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Unit 5 Reverse Mergers

A reverse merger is when a private company becomes public by acquiring a public shell company, allowing it to gain the benefits of being public like access to capital without the costly process of an IPO. Reverse mergers are less expensive and faster than IPOs but come with greater risks due to less regulatory scrutiny and the companies involved potentially lacking viability as long-term public entities.

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33 views10 pages

Unit 5 Reverse Mergers

A reverse merger is when a private company becomes public by acquiring a public shell company, allowing it to gain the benefits of being public like access to capital without the costly process of an IPO. Reverse mergers are less expensive and faster than IPOs but come with greater risks due to less regulatory scrutiny and the companies involved potentially lacking viability as long-term public entities.

Uploaded by

divlingvarshney
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Reverse Merger

A merger is a process in which a company


combines with another company to form a
single entity. There are many types of
mergers; one of them is a reverse merger.
What is Reverse Merger?
A reverse merger is when a private company
becomes a public company by acquiring it.
It saves a private company from the
complicated process and expensive
compliance of becoming a public company.
Instead, it acquires a public company as an
investment and converts itself into a public
company.
Why Reverse Merger?
This merger is like solving a basic math
quest ion of 1+2 or 2+ 1, where the answer
would be the same. There are many
regulations and compliance on private
compan ies converting to public companies.

What is Reverse Merger? I


rApublic
reverse merger is a merger in which a private company becomes a
company by acquiring it. Reverse merger saves a private
company from the complicated process and expensive compliance of l
becoming a public company.

! Advantages
• The private company becomes a
public company at a lesser cost
Disadvantages
• Lawsuits for various reasons are
very common during the reverse
and gets listed on the exchange merger.
without IPO. • Reverse merger leads to reverse
• Reverse merger helps in saving stock splits. This further leads to a
of taxes of private companies. reduction in the number of shares
held by the shareholders.

Hence, this merger is an easy way for a


private company to convert into a public
company.

Another reason for opting for this merger is


to save taxes. The losses of smaller
companies can be carried forward when
they become a combined entity. This results
in companies having to pay lesser taxes .
The listing of a company on the exchange
via IPO is a long task that is full of
compliance. Therefore, large companies opt
for this merge with smaller companies that
are listed on the exchange. This way, the
company gets listed on the exchange and
becomes a public company without an IPO.
Reverse Merger Process
There is a detailed Rrocess for a reverse
merger. Broadly, the stages of reverse
mergers include the following:

1. Identification of a Suitable Shell Co.


2. Recruiting Financial Staff
3. Financial Audits
4. Transaction Documents like a letter
of intent, agreement, super 8-k
5. Issuance of Stock Certificates

Let us now see its advantages and


disadvantages.

Advantages of Reverse
Merger
• The private company becomes a
public company at a lesser cost and
gets listed on the exchange without
IPO.
• This type of merger does not create a
negative impact on the competition
in the market. The chances of reverse
mergers being put on hold due to
negative impact are very less.
• It helps in saving taxes of private
companies.
Disadvantages of Reverse
Merger
• Lawsuits for various reasons are very
common during the reverse
• Often, the promises made during
mergers do not come true, leading to
almost no value increase for the
shareholders.
• It leads to reverse stock splits. This
further leads to a reduction in the
number of shares held by the
shareholders.
• It leads to inefficiency in operations
as the private company's managers
do not have the expertise to run a
public company.
Conclusion

Such a merger has become a popular mode


of business restructuring. It benefits not
only the company but also the shareholders.
It results in efficient use of available
resources and safeguards the interest of
different stakeholders. This merger adds
value to the business and enhances its
future sustainability. If all the legal
compliance is followed, a reverse merger
should not be viewed with suspicion. Even
though the process of this lY.Re of merger
can be time-consuming, but it can unlock
tremendous business value.
Why Do Companies Choose a
Reverse Merger?

First, it's important to understand why a


company may choose to go public to begin
with. Companies sell shares to the general
investing public to raise their name
recognition and access more sources of
financing than are generally available to
private firms. Traditionally, this is done
through an initial public offering, or IPO.

IPOs, however, are complicated, time-


consuming endeavors and usually involve
hiring an investment bank to underwrite the
deal and issue shares. There's also an
extensive due diligence process, tons of
paperwork and regulatory reviews. What's
more, even after all of that, unfavorable
market conditions beyond any company's
control can complicate if, or when, an IPO
happens.
But none of the costs and complications of a
standard IPO apply in a reverse merger,
which means they provide private
companies a quick way to go public. This is
especially important for companies that
might not have the funding or abilities to
handle an official IPO.

The Reverse Merger Process

There are many public companies with


shares listed on public stock exchanges-
typically over-the-counter (OTC) markets-
that have few to no ongoing operations or
assets. These are called "shell companies,"
and they are the usual targets of reverse
mergers.

The first step in a reverse merger is for the


owners of the public company to buy at least
51 % of the shares of a shell company. Once
they own a majority stake, they swap the
shares of the private company for existing or
new shares of the public shell company. The
private company then ends up as a wholly
owned subsidiary of the shell company.

Unlike a conventional IPO, there is no new


capital raised during a reverse merger.
That's why they can be completed more
quickly: There's no need to drum up
publicity for the deal and catch the attention
of institutional or retail investors.
Adv ant age s of a Reverse Mer ger

• Quicker acce ss to financing. Reverse


mer gers take one to thre e mon ths to
com plete whil e IPOs ofte n take six
mon ths or longer.
• No mid dlem an. Unlike IPOs, reve rse
mer gers don' t requ ire an inve stme nt
ban k to serv e as an unde rwri ter.
Inste ad, the deal is betw een two part ies
-th e publ ic com pany and the priv ate
company.
• Less expe nsiv e. Because they don' t
invo lve payi ng fees to fina ncia l
insti tutio ns and take less time to
complete, reve rse mer gers cost less than
IPOs.
• Not as dep end ent on mar ket
cond ition s. Successful IPOs depe nd on
robu st dem and and atten tion to be
successful. Because they are not seek ing
to raise fund s in the sam e way, thou gh,
reve rse mer gers are not as relia nt on the
over all state of the mar ket.
Disa dvan tage s of a Reverse Merg er

• More due dilige nce requi red. That goes


for both inves tors and the comp anies
invol ved in a rever se merg er.
Cons umer s in partic ular shoul d heed the
SEC fraud warn ing above: Vetting the
comp any that emer ges from a rever se
merg er is essen tial, given the much
lowe r level of regul atory revie w neede d
to comp lete a rever se merg er comp ared
to an IPO.
• Lack of inter est and liquid ity after
merg er is done . The sort of small
comp anies that are typically invol ved in
rever se merg er migh t not be ready to be
publi c comp anies. They the refore may
lack the scale and viabil ity neede d to
susta in the burde ns of being a publi c
comp any and susta in inves tor intere st in
their share s, which may make them
harde r to trade long term.
• A risk of no big retur n on the
inves tmen t. Rever se merg ers don't
alway s get a lot of publicity, aren' t
comm only track ed by Wall Stree t
analy sts and may not deliv er the sizab le
inves tmen t gains that a robus t IPO
comp any may. And reme mber : Even
IPOs are not sure bets when it come s to
seein g retur ns on your inves tment s, but
comp anies that go publi c throu gh
rever se merg ers are on even shaki er
footing.

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