Reverse Merger M&A Definition + Examples
After the acquisition is complete, the owners reorganize the public company’s assets and operations to absorb the (formerly) private company. As mentioned, a reverse merger occurs when a private entity acquires a controlling stake in a publicly listed firm. Excluding a SPAC or shell company, a reverse merger can sometimes involve struggling publicly-traded businesses ripe for takeover. A reverse merger is a type of merger in which a private company acquires a publicly traded company, essentially bypassing the need for an initial public offering (IPO) to go public. A reverse merger occurs when a smaller, private company acquires a larger, publicly listed company. Also known as a reverse takeover, the “reverse” term refers to the uncommon process of a smaller company acquiring a larger one.
To understand Reverse mergers thoroughly, one has to understand what IPO means. Initial Public Offering or IPO is a process of offering a private corporation’s share to the public in a new stock issuance. Moreover, the takeover of a private company is not always an easy process, since the existing stakeholders could oppose the merger, causing the process to be prolonged from unexpected obstacles. As mentioned at the outset, despite attracting negative publicity over a decade ago, a reverse merger can be a legitimate way of publicly listing a company. An IPO involves the company directly listing on the stock market index, going through the month process of SEC oversight, investor roadshows and corporate governance preparation.
It’s simply a “shell” that the private company can step into and use to access the public market. The very first step in the reverse merger process is identifying a suitable shell. Shell is basically the company through which the private company will merge for the reverse merger. This is the method through which a private company becomes public through the process of a reverse merger and is listed on the U.S. Special purpose acquisition companies or spac in short are also one of the ways the private companies become public.
What laws govern reverse mergers in Canada?
Being a shell company that has limited to no assets, the public company can now acquire the necessary shares and assets to operate fully. On the other hand, private companies become public, giving them more opportunities to acquire capital from wider sources. After identifying a suitable public company, the private company will need to negotiate the terms of the merger, including the exchange ratio and other important details. This involves working with legal and financial advisors to ensure that the terms of the merger are favourable to both parties.
No Demand for Shares Post Merger
In other words, when managers spend a great deal of time on administrative concerns rather than running their businesses, they can result in a stagnant and underperforming company. While the public shell company remains intact post-merger, the private company’s controlling stake enables it to take over the consolidated company’s operations, structure, and branding, among other factors. The idea of anybody involved in a reverse merger is that they’ll have instant access to the liquidity afforded to most companies on the stock market.
Capital is not immediately raised through reverse mergers, which is what makes them more quick and easy to execute than an IPO. Let us understand the intricate details about reverse merger stocks with the help of a few of examples. We also have a different directory of the top law firms in the field of M&A if you need help regarding a possible reverse merger. Head over to our page on the Lexpert-ranked best law firms for M&As in Canada.
ICICI Bank, India
The reverse merger process typically involves identifying a suitable publicly traded company to acquire, negotiating the terms of the merger, obtaining regulatory approvals, and completing the transaction. Companies also need to consider matters such as due diligence, valuation, and the integration of the merging entities. To ensure a successful reverse merger, companies should carefully evaluate the merging entity and perform due diligence, address regulatory and market conditions, and plan for the integration of both entities.
As mentioned earlier, the traditional IPO combines both the process of going public and the capital-raising functions. Because the reverse merger is solely a mechanism to convert a private company into a public entity, the process is less dependent on market conditions (because the company is not proposing to raise capital). Since a reverse merger functions solely as a conversion mechanism, market conditions have little bearing on the offering. Rather, the process is undertaken in an attempt to realize the benefits of being a public entity. For example, the public company may have a tainted corporate image or history that could negatively impact the private company.
- I) There is a risk that the shell company with which the private company will reverse merge is hiding some serious issues such as hidden debt, lawsuits, etc.
- Ultimately, companies considering either option should carefully evaluate the benefits and drawbacks of each approach and consult with financial and legal advisors to determine the best course of action.
- An acquisition is a strategic move to buy a controlling stake in another company, gaining control over assets and operations.
- It involves a series of key steps that must be carefully followed to ensure a successful outcome.
What Are the Alternatives to a Reverse Merger?
If a company you’re invested in appears to be in a reverse takeover, or if you’re looking to invest in one that is in the process, look for the free SEC filings on EDGAR. If stockholders had what is reverse merger warrants, which give them the power to buy more shares at a certain price, exercising those rights would bring more money into the firm. Public companies have a high amount of revenues, which in turn is a key feature to consider converting into one.
- The private company’s shareholders usually receive large ownership stakes in the public company and control of its board of directors.
- The new company also might not meet the listing criteria for the exchange the public company’s shares were traded on.
- Therefore, a company itself needs to be financially and operationally attractive to be a desirable investment to potential investors for its shares to be worthy.
- Market conditions can also pose a challenge for companies pursuing a reverse merger.
In order to offer both urban and rural consumers a wide variety of loan services, the ICICI group made the decision to do a reverse turnover. Dell soon confirmed its intention to merge with VMware Inc, its publicly-held subsidiary. In 2013, Dell was taken private in a $24.4 billion management buyout (MBO) alongside Silver Lake, a global technology-oriented private equity firm. By acquiring the television company, Turner not only generated good synergies between his advertising company and thetelevision broadcaster, but was also able to find a much larger audience for his corporate vision. Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.
As an alternative to the traditional IPO route, a reverse merger can be perceived as a more convenient, cost-efficient method to obtain access to the capital markets, i.e. public equity and debt investors. A reverse merger is similar to IPOs and SPACs in the sense that the ultimate aim of all three is for the company to gain a stock market listing and the increased access to capital that comes with that. Private companies don’t have to follow the same rules and regulations as public companies. This means that investors can’t do their due diligence or research about the financial history of the company initiating the merger.
Reverse mergers allow a private company to become public without raising capital, which considerably simplifies the process. While conventional IPOs can take months (or over a year) to materialize, reverse mergers can take only a few weeks to complete (in some cases, in as little as 30 days). This saves management time and energy, ensuring that there is sufficient time devoted to running the company. Aside from filing the regulatory paperwork and helping authorities review the deal, the investment bank also helps to establish interest in the stock and provides advice on appropriate initial pricing. A traditional IPO process combines the process of going public with the capital-raising function. A reverse merger separates these two functions, making it an attractive strategic option for corporate managers and investors.
A reverse merger is when a private company becomes a public company by purchasing control of the public company. Reverse mergers allow a private company to become public without raising capital, which considerably simplifies the process. While a reverse merger can be an excellent opportunity for investors, they also have certain disadvantages. The advantages of a reverse merger include faster access to public markets, lower costs compared to an IPO, and the ability to leverage the existing infrastructure of the acquired company. However, potential disadvantages include the risk of inheriting the acquired company’s liabilities and the need for transparency and compliance with regulatory requirements. Market conditions can also pose a challenge for companies pursuing a reverse merger.
To consummate the deal, the private company trades shares with the public shell company in exchange for the shell’s stock, transforming the acquirer into a public company. However, it’s still advised to consult an M&A lawyer who can deeply evaluate whether a reverse M&A or an IPO would be a better option if a private company wants to go public. A reverse merger is a process by which a smaller, private company goes public by acquiring an already-public company.
A private company may elect to do a reverse takeover in order to simplify the process of becoming a public company. Reverse takeovers allow companies to go public without the requirement to raise capital. A potentially significant setback when a private company goes public is that managers are often inexperienced in the additional regulatory and compliance requirements of being a publicly-traded company. After a private company executes a reverse merger, will its investors really obtain sufficient liquidity?
Unlike a conventional IPO, a reverse merger involves the acquisition of an existing public company, which may be subject to scrutiny by regulatory bodies such as the Securities and Exchange Commission (SEC). Companies considering a reverse merger must ensure that all rules and regulations are followed, and that any potential compliance issues are identified and addressed. While a reverse merger can offer a number of benefits for private companies seeking to go public, it also comes with its own set of risks and challenges. It is important for companies considering this approach to understand the implications and carefully evaluate whether it is the right strategy for their business.
After all the filing of required documents, it can be said that the reverse merger is approved. At this step, the stock of the shell company is transferred to shareholders of the private company. The public company is mainly there for the purpose of bypassing the complex and time-consuming IPO process. The reverse merger also requires a capitalization restructuring of the company that is acquiring. In simple words, it just means that the assets and capitalization of both the acquiring and acquired company are swapped. Inexperience managers sometimes can harm a potential private company’s journey to a publicly-traded company.