A:

A back door listing, sometimes referred to as a reverse takeover, reverse merger, or reverse IPO, occurs when a privately-held company that may not qualify for the public offering process purchases a publicly-traded company.

By undertaking a back door listing, the privately-held company avoids the public offering process and gains automatic inclusion on a stock exchange. Following the acquisition, the acquirer may merge both companies' operations or, alternatively, create a shell corporation that allows the two companies to continue operations independent of each other.

Although rare, a private company sometimes will engage in a back door listing simply to avoid the time and expense of engaging in an initial public offering (IPO). For example, Archipelago Holdings acquired the New York Stock Exchange (NYSE) via a back door listing in 2006. A back door listing usually indicates significant weakness in the acquired company and serves as a warning sign for investors to be wary.

For more on this topic, read Mergers and Acquisitions: Definition.

This question was answered by Justin Bynum.

RELATED FAQS
  1. Why would a company do a reverse merger instead of an IPO?

    Reverse mergers are often the most expedient and cost-efficient way for private companies that hold shares that are not available ... Read Answer >>
  2. What's the difference between publicly- and privately-held companies?

    Privately-held companies are owned by the company's founders, management, or group of private investors. Public companies ... Read Answer >>
  3. How long does it take for a merger to go through?

    Corporate mergers and acquisitions can vary considerably in the time they take to be completed. There are a number of individual ... Read Answer >>
Related Articles
  1. Investing

    Reverse Mergers: The Pros And Cons

    Reverse mergers can provide excellent opportunities for companies and investors, but there are still some downsides and risks.
  2. Investing

    A Guide To Spotting A Reverse Merger

    This corporate action can be profitable for investors who know what to look for.
  3. Investing

    IPOs Are Becoming Less Attractive for Companies

    U.S. companies are choosing to be acquired instead of going public
  4. Investing

    Valuing Private Companies

    You may be familiar with publicly-traded companies, but how much do you know about privately-held firms?
  5. Investing

    Best Types of Remodels For A Smart Sale Strategy

    Consider these improvements to your home if you want to increase its resale price.
  6. Insurance

    Initial Public Offering (IPO) Explained

    An initial public offering (IPO) marks the start of a company's publicly traded life. Find out why companies undergo IPOs, and how the process works.
  7. Investing

    The Wonderful World Of Mergers

    While acquisitions can be hostile, these varied mergers are always friendly.
  8. Investing

    Closing Mutual Funds: Investment Protection Or Trap?

    Discover the characteristics of closing funds, the reasons why they close and key factors to consider.
RELATED TERMS
  1. Back Door Listing

    A strategy of going public used by a company that fails to meet ...
  2. Reverse Takeover - RTO

    A type of merger used by private companies to become publicly ...
  3. Mergers and Acquisitions - M&A

    A merger is a combination of two companies to form a new company, ...
  4. Going Public

    The process of selling shares that were formerly privately held ...
  5. Privatization

    1. The transfer of ownership of property or businesses from a ...
  6. Private Purchase

    A situation in which an investor (either individual or institutional) ...
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  3. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  4. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  5. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
  6. Indirect Tax

    A tax that increases the price of a good so that consumers are actually paying the tax by paying more for the products. An ...
Trading Center