Reverse Mergers

It also assigns a company’s upper management the responsibility of overseeing and attesting to accurate financial reporting and increases reporting and disclosure requirements. Companies going through a reverse merger may not be prepared for the increased regulatory compliance that is required of public companies. Under the first scenario, a private company acquires enough shares of a public company to gain control of the company and its board.

In theory, a well-executed reverse merger should create shareholder value for all stakeholders and offer access to the capital markets (and increase liquidity). Upon completion of the merger, the private company obtains control over the public company (which remains public). To be successful, you must ask yourself if you can handle investing in a company that could take a long time to turn around.

Once this is complete, the private and public companies merge into one publicly traded company. Reverse mergers are also referred to as reverse takeovers or reverse initial public offerings (IPOs). The public company in this scenario is sometimes referred to as a “shell company” because it often has few (if any) operations of its own.

Why Would a Company Undergo a Reverse Merger?

CFI is on a mission to enable anyone to be a great financial analyst and have a great career path. In order to help you advance your career, CFI has compiled many resources to assist you along the path. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Approximately three years later, Dell acquired storage provider EMC in 2016 for roughly $67 billion in a deal that effectively created the largest private technology company (renamed “Dell Technologies”).

This trend, coupled with challenging conditions in the traditional IPO market, has led to a significant uptick in reverse mergers with publicly held life sciences companies since the beginning of 2022. Many companies perform reverse mergers, also known as reverse takeovers, as opposed to other, more traditional forms of raising capital. A reverse merger is when a private company becomes a public company by purchasing control of the public company.

Reverse takeover

The shareholders of the private company usually receive large amounts of ownership in the public company and control of its board of directors. If your company is looking to go public, an initial public offering (IPO) is not the only way to become publicly traded. Every year, a few private companies use reverse mergers to become public companies without going through the IPO process. This article defines reverse mergers, provides some of the advantages and disadvantages of a reverse merger, and lists a few notable reverse merger transactions. The exchange ratio for a reverse merger transaction is typically based on the relative valuations of the public and private companies. Although the private company’s valuation is often tethered to the valuation from its most recent private financing, the final valuation will ultimately be the product of negotiations between the parties.

In 2013, Dell was taken private in a $24.4 billion management buyout (MBO) alongside Silver Lake, a global technology-oriented private equity firm. Read more about Mergers & Acquisitions, including SPACs, reverse triangular mergers, and shell companies. 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.

#4 Gaining entry to a foreign country

The final disadvantage relates to the share price movement of the private company following the merger. 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. In a limited time frame, the companies involved (and their shareholders) must conduct diligence on the proposed transaction, but there is a significant time constraint for all parties engaged. The drawback to an expedited, quick process is the reduced time to perform due diligence, which creates more risk stemming from overlooking certain details that can turn out to be costly mistakes. The primary advantage for a company to pursue a reverse merger instead of an IPO is the avoidance of the onerous IPO process, which is lengthy and costly. Nevertheless, there are other instances in which the public company does indeed have ongoing day-to-day operations.

Undergoing the conventional IPO process does not guarantee that a company will ultimately go public. But, if the stock market conditions become unfavorable to the proposed offering, the deal may be canceled—and all of those hours will amount to a wasted effort. A typical initial public offering process takes months at a minimum—sometimes, it takes more than a year.

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. While a reverse merger helps avoid some aspects of the cumbersome IPO process, it does not alleviate the burdens of being a SEC-registered public company. This means that the acquirer needs to hire a firm capable of doing a public company audit, prepare annual and quarterly financial statements, and develop proper internal controls. The Sarbanes-Oxley Act (SOX) requires that a public company’s internal controls be audited in addition to its overall financial-statement audit.

1. Significantly increased liquidity means that both the general public and institutional investors (and large operational companies) have access to the company’s stock, which can drive its price up.
2. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network.
3. To bypass the expensive and laborious process, a private company can go public more simply by acquiring a public company.
4. As part of the reverse merger, the private company acquires the publicly-listed target company by exchanging the vast majority of its shares with the target, i.e. a stock swap.
5. In the United States, if the shell is an SEC-registered company, the private company does not go through an expensive and time-consuming review with state and federal regulators because this process was completed beforehand with the public company.
6. Additionally, company performance has historically dropped following a reverse merger.
7. This trend, coupled with challenging conditions in the traditional IPO market, has led to a significant uptick in reverse mergers with publicly held life sciences companies since the beginning of 2022.

It underlines why there was such a crackdown on reverse mergers by the SEC at the beginning of the last decade. On the other hand, reverse mergers have various risks, namely the lack of transparency. By paying attention to the financial media, it is possible to find opportunities in potential reverse mergers.

It is also often referred to as a reverse takeover or what is reverse merger a reverse initial public offering (IPO), and is commonly done by smaller private companies that take over larger public ones. A reverse merger, sometimes referred to as a ‘reverse acquisition’, is a transaction that involves a private company acquiring a majority stake in a dormant public company in order to bypass the IPO process and gain access to the capital markets. A Reverse Merger occurs when a privately-held company acquires a majority stake in a publicly-traded company. A reverse merger – or “reverse takeover” – is most often undertaken to bypass the traditional initial public offering (IPO) process, which can be time-consuming and costly.

1. Since the fourth quarter of 2021, the number of such candidates has grown dramatically as more and more life sciences companies find themselves trading at valuations below their cash on hand.
2. If the public shell’s investors sell significant portions of their shares right after the merger, this can materially and negatively affect the stock price.
3. As stewards of the acquiring company, the management can use company stock as the currency with which to acquire target companies.
4. Finally, because public shares are more liquid, management can use stock incentive plans to attract and retain employees.
5. From 2010 to 2011, it was noted that 62 CRM’s were accused of fraud by these eventual short sellers.
6. While the public company “survives” the merger, the private company owners become the controlling shareholders.

The reverse takeover route typically costs only a fraction of what the average IPO costs. Despite the reputational damage caused at the time, reverse mergers are a wholly legitimate means to bring a company public. In effect, the private company essentially becomes a subsidiary belonging to the publicly-traded company (and is thereby considered a public company). Usually, the public company in a reverse merger is a shell company, meaning that the company is an “empty” company only existing on paper and does not actually have any active business operations.