Zaven has worked in several industries throughout his career, from aircraft factories to game development studios. He has been actively investing in the stock market for the better part of a decade, managing over $1 million across multiple portfolios. Prosper is a self-taught financial analyst and investor with years of experience. Inspired by Benjamin Graham, he employs a value-investing school of thought throughout his analyses. This has led to Prosper developing a wealth of knowledge in equities, foreign exchange, commodities, and global macroeconomic issues. It does not take into account the personal financial situation of the reader.
The Auditors’ View of the Current SPAC Market
Since a SPAC is essentially a shell company, it lacks a prior operating history. Reverse mergers typically occur through a simpler, shorter, and less expensive process than a conventional IPO. With an IPO, private companies hire an investment bank to underwrite and issue shares of the new what is reverse merger soon-to-be public entity.
- The traditional IPO necessarily combines the go-public process with the capital-raising function.
- Jennifer comes from a discipline of Operations, including Finance and Technology.
- A SPAC, on the other hand, is a vehicle or business entity used to facilitate that acquisition.
- It’s simply a “shell” that the private company can step into and use to access the public market.
Let us discuss the disadvantages of the reverse merger process to understand the topic in depth. 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. In this article, we delve a little further into reverse mergers, how they work, and what you need to know about this type of merger. The term “reverse” refers to the idea of a private firm acquiring an already public company, which is the opposite of a typical IPO scenario.
It also allows companies to avoid some of the regulatory hurdles and requirements of a traditional IPO. Private companies acquire a public company to avoid the process of IPO and raising capital. Only a few Indian companies have used the reverse IPO, making the reverse merger concept relatively new to India. In 2002, ICICI became the first firm to choose a reverse merger when it merged with its arm company, ICICI Bank, and renamed the combined entity ICICI Bank. ICICI also had two subsidiaries, ICICI Personal Financial Services Ltd. and ICICI Capital Services Ltd. It is important to go through every nook and corner of the private and public companies before starting the merging process.
Step 4: Shareholder Approval
Starting from looking into their motives to checking whether the company is neat and clean, pending liabilities, or other things that might disturb the merging. It is therefore imperative to conduct appropriate due diligence and to expect transparent disclosure (on both sides). Participating in a reverse merger typically necessitates heightened levels of due diligence for both investors and the companies involved. This increased scrutiny can introduce additional complexities, expenses, and time commitments.
That means the controlling interest in a company changes hands, because the private company is acquiring the public one. As a result, your shares in the new company might not allow you the same privileges as the old one. A reverse merger is a process by which a smaller, private company goes public by acquiring an already-public company.
Reverse Mergers and Shell Corporations
In a reverse merger, a private company buys an existing, smaller company, generally by purchasing more than 50% of the public company’s stock. Once the private company effectively controls the public company, it can begin merging operations. In the context of reverse mergers, there is a possibility of performing a reverse stock split, especially to meet listing requirements or address the structure of the merged entity.
Impact of Improved EBITDA on Business Valuation
It involves taking over a public company so the private company can begin trading on a stock exchange. But there are alternatives, including undergoing an IPO or remaining private. Another alternative is a special purpose acquisition company, which is a company that is established to raise capital through an IPO so it can purchase another company.
That helps to expedite the process of going public, but it also means that reverse mergers are only appropriate for private firms that don’t need cash right away. Companies that are looking to raise funds as they go public are better off taking the traditional route of pursuing an IPO. The relative lack of public company experience within the management team of the merged entity may present a competitive disadvantage. This presents a complex scenario that requires careful consideration of shareholder rights, market dynamics, and the long-term impact on the financial landscape of the new public entity. Companies involved in reverse mergers should proactively assess the potential effects of a reverse stock split and develop strategies to effectively communicate its implications to their stakeholders. A reverse merger provides an opportunity for the existing shareholders of the private company to realize liquidity through the public listing.
To alleviate this risk, managers of the private company can partner with investors of the public shell who have experience in being officers and directors of a public company. The CEO can additionally hire employees (and outside consultants) with relevant compliance experience. Managers should ensure that the company has the administrative infrastructure, resources, road map, and cultural discipline to meet these new requirements after a reverse merger. After a private company executes a reverse merger, will its investors really obtain sufficient liquidity?
