Reverse Merger

What is Reverse Merger?

Reverse merger refers to a type of merger in which private companies acquire a public company by exchanging the majority of its shares with a public company, thereby effectively becoming a subsidiary of a publicly-traded company. It is also known as reverse IPO, or Reverse Take Over (RTO)

Forms of the Reverse Merger

Example of Reverse Merger

Example #1 – Diginex Reverse Merger

Reverse Merger Example

source: cfo.com

Diginex is a Hong Kong-based cryptocurrency firm that became a public company by closing a reverse merger deal. It exchanges shares with 8i enterprises Acquisitions Corp, a publicly listed company.

Example #2 – Ted Turner-Rice broadcasting

A prominent example of a reverse merger is of Ted Turner merging his company with Rice broadcasting. Ted had inherited his father’s billboard company, but the operations were in bad shape. However, with his bold vision for the future, he managed to get a little investment cash in 1970 and went on to purchase Rice Broadcasting, which is today a part of The Times Warner group

Example #3 – Rodman & Renshaw and Roth Capital

Small boutique firms like Rodman & Renshaw and Roth Capital went on to bring more than 40 Chinese companies to the American investors and stock exchangesStock ExchangesStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more by undertaking reverse mergers with ‘shell’ American public companies that were defunct or had little or no business with deals worth 32 million USD.

Advantages

Reverse-Merger

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Source: Reverse Merger (wallstreetmojo.com)

Disadvantages

Of course, the process comes with certain drawbacks, as listed

Limitations

  • It is often noticed that it is the IPO process that raises more money, contrary to a reverse merger process
  • It lacks the market support for the stock, which is usually prevalent in case of an IPO

Conclusion

Reverse merger stands as an excellent opportunity for private companies to bypass all of the procedure, which is generally involved as a part of the IPO process. It tends to be a cost-effective route for companies to get themselves listed on any stock exchange and thereby become public.

However, given the limitations and the scope of misuse of such routes owing to limited transparency and information asymmetry, it has enabled many in the financial sector sphere to take advantage of such loopholes. It becomes imperative that ethical frameworks be well imbibed in them to avoid such occurrences.

Once such issues are taken care of, the only factor the private companies need to consider becomes the limited scope of such routes as a contrast to that of the IPO route and also the essential nitty-gritty involved in managing the regulatory requirements demanded from that of a public company.

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This article has been a guide to what is Reverse Merger and its definition. Here we discuss the example of a reverse merger along with its advantages and disadvantages. You can learn more about accounting from the following articles –

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