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A DECADE ago, Australian technology stocks left bleeding by the bursting of the dotcom bubble became the target of reverse takeovers by resources companies riding a wave of soaring Asian demand.
Now, the opposite is happening. The end of Australia’s lengthy mining boom has left a vast pit of casualties, including many small exploration companies unable to hang on after commodities prices tumbled. Those companies are being courted by tech start-ups from Singapore to Silicon Valley, which want access to stockmarket investors but are unwilling to take on the risk, costs or time to do an initial public offering.
A reverse takeover involves a listed company that is essentially a shell — with few or no assets left other than some cash on its balance sheet — buying a closely-held company that wants a listing on a stock exchange. The unlisted company then pumps its assets into the listed one in exchange for stock. Once the reverse takeover is completed, the new entity can tap investors for new funds.
The unlikely partnership between tech and resources companies is helping to drive the number of these so-called backdoor listings on the share market toward record levels this year. About half of the 26 backdoor listings so far this year have comprised technology-related businesses reversing into mining or resources services companies. Several more are on course to complete by year-end.
“In Australia we have an abundance of failed mining shells. They are sitting on a lot of cash and have a large shareholder base,” said Zhenya Tsvetnenko, executive chairman of bitcoin trader Digital CC, which did a reverse takeover of the shell of an energy investment firm, Macro Energy, earlier this year.
“It is a really good opportunity to get into the publicly-listed space in the quickest possible way,” added the Russian-born technology entrepreneur.
“Digital CC needed the funds immediately — with bitcoin things move a million miles an hour and the opportunity cost was too huge,” said the Perth-based Mr Tsvetnenko. Macro had more than $3 million in cash on its balance sheet, which Mr Tsvetnenko’s start-up could use.
He is now looking to do a reverse listing of his internet marketing business, Mpire Media, into graphite explorer Lithex Resources.
Falling commodity markets have dragged down mining equities and crimped credit conditions for small companies, especially those without producing mines to generate cash. The value of commodities such as iron ore and coal, Australia’s two biggest exports, have fallen sharply due to a substantial rise in supply of the raw materials as mines planned during boom times enter production.
Reverse takeovers can be complex, lawyers say. Weighty information packs are still required in most cases. For the unlisted company, however, such transactions are often considered to be less risky than an IPO because they don’t require costly and lengthy roadshows to win over new investors. The shell company can also loan money to its proposed partner, repayable only if the deal doesn’t go ahead.
Investors don’t always benefit from backdoor listings: one risk is that boards desperate to save their companies from insolvency don’t do enough due diligence on the firm offering to acquire them.
Three years ago, the US Securities and Exchange Commission began investigating accounting firms over their audits of Chinese companies that were listed in the US via reverse takeovers. As part of that inquiry, the SEC suspended trading on some Chinese companies, questioning their truthfulness about their finances and operations.
In Australia, this year’s wave of backdoor listings has prompted a warning from the country’s corporate watchdog, which said the emerging trend was raising regulatory issues similar to those faced during the dotcom boom, when the number of start-ups accessing the share market through reverse takeovers rocketed. Among the regulator’s worries: a lack of audited financial reports from the unlisted company, limiting the ability of shareholders to weigh the merits of a deal. It also is concerned that proposed business models are often opaque.
Among the newly listed companies in Australia are cloud platform provider Bulletproof, which reversed into copper-and-gold explorer Spencer Resources in January, and social-entertainment site operator Migme, which effectively swallowed a listed gold company. In October, online recruitment start-up 1-Page, became the first Silicon Valley business to list on the Australian Securities Exchange, via a reverse takeover of InterMet Resources, which explores for nickel and gold in Western Australia.
Migme’s shares have risen sixfold since its deal with Latin Gold was announced in January, highlighting the potential rewards for investors.
“As we come off the tail of a resources boom, some junior iron-ore and coal businesses became unviable overnight,” said Nick Abrahams, a Sydney-based partner and Asia-Pacific technology practice leader for Norton Rose Fulbright. “People are now cashing in on the tech boom.”
A total of 32 backdoor listings could be completed in Australia this year. That would beat the 2011 high of 27 recorded by the ASX since it started a tally that year. It would also match the peak of the dotcom boom in 2000 when 32 companies listed this way, according to UTS Business School lecturer Peter Lam.
Mr Abrahams says the industry has come full circle. A decade ago, many minerals explorers were themselves reversed into the shells of information-technology stocks as the country’s mining sector began to heat up.
Mr Abrahams was once chief operating officer of a dotcom company, Spike Networks, that ended up as a coal business, now named White Energy.
It isn’t just information-technology companies seeking a start this way, but also biotech start-ups like Reproductive Health Science, which revived the stock of resources explorer AO Energy.
Investors say the trend appears to be unique to Australia, because of its large pool of tiny minerals explorers.
The Wall Street Journal