By comparison, the IPO process can take anywhere from six to 12 months. 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. Reverse mergers allow owners of private companies to retain greater ownership and control over the new company, which could be seen as a huge benefit to owners looking to raise capital without diluting their ownership.
In most cases, a reverse merger is solely a mechanism to convert a private company into a public entity without the need to appoint an investment bank or to raise capital.
Instead, the company aims to realize any inherent benefits of becoming a publicly listed company, including enjoying greater liquidity. There may also be an opportunity to take advantage of greater flexibility with alternative financing options when operating as a public company. The reverse merger process is also usually less dependent on market conditions.
If a company has spent months preparing a proposed offering through traditional IPO channels and the market conditions become unfavorable, it can prevent the process from being completed. The result is a lot of wasted time and effort. By comparison, a reverse merger minimizes the risk, as the company is not as reliant on raising capital.
The expediency and lower cost of the reverse merger process can be beneficial to smaller companies in need of quick capital. Additionally, reverse mergers allow owners of private companies to retain greater ownership and control over the new company, which could be seen as a huge benefit to owners looking to raise capital without diluting their ownership.
For managers or investors of private companies, the option of a reverse merger could be seen as an attractive strategic option. One of the risks associated with a reverse merger stems from the potential unknowns the shell corporation brings to the merger. There are many legitimate reasons for a shell corporation to exist, such as to facilitate different forms of financing and to enable large corporations to offshore work in foreign countries.
However, some companies and individuals have used shell corporations for various illegitimate purposes. This includes everything from tax evasion, money laundering, and attempts to avoid law enforcement. Prior to finalizing the reverse merger, the managers of the private company must conduct a thorough investigation of the shell corporation to determine if the merger brings with it the possibility of future liabilities or legal entanglements.
Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Reverse mergers are also commonly referred to as reverse takeovers or reverse initial public offerings IPOs.
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. Reverse mergers typically occur through a simpler, shorter, and less expensive process than a conventional IPO. With an IPO, private companies hire an investment bank to underwrite and issue shares of the new soon-to-be public entity. 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. 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.
To consummate the deal, the private company trades shares with the public shell in exchange for the shell's stock, transforming the acquirer into a public company. Reverse mergers have advantages that make them attractive options for private companies, such as a simplifed way to go public and with less risk. Reverse mergers allow a private company to become public without raising capital , which considerably simplifies the process. While conventional IPOs can take months even over a calendar year to materialize, reverse mergers can take only a few weeks to complete in some cases, in as little as 30 days.
Undergoing the conventional IPO process does not guarantee that the company will ultimately go public. Managers can spend hundreds of hours planning for a traditional IPO.
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. Pursuing a reverse merger minimizes this risk. As mentioned earlier, the traditional IPO combines both the go-public and capital-raising functions. As 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. Rather, the process is undertaken in an attempt to realize the benefits of being a public entity. Once this happens, the company's securities are traded on an exchange and enjoy greater liquidity. The original investors gain the ability to liquidate their holdings, providing a convenient exit alternative to having the company buy back their shares.
The company has greater access to capital markets, as management now has the option of issuing additional stock through secondary offerings. One of the greatest of these is finding the best-fit SPAC sponsor in a sea of possibilities. In an IPO, a private company issues new shares and, with the help of an underwriter, sells them on a public exchange. For private companies interested in pursuing a SPAC merger, analysis of recently completed transactions may be helpful in gauging the prospects for their own deals in the future.
Between and when the current SPAC boom took off, the largest deals in terms of size and volume were in industrial manufacturing, likely due to the attractiveness of futuristic sectors such as electric vehicles and space tourism. But the relatively modest revenue sizes indicate that many SPAC targets are valued for their future financial potential.
A look at net income makes it even clearer that SPAC targets tend to be developing companies. Across all industries, a vast majority of the companies merging with SPACs in the last two years were not yet profitable. Download the document and see exhibits 2 and 3 for more details on deal sizes, target company revenues and target company net incomes. We'll notify you via email when we release new insights or schedule webcasts and other events.
Business Phone. The recent flurry of SPAC launches means the demand for target companies is also soaring.
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