The reverse takeover (merger) process ............................................................................ 9 SECTION 2 ............................................................................................................................ 11 Comparative Regulation .................................................................................................. 11 US Regulatory Framework ............................................................................................... 11 UK Regulatory Framework............................................................................................... 13 Swedish Regulatory Framework ...................................................................................... 14 Summary .......................................................................................................................... 14 SECTION 3 ............................................................................................................................ 15 Reverse Mergers versus IPOs .......................................................................................... 15 Advantages of RMs over IPOs ......................................................................................... 15 Disadvantages of RMs over IPOs..................................................................................... 17 A Reverse Takeover Case ................................................................................................. 18 SECTION 4 ............................................................................................................................ 20 Relevant Literature .......................................................................................................... 20 1 US Evidence ..................................................................................................................... 20 Non-US Evidence ............................................................................................................. 24 SECTION 5 ............................................................................................................................ 26 Data and Descriptive Statistics ........................................................................................ 26 Methodology ................................................................................................................... 35 SECTION 6 ............................................................................................................................ 38 Empirical Results and analysis ......................................................................................... 38 Short term price performance analysis ........................................................................... 39 Stock price reaction to RTOs announcements ................................................................ 39 First day returns of RMs versus IPOs ............................................................................... 42 Long-term price performance analysis ............................................................................ 44 BHARs of RTOs vs. IPOs ................................................................................................... 44 Post-going public operating performance of RMs versus IPOs ....................................... 47 Survival analysis ............................................................................................................... 57 SECTION 7 ............................................................................................................................ 58 Conclusion ....................................................................................................................... 58 REFERENCES ........................................................................................................................ 61 2 Table of figures Table 1: Distribution of the deal announcements in Europe 1996-2015. .................... 27 Table 2: Distribution by country. ................................................................................. 28 Table 3: Distribution between cross-border and domestic RTO deals. ....................... 29 Table 4: Distribution by macro industry and sector..................................................... 29 Table 5: Distribution by mid industry and sector. ....................................................... 30 Table 6: Number of deals within the same industry. ................................................... 32 Table 7: Selective key fundamentals for the year 0 of the RTO deals. ....................... 32 Table 8: Selective key fundamentals for the year 0 of the IPO deals. ......................... 33 Table 9: Public and private firms that had a financial advisor. ................................... 34 Table 10: Number of Bookrunners and managers per initial public offer. .................. 34 Table 11: Univariate results for selective key fundamentals of RTOs and IPOs at the year of going public. .................................................................................................... 39 Table 12: Abnormal and cumulative abnormal returns around reverse mergers (Market Model). ........................................................................................................... 40 Table 13:Abnormal and cumulative abnormal returns around reverse mergers (Market Adjusted Model). ......................................................................................................... 41 Table 14:First day returns. ........................................................................................... 42 Table 15: BHARs of RTOs vs. matched IPOs (full sample). ...................................... 45 Table 16: BHARs of RTOs vs. matched IPOs (UK sample). ...................................... 45 Table 17: BHARs of RTOs vs. matched IPOs (non-UK sample). ............................... 46 3 Table 18: Post-going public operating performance of RTOs (full sample). .............. 49 Table 19: Changes in the operating performance of RTOs versus changes in the operating performance of matched IPOs (full sample). ............................................... 51 Table 20: Changes in the operating performance of RTOs versus changes in the operating performance of matched IPOs (UK and non-UK sample). .......................... 53 Table 21: Survival rates of RTOs and their matched IPOs. ......................................... 57 4 Acknowledgements We are grateful to Professor Apostolos Dasilas for his valuable assistance and meaningful comments throughout the dissertation process. Abstract The study examines a sample of 224 reverse takeovers (RTOs) that took place in Europe between 1996 and 2015 along with a matched sample of IPOs that occurred over the same period. Particularly, our study investigates whether RTOs provoke wealth effects comparable to IPOs. Employing the classical event study methodology, we find that both RTOs and IPOs exhibit comparable short-term and long-term price performance. It is also shown that RTO firms display better operating performance than their control IPO counterparts in the post-going public period. Equivalent survival rates for both groups are reported, as well. By splitting the overall population into UK and non-UK sub-samples, it seems that our results are not UK-driven but rather it is a pan-European phenomenon. In sum, reverse takeovers should offer a viable alternative to IPOs for certain types of firms. Introduction Going public has always been regarded as one of the most important options that the owners of every private firm consider at some point of the business life. The conventional going-public mechanism is that of an initial public offering (IPO), which is the first time that the stock of a private company is offered to the investing public.
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