The traditional path to a public offering of ownership and investment in a company is a long, rigorous approach with a heavy amount of scrutiny, and it takes a significant play by capital movers to bring to fruition. As a market entry expert, Konstantin Lichtenwald, Vancouver, thinks there is a far easier alternative, however, known as the reverse takeover strategy. In essence, it follows the old, familiar saying, “If you can’t beat them, join them.”
For the RTO approach, a private company wanting to go public avoids the traditional path and instead just outright buys a controlling share of a company that is already public. In doing so, and merging with the public company, the private company gains public market status by default. Konstantin Lichtenwald notes this approach avoids the whole capitalization launch, and instead it works within the shell of a company already in the public realm.
Under previously “normal” conditions, the RTO strategy would be a cost-saving strategy of entering the public market at a time when generally things are operating strong, there’s plenty of liquidity in the market to provide opportunity, and a new player even in the guise of an old one would get attention. However, in the last few months entering the summer of 2022, things have changed dramatically.
Konstantin Lichtenwald reminds folks that the current U.S. economy has quickly changed the landscape for investment. Inflation has skyrocketed to historic eyes, the power of the consumer dollar has eroded badly, and now investment dollars are running for the exit doors as the public markets contract. No surprise, the landscape seems to have turned negative towards new entrants.
However, a contrarian argument could push the premise that mid-2022 is an ideal time to pull off an RTO. First off, there will be plenty of companies that provide prime targets for a controlling takeover with depressed stock prices and available opportunities for a new private player to step in and take over via default ownership. Second, the market will be looking for and needing an active presence. Konstantin Lichtenwald points out that as existing players contract, the overall environment will need something to fill the vacuum. Otherwise, the resulting contraction hurts everyone involved.
Secondly, a proactive RTO can create a catalyst for a significant and fast company expansion as new capital comes flooding in with a public presence, a bit like a shining light in a market that is depressed and desperately needs a new actor to show the way out of the slump. Having a new player come in strong, Konstantin Lichtenwald argues, can create its own following with investors, much the same way as a viral hit on social media generates an exponential audience.
So, an RTO strategy right now in 2022 may just be the ticket for a company looking to take itself to the next level but not wanting to get lost in the mud and quagmire of a long, extended traditional initial purchase offering. Instead, Konstantin Lichtenwald suggests by slipping into a public position via an existing company shell, a formerly private company can reshape itself quickly and effectively, focusing valuable activity on full investment instead of losing steam on the IPO process.