The first step in a reverse merger is for the owners of the public company to buy at least 51% of the shares of a shell company. Once they own a majority stake, they swap the shares of the private company for existing or new shares of the public shell company. The private company then ends up as a wholly owned subsidiary of the shell company. Undergoing the conventional IPO process does not guarantee that the company will ultimately go public. But if 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. While the public company „survives“ the merger, the private company owners become the controlling shareholders.

The statement shall include details such as the name and identity of the parties involved, the nature of the proposed acquisition, and the mode of consideration. Privately Held CompanyA privately held company refers to the separate legal entity registered with SEC having a limited number of outstanding share capital and shareowners. A privately held company refers to the separate legal entity registered with SEC having a limited number of outstanding share capital and shareowners. A public company may acquire a significant proportion of the privately held company, thereby giving in exchange a majority of usually more than 50% of the public company. The private company now becomes a subsidiary of the public company and can now be considered public. The sort of small companies that are typically involved in reverse merger might not be ready to be public companies.

• When VMWare was acquired by Dell, a reverse merge was in place so the latter would be back to the stock market as a public company.
• First, it’s important to understand why a company may choose to go public to begin with.
• Companies sell shares to the general investing public to raise their name recognition and access more sources of financing than are generally available to private firms.
• These burdens can prove significant, and the initial effort to comply with additional regulations can result in a stagnant and underperforming company if managers devote much more time to administrative concerns than to running the business.

The ability for a private company to become public for a lower cost and in less time than with an initial public offering. When a company plans to go public through an IPO, the process can take a year or more to complete. With a reverse merger, a private company can go public in as little as 30 days.

How a Reverse Takeover (RTO) Works

Thus, smaller companies may not attract analyst coverage from Wall Street. After the reverse merger is consummated, the original investors may find little demand for their shares. For a company’s shares to be attractive to prospective investors, the company itself should be attractive operationally and financially. Reverse mergers are also commonly referred to as reverse takeovers or reverse initial public offerings . A reverse merger is a way for private companies to go public, and while they can be an excellent opportunity for investors, they also have certain disadvantages.

Since a reverse merger functions solely as a conversion mechanism, market conditions have little bearing on the offering. Rather, the process is undertaken in an attempt to realize the benefits of being a public entity. A reverse takeover is a process whereby private companies can become publicly traded companies without going through an initial public offering . However, the equity structure reflects the equity structure of the legal parent , including the equity interests the legal parent issued to effect the combination. Accordingly, the equity structure of the legal subsidiary is restated using the exchange ratio established in the acquisition agreement to reflect the number of shares of the legal parent issued in the reverse acquisition. After a private company executes a reverse merger, will its investors really obtain sufficient liquidity?

Advantages of a Reverse Merger

Schedule TO-T must be filed with the SEC by any entity that makes a tender offer for a company’s stock, usually as part of a takeover effort. Corporations may reincorporate into a low-tax company through reversing a merger with a foreign corporation . Example BCG 2-40 illustrates the measurement of a noncontrolling interest in a reverse acquisition. Company A issues 400 shares in exchange for 100% of Company B. Company A legally owns 100% of Company B. The retained earnings and other equity balances of the legal subsidiary before the business combination. The assets and liabilities of the legal parent recognized and measured in accordance with the guidance in this Topic applicable to business combinations.

Either transaction will result in increased information disclosure, more liquidity, and dilution.2Reverse Mergers are touted as being less expensive and involving less time. In a reverse takeover, shareholders of the private company purchase control of the public shell company/SPAC and then merge it with the private company. The publicly traded corporation is called a „shell“ since all that exists of the original company is its organizational structure. The private company shareholders receive a substantial majority of the shares of the public company and control of its board of directors.

Reverse takeover

The public entity is treated as the acquiree and the private entity is deemed to be the acquirer. A Reverse merger is the process where a private company acquires a majority stake in a publicly listed company. Through this acquisition, the private company can save time and money which the traditional IPO route might take. Significantly increased liquidity means that both the general public and institutional investors have access to the company’s stock, which can drive its price. Management also has more strategic options to pursue growth, including mergers and acquisitions.

The legal acquiree’s historical weighted-average number of common shares outstanding multiplied by the exchange ratio established in the acquisition agreement. Example BCG 2-38 and Example BCG 2-39 illustrate the presentation of shareholders’ equity following a reverse acquisition. Ii) Huge cost saving for the private company as the costly process of an Initial public offering or IPO is avoided. The shell company should have a great reputation as it will help the evaluation of the private company. The shell company is also required to have filed all the required documents with the SEC.

Everything You Need To Master Financial Modeling

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. When VMWare was acquired by Dell, a reverse merge was in place so the latter would be back to the stock market as a public company. On June 9, 2011, the United States Securities and Exchange Commission issued an investor bulletin cautioning investors about investing in reverse mergers, stating that they may be prone to fraud and other abuses. He staved off bankruptcy by engineering a reverse merger with a dormant holding company listed on the Milan stock exchange.

A reverse merger separates these two functions, making it an attractive strategic option for corporate managers and investors alike. Aside from filing the regulatory paperwork and helping authorities review the deal, the bank also helps to establish interest in the stock and provide advice on appropriate initial pricing. The traditional IPO necessarily combines the go-public process with the capital-raising function. Some of the reasons for this include greater liquidity, increased transparency and publicity, and most likely faster growth rates compared to private companies.

A letter of offer shall be posted to the shareholders whose names are listed in the register of the private entity after approval from SEBI. A period of tendering is set by the Board for the shareholders to accept the offer. The statutory requirements of such an exchange are to be accomplished by the public entity and the offer is to be completed for the shareholders who have accepted the offer. A public statement shall be made by a merchant banker appointed as the ‘manager to the open offer’ on behalf of the acquiring company. The public statement shall also be filed with all relevant stock exchanges with which the entity is registered. The same shall also be published in any English national daily, any Hindi national daily, and any regional language daily in the location where the private entity is registered.

Reverse mergers have advantages that make them attractive options for private companies, such as a simplifed way to go public and with less risk. If a company you’re invested in appears to be in a reverse takeover, or if you’re looking to invest in one that is in the process, look for the free SEC filings on EDGAR. 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. US Airways was acquired by America West Airlines, with the goal of removing the former from Chapter 11 bankruptcy.

While the public entity may be the one issuing the securities, under Ind AS-103 other factors are also evaluated in determining the status of the acquirer. Despite the series of benefits mentioned above, there are factors from the other end of the spectrum that prove to be hassles or hurdles in the whole process. Let us discuss the disadvantages of the reverse merger process to understand the topic in depth. Financial SectorThe financial sector refers to businesses, firms, banks, and institutions providing financial services and supporting the economy.

After the merger, the acquired entity, i.e., the private company holds a majority of the shares and thereby obtains control over the acquiring entity, i.e., the public company in the new resultant entity. In such a merger, a public shell company is usually used as a placeholder for the transaction as, in most cases, the public entity ceases to exist after the merger. Going public through a reverse takeover allows a privately held company to become publicly held at a lesser cost, and with less stock dilution, when compared with an initial public offering . While the process of going public and raising capital is combined in an IPO, in a reverse takeover, these two functions are separate. In a reverse takeover, a company can go public without raising additional capital.

• At this step, the stock of the shell company is transferred to shareholders of the private company.
• 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.
• In July 2020, Fisker, Inc announced plans to go public via a merger with Spartan Acquisition Corp , a „blank-check“ company backed by Apollo Global Management.
• In a reverse acquisition, the accounting acquirer usually issues no consideration for the acquiree.
• A follow-on public offer is an issuance of additional shares by a public company that already listed on an exchange.
• Given these issues, a reverse merger is generally not recommended, though many organizations still use it every year.

DisclaimerAll content on this website, including dictionary, thesaurus, literature, geography, and other reference data is for informational purposes only. This information should not be considered complete, up to date, and is not intended to be used in place of a visit, consultation, or advice of a legal, medical, or any other professional. T-Mobile US which was called T-Mobile USA, Inc. at the time acquired MetroPCS and after the merger was completed changed the company name to T-Mobile US and began trading on the New York Stock Exchange as TMUS.

Shareholders of the public shell entity may be categorized as promoters and bystanders, promoters. Bystanders, on the other hand, most likely have never closed out a position in an operating public company that is wrapping up its affairs sending the company’s common stock to a virtual zero prices. At this stage, Promoters receive cash fees for their financial advisory services related to the transaction as well as a small slice of the equity in the post-transaction combined entity. And Bystander hold the same small amount of common stock in the public shell both before and after the transaction, receive an economic benefit only through their equity position. Interestingly, they only experience the upside of the increase in value of their equity after the shell acquires assets and operations through the Reverse Merger.

They therefore may lack the scale and viability needed to sustain the burdens of being a public company and sustain investor interest in their shares, which may make them harder to trade long term. 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 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. A special purpose acquisition company is a publicly traded company created for the purpose of acquiring or merging with an existing company. Many reverse mergers do little of what is promised and the company ends up trading on the OTC bulletin board and providing shareholders with little to no additional value or liquidity.

A reverse merger is a corporate tactic utilized by private companies seeking to “go public” – i.e. become publicly listed on an exchange – without formally undergoing the initial public offering process. Unlike an IPO, market conditions have a low impact on determining the timing of a Reverse Merger. Lower cost due to lower investment banking fees and lower professional fees, Lower market discount (IPOs typically require 10-20% discount at offering), the potential for liquidity to existing shareholders. While these are certainly attractive merits, owners and management teams must carefully consider whether the private company is prepared for a public investor base. Instead of hiring an underwriter to market and sell the company’s shares in an initial public offering (“IPO”), a private operating company works with a “shell promoter” to locate a suitable non-operating or shell public company. Reverse acquisitions present unique accounting and reporting considerations.

This is reverse merger meaning on a 6.7% ownership (4 shares / 60 issued shares) in Company B and Company B’s net assets of $2,000. Company B, a private company, acquires Company A, a public company, in a reverse acquisition. Any excess of the fair value of the shares issued by the private entity over the value of the net monetary assets of the public shell corporation is recognized as a reduction to equity. Although, recently the reverse merger has come under increased scrutiny due to a bunch of Chinese companies that went public on the U.S.