A vertical merger occurs when two companies operating at different levels within the same industry’s supply chain combine their operations. Such mergers are done to increase synergies achieved through cost reduction, which results from merging with one or more supply companies. One of the most well-known examples of a vertical merger occurred in 2000 when internet provider America Online (AOL) combined with media conglomerate Time Warner.
Step 1: Identifying a Suitable Public 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. A reverse merger—also known as a reverse takeover or a reverse initial public offering (IPO)—is an alternative strategy private companies use to make their stock available to the general public. A reverse merger is a tactic that private companies use to go public without having to go through an IPO. During the what is reverse merger merger, the private company takes control of a public shell company with an existing hierarchical structure but little in the way of assets or net worth.
- At least with transparency, good investors have enough access to make informed decisions on a price.
- While a reverse merger can offer benefits such as a quicker and cost-effective process, there are also potential risks and challenges that need addressing.
- The involvement of shell companies may impact the overall stability and future prospects of the resulting public company.
- It’s essential to recognize that some reverse mergers come with unforeseen circumstances, such as liability lawsuits and challenges related to inadequate record-keeping by the involved parties.
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. Either way, there’s only one company left at the end of the transaction. And that company has both an underlying business — from the private company — and publicly traded shares from the shell company. In the end, the decision to pursue a reverse merger or a traditional IPO will depend on the specific needs and goals of the company. While a reverse merger can offer speed and cost savings, a traditional IPO may be the better option for companies seeking larger capital raises and greater visibility in the market. To begin, a private company buys enough shares to control a publicly-traded company.
Likelihood of Performing a Reverse Stock Split
That said, it’s a good idea for investors to perform due diligence and evaluate the shell company or SPAC as they would analyze a stock. Allegro Merger’s stock was liquidated, while the owners of TGI Fridays — two investment firms — kept the company. They may set a funding goal, but the managers of the SPAC will have control over how much money they will use during an acquisition. You are now leaving the SoFi website and entering a third-party website.
What are the differences between a reverse merger and a conventional IPO?
This involves a thorough review of the legal and financial history of both merging entities, as well as proactive measures to address any outstanding liabilities or legal contingencies. By being diligent in assessing potential risks, companies can better position themselves to navigate challenges that may arise post-merger. A reverse merger can be a relatively simple way for a company to go public.
This involves working with legal and financial advisors to ensure that the terms of the merger are favourable to both parties. Overall, a reverse merger can offer advantages in terms of speed, cost, and access to infrastructure, but it is not without its risks and challenges. Companies considering a reverse merger should carefully evaluate the pros and cons and seek advice from professionals to make an informed decision. While not a requirement of an RTO, the name of the publicly-traded company involved is often changed as part of the process.
There is no assurance of the investors obtaining sufficient liquidity after the merger. Due to financial and operational crises, sometimes, small companies may not be ready to be in public. If stockholders had warrants, which give them the power to buy more shares at a certain price, exercising those rights would bring more money into the firm. Many investors get a thrill from the “big risk, big reward” potential of SPACs, as well as the relatively affordable per-unit price or stock share that may be available to them. This can make it challenging for investors to understand the specifics of how a SPAC is operating, including the financials, operations, and management. Finally, there are regulatory issues to be aware of that can be a big hurdle for some companies that are making the transition from private to public.
They reorganize the merged entities in their vision, which usually includes replacing the board of directors and altering assets and business operations. In a reverse merger, investors of the private company acquire a majority of the shares of a public shell company, which is then combined with the purchasing entity. Investment banks and financial institutions typically use shell companies as vehicles to complete these deals. These simple shell companies can be registered with the Securities and Exchange Commission (SEC) on the front end (prior to the deal), making the registration process relatively straightforward and less expensive.
Many private company managers simply aren’t experienced in these issues, and as a result, the reverse merger is dogged with compliance issues. The reverse merger process is also usually less dependent on market trends and conditions. If a company spends months preparing a proposed offering through traditional IPO channels and the market conditions become unfavorable, it can prevent the process from being completed. By comparison, a reverse merger minimizes the risk, as the company is not as reliant on raising capital. It can take a company from just a few weeks to up to four months to complete a reverse merger. A conventional IPO is a more complicated process and tends to be considerably more expensive, as many private companies hire an investment bank to underwrite and market shares of the soon-to-be public company.
In this piece, we take a deeper dive into reverse mergers, exploring their mechanics and providing essential insights into this particular type of merger. If the SPAC does not find a company within the specified time period — or if a deal is not voted through — investors will get back their money, minus any fees or expenses incurred during the life of the SPAC. It is a temporary shell created exclusively to find companies to take public through acquisition. The SPAC may have a time limit to find a company appropriate to acquire.