Back-Door Listing

What Is a Back-Door Listing?

In finance, the term "back-door listing" alludes to an alternative strategy utilized by private companies that wish to become publicly traded. One such strategy comprises of securing an existing publicly-traded company, and afterward continuing to operate under the acquired company's ticker symbol.

Albeit back-door listings can be more prudent than a formal initial public offering (IPO), they may in any case demonstrate restrictively costly for the private company included. As a rule, companies seeking after a back-door listing must depend on substantial measures of debt to finance the acquisition of the publicly traded vehicle.

How Back-Door Listings Work

There are several key factors affecting the phenomenon of back-door listings. Regardless, companies might be drawn to the increased liquidity that can be available to public companies, permitting the private company's founders to all the more effectively cash out on their holdings. Besides, public companies can some of the time benefit from better gathering pledges terms, as numerous investors take confidence in the increased oversight and reporting requirements demanded of public firms.

Hence, numerous owners of private companies might feel that their business would benefit from being publicly traded. Be that as it may, the real cost of opening up to the world — in terms of both time and cash — can be restrictively costly for most private firms. All things considered, the upfront cost of an IPO is regularly around 5% of its total proceeds, with extra fees frequently adding up to several huge number of dollars. Recurring costs, for example, annual auditing fees and internal compliance costs, can likewise add a huge number of dollars to a company's administrative expenditures.

In situations where a private company can bear these additional costs, they in any case must battle with the conventional listing requirements forced by the different stock exchanges. For instance, the New York Stock Exchange (NYSE) requires recently listed companies to have combined annual pre-charge earnings of no less than $10 million throughout recent years, among several different factors. The Nasdaq Stock Market additionally has its own requirements.

Real World Example of a Back-Door Listing

XYZ Corporation is a mid-size manufacturing company that has developed substantially under its current management team. The company's management are feeling extremely optimistic, as they have produced record profits in every one of the last three years, finishing with a recent annual profit of $3 million.

Supported by their recent achievement, XYZ's managers accept that they are ready to make the progress to turning into a public company. All things considered, they reason that this will benefit their shareholders by giving increased liquidity, authenticity, and access to prudent gathering pledges. With that in mind, they set about sorting out for an IPO on the NYSE.

Yet regardless of their recent performance, XYZ before long observes that they are as yet not eligible for acceptance by the NYSE. One justification for this is their current earnings: despite the fact that their growth has been strong, they have still not produced a cumulative $10 million in pre-charge earnings in the last 3 years.

Confronted with everything going on, XYZ's managers adopt an alternative strategy. Instead of essentially waiting until they meet the listing requirements, they decide to engineer a back-door listing by seeking out a generally reasonable publicly listed company and securing it outright. To finance this, XYZ is forced to depend on substantial measures of debt, making the acquisition a type of leveraged buyout (LBO) transaction. Once acquired, the recently bought company can act as the public "vehicle" of XYZ, in this way permitting XYZ to get the benefits of public ownership without officially meeting the new listing requirements.

Features

• Companies which opt for a back-door listing are generally unable to meet key listing requirements. These requirements can incorporate least levels of pre-charge earnings, shareholder equity, and other such criteria.
• A back-door listing is a method for changing over a private company into a publicly traded company which sidesteps the normal listing requirements of the stock exchange picked.
• A common illustration of this strategy comprises of securing a company that is already publicly traded on the exchange.