What is a reverse mergers / reverse IPO?
I'd like to find out more about reverse mergers and reverse IPOs. What are the pros and cons? Who are the typical clients?
Good Answers (7)
Christie (.
Director/Partner, Corporate and Securities Lawyer, Cohen & Grigsby, P.C.
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I agree with the posts above. I'll add some pros and cons.
Cons:
1. Not all merger targets are created equal. You pay for what you get (i.e. successor liability if they had operations and integrity of their financials). They have to be current in their reporting obligations and if you get in there and find out the historical financial statements are wrong, you'll have the added cost of a restatement.
2. Expensive accounting and legal due diligence, and no or limited recourse if you find liabilities after the fact or if the deal doesn't close.
3. Most merger targets are only OTC so you don't necessarily get increased marketability of your shares.
4. Your current shareholders are going to be locked up pursuant to Rule 144 and you might be locked up longer due to lock-up agreement.
5. Costs and legal liability of being a public company (audited financials, filing fees, diversion of management, internal controls, board fees usually higher, increased insurance costs, particularly D&O, listing exchange fees if will be listed on a major exchange, Section 16 filings for insiders).
6. Some negative market perception still exists despite SEC recent regulations and rules.
Pros:
1. Faster than an IPO typically
2. May be done with less upfront cost
3. Market perception and acceptance has gotten better
4. Potentially increased marketability and transferability of shares, but this should be a long-term objective rather than a short-term objective.
Clients tend to be foreign companies (particularly China) and often in the life sciences business. More recently, we have seen companies being approached by parties that own shell companies to consider using this model as a vehicle to go-public.
Justin K.
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This is a tricky one and I'm curious to see what the answers are. My basic understanding of this is when a private company purchases a previously public company (or merges with one). The private company now owns all assets and liabilities of the public company, however, they don't need to go through the IPO process themselves - reducing even more costs with attorneys, accountants, consultants, etc.. - to acquire or merge with a public company. They are buying into the shell that was the previously public company, essentially going public themselves. Sort of like piggybacking on the public company to become public.
The time and cost requirements for a traditional IPO can be insane numbers, and by going public in this reverse method you can significantly reduce those expense. Also, since the private company is piggybacking on the public one, they have eliminated the underwriting process - which is a complex beast by itself.
The increase in value of your newly formed public company is pretty enticing for business owners, the employees, and other stakeholders. This also makes it easier to obtain other public companies (or private I guess) since your new stock price has just increased in value. Stock buyouts are easier on cash reserves then writing a check..
I hope this puts you on the right track!
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I would assume that by reverse mergers and reverse IPO you are referring to demergers and delisting of listed shares/stocks. Assuming that my assumptions are not incorrect, the reasons for a company to demerge or delist would be driven by a number of commercial considerations. For instance, a corporate may decide a demerge a part of the entity (spin off) to enhance more share holder value, or segregate greater revenue generating vertical in a company from the not so great revenue generating vertical in the company. Further, a company may decide to voluntary delist, in an instance where the stocks/shares are delisted on a "near defunct" stock exchange, and as result the company my be incuring unnecesary administrative costs.
Probably, you may consider further clarifying your question, so that it could be responded to in a more succinct manner.
A Reverse Merger is when a non-public takes over a public (usually inactive or not traded) company. The surviving company is now the public company. This new company will reorganize and prepare for re-listing and selling its stock in the public marketplace. The resulting public offering is called a "secondary offering" and is NOT an IPO.
An IPO is an "Initial Public Offering". There is no such thing as a Reverse IPO.
Typical clients for the Reverse Merger technique are growing companies wishing to expedite the path to the publicly traded marketplace. They often think it is a less expensive route to getting there rather than going public through a traditional IPO.
Reasons for going public include being able to raise cash by issuing additional shares of stock; using corporate stock as a means of purchasing other companies; and for an investor to "cash out" of an investment in the company.
James L.
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The key to "reverse IPOs" is that, while in practice private company A is acquiring public company B, the actual mechanism is for company B to acquire A through issuing new shares (hence "reverse").
For example, let's say private company A wants to acquire public company B, and the 2 sides agree that A is worth $80m while B is worth $20m. Let's say B has 200m shares outstanding currently. What B needs to do is then to issue 800m new shares and use these to "acquire" company A, i.e. giving these shares to A shareholders in return for all of A's assets.
What we then end up with is a new, expanded B (let's call it "NewCo") which is still publicly listed. NewCo will own all of the assets from both A and B, but will be 80% owned by the original shareholders of A and 20% owned by the original shareholders of B.
The price pros and cons will depend on details such as valuation, exchange ratios, total size. The most obvious pro is that the private acquiror gains a public listing easily without going through an IPO. The most obvious con is legal complexity; note also that, unlike an IPO, there is no immediate liquidity of the stock (since most are still owned by the original shareholders of the private acquiror).
Surabhi A.
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Reverse IPO : An unlisted (privately held) Company acquires/ takes over a listed Company (publicly held) thereby becoming listed without having to go through the process of an Initial Public Offer. (IPO).
Reverse Merger : Mostly refers to a private companycompany acquiring/ merging with a public one. The term thus could be used interchangeably with a Reverse IPO where the acquirer becomes a listed company in the process. However, Reverse Merger is a much wider term than Reverse IPO. For ex. in India Reverse Merger mostly refers to a financially weak (loss making) company merging with a profit making one in a way that the profit maing company loses its existence thereby giving a tax advantage to the acquirer.
Typical clients may include (amongst several others) corporates looking for quick listing (Reverse IPO) or profit making corporates looking for tax savings (Reverse Mergers) .....
Clarification : Anupam, I dont think Reverse IPOs and Reverse Mergers have anything to do with delisting or de-mergers.
Rick C.
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Jennifer,
Short answer: "reverse merger" is almost always spelled s-c-a-m.
There are a small handful of legitimate reasons why a non-scammy, non-scuzzy company would go through this process. It is expensive, provides little intrinsic value to the private company paying for everything, and does little else.
Standard format: a private company enters into an agreement to merge with an existing listed (meaning on a stock exchange) company that has little or no assets, may have (preferably) gone through a bankruptcy to become a "clean shell," and has existing stockholders whose shares probably have a fair market value of close to zero.
The merger goes through and the private company is able to take over the securities filing status of the public company, meaning the private company is now public (as if that matters!). In exchange, the shareholders of the shell get some amount of money, generally well into 6 figures (most of which will certainly go to fees for third-party advisors) and some percentage in the post-deal company (5-20% is not uncommon).
Why do people do these deals? Because they think that now they can "raise money" that they couldn't previously. Sort of true in a technical sense, but not really true on a practical level. A full-form securities registration (S1) is expensive, and they still need brokers to sell the shares to investors. If you don't spend the cash on the reverse merger, you could just look for underwriters to sell the shares in a regular IPO. Same result, cheaper, faster (since you don't have to do the merger deal first), and without the equity haircut.
Are there legitimate reasons to do these deals if you're the private company? Sure, there's at least one: if you have an investor IN HAND who has ALREADY committed to investing but is subject to investment policy restrictions such as only investing in public companies, then the speed of getting from A to B via reverse merger might make sense. And in that scenario, the terms should be negotiated way, way down from the "typical" deal.
Hope that helps. In general, stay away and get advice from a reputable, experienced corporate/securities lawyer who has done mainstream deals before getting into this one.
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Frank F.
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Usually, this is where a non-public company
acquires a publicly-listed company, in what
is called a reverse take over (RTO). The public
company may be basically inactive. It gets
reconstituted and probably re-named. This is
a far easier way for a non-public company to
get a public listing.
Search for it online.
Cyrus A.
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Just to add to what others have written, "reverse" anything is usually a bad sign -- be it a merger, stock split, etc. This strategy isn't usually tried unless a company is in dire straits and looking for a maneuver to prop it up in the hopes of rebounding. Thing is, the rebound often never happens.
As others said, there is no such thing as a reverse IPO. Reverse stock splits do occur, although often it's to get a small company off the Pink Sheets and onto the Nasdaq National Market.
Wallace J.
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Lawrence R. G.
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An IPO can be cancelled for some perceived breach of the underwriting agreement (or agreement among underwriters) after trading has occurred in the secondary market, at which point all the trades are DK'd and the "IPO" is functionally killed. This will lead to litigation. I do not know what a "reverse IPO" is, but if somehting is labled that, it is technically incorrect.
The above is my guess. I may be wrong. do not rely on this post to act or not act. This is subject to the disclaimers at www.GelberLaw.net
