Reverse Merger What Is It, Examples, Benefits, Forms

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. After the merger, the stock price may or may not suffer significantly if the public shell's shareholders sell a sizable amount of their shares. So it is a must-need merger agreement to have clauses defining necessary holding periods, subsequently, lessening or completely eliminating the possibility that the shares will be dumped. It is one of the efficient ways in which a private company can go public and monetize its share effectively.

How Do Reverse Mergers Work?

An acquisition is a strategic move to buy a controlling stake in another company, gaining control over assets and operations. A special purpose acquisition company (SPAC) is a unique investment vehicle that seeks to acquire a private business solely to take it public. Going public through a reverse merger is significantly faster than performing an IPO, taking an average of five weeks versus up to a year.

What is Reverse Merger?

If you learn that a company may be engaged in a reverse merger, avoid any temptation to act right away. Take time to allow the merger to complete, and then watch the company’s performance. Over time, you’ll learn whether the company is on a solid financial footing or not. Although, recently the reverse merger has come under increased scrutiny due to a bunch of Chinese companies that went public on the U.S.

• That means the controlling interest in a company changes hands, because the private company is acquiring the public one.
• Shell is basically the company through which the private company will merge for the reverse merger.
• The reverse merger also requires a capitalization restructuring of the company that is acquiring.
• Reverse takeovers allow companies to go public without the requirement to raise capital.

In 2019, he completed his Law degree and was called to the Nigerian Bar in 2021. Outside The Money Cog, Prosper encourages others to join the investment community through his lectures on financial literacy as well as investing strategies. Prosper is a self-taught financial analyst and investor with what is reverse merger years of experience.

By gaining the opportunity to sell their interests, the original investors have a handy exit option other than having the corporation purchase back their shares. Since management may now issue extra shares through secondary offers, the firm has better access to the capital markets. Reverse mergers are an alternative route to going public that avoids the lengthy, expensive process of launching an IPO. Because the typical targets of a reverse merger tend to have low valuations, they can be profitable to savvy investors who can spot the signs of a potential acquisition.

There are also a bunch of other things that are required to be done before this step is cleared. A detailed audit, public filings, unforeseen liabilities, and DTC applicability are also reviewed. In 2005, the Industrial Development bank of India followed the reverse merge method with its commercial bank IDBI Bank. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies.

SPAC Perspective: What Do We Do About Cayman?

The shell must also be very financially sound, if it is not financially sound, it has debts and obligations, it will ultimately be a drag when the private company goes public through the reverse merger. Ever wondered what Reverse Merger means, even though it appears all over the internet? Well, in simple words, it is nothing but a private company holding ownership over already public companies. In this way, the private stocks and assets are now available to the general public. Once this is complete, the private and public companies merge into one publicly traded 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.

For Dell, the reverse merger – a complicated ordeal with several major setbacks – enabled the company to return to the public markets without undergoing an IPO. Although reverse mergers have taken a back seat to SPACs over the last half decade, they still offer an effective means of publicly listing a company if the right acquisition target can be found. Despite the reputational damage caused at the time, reverse mergers are a wholly legitimate means to bring a company public.

Dump of risky stocks

The IPO would be our normal process of going public, while the reverse M&A is the unconventional one. Check out our directory of the best M&A lawyers in Canada as ranked by Lexpert. One of the key benefits of a traditional IPO is that it allows companies to generate substantial capital and receive greater visibility in the market. However, the process can be time-consuming, costly, and requires significant resources to manage the IPO process.

While the public company "survives" the merger, the private company owners become the controlling shareholders. They reorganize the merged entities in their vision, which usually includes replacing the board of directors and altering assets and business operations. A reverse merger is often the most expedient and cost-efficient way for a private company that holds shares that are not available to the public to begin trading on a public stock exchange.

Some companies and individuals use shell corporations for various illegitimate purposes. This includes everything from tax evasion, money laundering, and attempts to avoid law enforcement. Going public through a reverse merger is like an IPO as it means the company's owners must dilute ownership and give up a stake in the company to public investors. This means that they also give up a great degree of control over the future of the company and how it's managed.

Management also has more strategic options to pursue growth, including mergers and acquisitions. 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.

• If market conditions are unfavourable, the company may struggle to generate interest in its shares and may be unable to raise the necessary capital to fund its operations.
• To understand Reverse mergers thoroughly, one has to understand what IPO means.
• There is no assurance of the investors obtaining sufficient liquidity after the merger.
• If the complexity of regulatory and compliance requirements isn’t too much of a burden, there are significant benefits to holding a public company.
• At least with transparency, good investors have enough access to make informed decisions on a price.

With proper planning and execution, a reverse merger can be an effective way for companies to go public and access capital markets. A reverse merger is when a private company goes public by buying a controlling stake of a public company. Shareholders of the private company then receive a large number of shares, allowing them to choose the board of directors and integrate their operations into the new company. Reverse mergers allow private companies to convert to a public entity cheaply.

As with your classic M&As, most of the aspects of reverse mergers are governed by Canada’s competition and antitrust laws, specifically the federal Competition Act. As such, the review processes for M&As may still apply to these types of mergers, especially when certain thresholds are already met by the transaction. Once due diligence is complete, both companies will need to obtain shareholder approval for the merger. This involves submitting a proxy statement to the Securities and Exchange Commission (SEC) and holding a vote for both companies’ shareholders.

Once the merger is complete, the private company will become a publicly traded company and can begin trading its shares on the stock market. The first step in the reverse merger process is to identify a publicly traded company that is compatible with the private company’s business. This involves extensive research into the potential partner’s financials, business operations, and reputation. The private company will need to ensure that the publicly traded company is a good fit and will enhance its overall value.

Reverse mergers, also known as reverse takeovers, are an alternative to more traditional forms of raising capital. A reverse merger is when a private company goes public by purchasing control of another public company. The private company's shareholders usually receive large ownership stakes in the public company and control of its board of directors. A Reverse Merger occurs when a privately-held company acquires a majority stake in a publicly-traded company.