For example, Nikola, a private company established in 2015 that makes hydrogen fuel-cell electric trucks, completed a reverse merger with VectoIQ, a special purpose acquisition company (SPAC) in June 2020. A reverse merger occurs when what is reverse merger a private company takes over a public company so it can be traded on an exchange. The result of a reverse merger is that owners of the private company become the controlling shareholders of the public company. After the acquisition is complete, the owners reorganize the public company’s assets and operations to absorb the (formerly) private company. Private companies—generally those with $100 million to several hundred million in revenue—are usually attracted to the prospect of going public.
Time spent in meetings and drafting sessions related to an IPO can have a disastrous effect on the growth upon which the offering is predicated, and may even nullify it. In addition, during the many months it takes to put an IPO together, market conditions can deteriorate, making the completion of an IPO unfavorable. In a reverse merger, an active private company takes control and merges with a dormant public company.
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The goal of a reverse merger is to realize any inherent benefits of becoming a publicly listed company, including enjoying greater liquidity. Having said that, the process comes with a number of benefits and drawbacks, which we’ve listed below. 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.
Early 21st-century Chinese reverse mergers
- Having said that, the process comes with a number of benefits and drawbacks, which we’ve listed below.
- A Reverse Takeover (RTO), often known as a reverse IPO, is the process in which a small private company goes public by acquiring a larger, already publicly listed company.
- In a reverse merger, an active private company takes control and merges with a dormant public company.
- However, a private company can easily gain access to a foreign country’s financial market by executing a reverse takeover.
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. 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.
What is a reverse takeover example?
Examples. The corporate shell of the REO Motor Car Company (whose sole asset was a tax loss carryover), in what amounted to a reverse ‘hostile’ takeover, was forced by dissident shareholders to acquire a small publicly traded company, Nuclear Consultants. Eventually this company became the modern-day Nucor.
#3 RTO saves time
- For managers or investors of private companies, the option of a reverse merger could be seen as an attractive strategic option.
- The reverse merger process is also usually less dependent on market trends and conditions.
- This means that investors can’t do their due diligence or research about the financial history of the company initiating the merger.
- In this case, investors of the private company acquire a majority of the shares of a public shell company, which is then combined with the purchasing entity.
- To be successful, you must ask yourself if you can handle investing in a company that could take a long time to turn around.
A reverse merger allows a private firm to go public much more quickly, because it bypasses proceedures set by the Securities and Exchange Commission (SEC). The purpose of a reverse merger is to help a private company gain access to a public market in a way that is more efficient than going through an IPO. Public markets provide liquidity to private company shareholders, increase the private company’s investor base, and make it easier to obtain future equity and debt funding. The process involves the private company’s shareholders engaging actively in the exchange of its shares with those of the public company. The board of a company contemplating a reverse merger transaction should establish a clear record of the process it follows and the determinations it reaches, including through carefully crafted board minutes.
The Reverse Merger Alternative to an IPO: Technique Gaining Traction in Life Sciences Sector
Who benefits the most from a merger?
a) Shareholders: Shareholders of the acquired company typically benefit from the acquisition as they receive a premium for their shares, which is higher than the market value before the acquisition.
The private company then exchanges its private shares for the public company’s shares and effectively goes public if it meets the qualifications for listing on a stock exchange. A large part of these scams was played through small US banks willing to ignore clear warning signs when promoting these newly merged companies to the public market. It involves taking over a public company so the private company can begin trading on a stock exchange. 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. Private companies are held privately, and they are almost always owned by the people who establish them. While they may have access to private equity, they are generally closed off from the public, including stock markets.
To bypass the expensive and laborious process, a private company can go public more simply by acquiring a public company. SPACs are a less administratively cumbersome method of accessing the stock market than an IPO. In a SPAC deal, a listed shell company led by a management team looking for an acquisition raises funds to acquire a private firm and bring it public. It is common for the process to involve acquiring a small-scale public company with a relatively low level of operations. Although the public company remains intact after being acquired, the owners of the (formerly) private company transition to being the controlling shareholders. This is generally followed by a reorganization of the company’s assets and operations and a new board of directors.
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. This can be very risky for investors as there is no way to make an educated guess about the future of the company. The vast majority of public companies were created through the IPO process before reverse mergers became popular.
SPACs are initially formed by a group of investors who contribute cash or other assets. The SPAC is then taken public through the Securities and Exchange Commission (“SEC”) registration process. However, because the SPAC does not actively generate revenue, the registration process is often quicker and simpler than it would be for other revenue-generating companies. However, a private company can easily gain access to a foreign country’s financial market by executing a reverse takeover. The public company – which is now effectively a shell company – cedes a large majority of its stock shares to the private company’s shareholders, along with control of the board of directors. In a typical public listing, a private company must undergo an initial public offering (IPO).
If so, shareholders of the public shell may merely be looking for a new owner to take possession of these problems. Thus, appropriate due diligence should be conducted, and transparent disclosure should be expected (from both parties). The overwhelming main cause of why such a large influx of Chinese companies were easily able to enter the United States markets through these reverse mergers is that U.S. regulators are not able to investigate and monitor these companies under China’s federal authority.
Thorough recordkeeping should begin with the initial consideration and evaluation of a potential transaction—which often starts with auction-style market outreach to multiple private companies—and continue throughout the duration of the process. A public company evaluating whether to engage in a reverse merger is often already in a difficult position. The company may be facing “stock-drop” lawsuits, may be attempting to monetize its legacy assets, and may be under significant investor pressure to increase stockholder value. Although a reverse merger presents the possibility of a “whole company” solution, the board—as in other strategic and change of control transactions—must run a thoughtful process, typically with the assistance of a financial advisor and outside legal counsel.
What is the largest reverse merger?
The largest non-SPAC reverse merger announced in 2022, as reported by Bloomberg,was the $4.6 billion Hempacco Co. Inc. –Green Globe International Inc. cannabidiol (CBD) industry deal.
