Backdoor Listing - Explained
What is a Backdoor Listing?
Written by J. Mance Gordon
Updated at April 20th, 2024
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What is a Backdoor Listing?
A back door listing can be described as a strategy adopted by unlisted companies in which these companies merge with companies already listed on public exchange. When a company tries to get into the exchange listing without an Initial Public Offering (IPO), this is regarded as a backdoor listing.
Failure for companies to meet certain criteria can deprive them of listing on a stock exchange. However, in a bid to get onto the exchange, some of these companies acquire or merge with companies already listed on the stock exchange. This is regarded as going through the back door, otherwise called back door listing.
How does a Back Door Listing Work?
Back door listing is often practiced by companies who do not meet the requirements to be listed on a stock exchange, in most cases, these companies are private firms with insufficient resources and qualities. After many failed attempts to get onto stock listing, these companies decide to use the back door to meet the requirements which is usually by acquiring or merging with listed companies.
For an unlisted company to acquire or merge with a listed company, enough resources are required, in cases of insufficient funds, a private or unlisted company can acquire enough loans to purchase the listed (public company). Mergers or acquisitions are features of back door listing.
Example of Back Door Listing
Back door listing can also be called reverse takeover, reverse IPO, or reverse merger. The illustration highlighted below is an instance of back door listing. If Company A (an unlisted company) does not meet the requirements to go public or get listed on stock exchange, it can merge with or acquire Company B (a listed company) so that it will go public.
Once the acquisition process is complete, Company A begins business or operations with Company B, this means Company A can trade as a part of Company B, hence, since Company B is listed, the merger would change Company As status to becoming a listed company as well. However, for a public (listed) company to be merged with an unlisted company, it is an indicator that it is weak or at the verge of going under.