Reverse takeovers

Q

Can you explain what a reverse takeover is? — W.B., online

A

The usual way a company goes public is via an initial public offering, which can be a lengthy and costly process. Some companies opt for a reverse takeover instead, which can be quicker and less expensive. It involves a privately held company buying a controlling stake in a company that’s listed on the stock market, in the process becoming a listed company itself. Smaller companies have merged with larger ones via reverse takeovers, too.

Some foreign companies have used reverse takeovers (occasionally referred to as reverse mergers or reverse IPOs) in order to get listed on U.S. markets, and some of those instances have involved fraud.

But reverse mergers have been executed by plenty of well-known names, such as Occidental Petroleum, Turner Broadcasting, Texas Instruments, Burger King, Jamba Juice and Warren Buffett’s Berkshire Hathaway. Even the New York Stock Exchange employed a reverse takeover in going public.

Q

What, exactly, is a “stock dividend”?

— D.L., Philadelphia

A

Some public companies regularly pay out some of their excess cash to shareholders in the form of dividends. Not all dividends are paid in cash, though. Companies can choose to reward shareholders with additional shares (or fractions of shares) of stock.

Stock dividends may seem preferable to cash, but when a company increases its share count by issuing additional shares of stock, it’s diluting the value of existing shares. Imagine a pizza, where the more slices there are, the smaller each one is. More shares of a company leave each share with a smaller stake in the company. A company might favor stock dividends, though, because it gets to reward shareholders without sacrificing any cash.