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Reverse Merger: Features of Reverse Mergers

A reverse merger occurs when a private company merges with a public company to gain access to public trading without an IPO. It allows private firms to go public through an acquisition rather than an IPO. Key advantages are that it is a simpler process than an IPO, minimizes risk if market conditions change, and is less dependent on market timing. However, thorough due diligence is required and regulatory compliance can burden inexperienced management.

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42 views3 pages

Reverse Merger: Features of Reverse Mergers

A reverse merger occurs when a private company merges with a public company to gain access to public trading without an IPO. It allows private firms to go public through an acquisition rather than an IPO. Key advantages are that it is a simpler process than an IPO, minimizes risk if market conditions change, and is less dependent on market timing. However, thorough due diligence is required and regulatory compliance can burden inexperienced management.

Uploaded by

sangeetagoele
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Reverse Merger

Merger is a legal unification of two companies, consolidating ownership, risk, properties,


liabilities, and functions. There is no definition of the term merger in any Act. A merger
usually occurs when a smaller company plates into a greater company by exchanging shares
or cash. Yet if the buying business is weaker or lower than the takeover one, it is referred to
as a reverse merger. Reverse mergers usually occur by a parent company that fuses into a
subsidiary or a profitable business that blends into a losing trade.

Reverse Merger via reverse IPO is a process by which a business with a private limited
company registration acquires a public company. A large private corporation shall have to
merge with a smaller listed business to go public without an IPO. The shareholders of the
Private Limited Company exchange shares for public company shares to ensure that the
private company is publicly traded without the IPO process and time and cost-effectiveness.

Reverse mergers are also known as reverse take over (RTO), which are quite common in the
US. A few examples of reverse merges in India were when ICICI merged with its arm ICICI
bank in 2002 to set up a universal bank to lend both to industry and retail borrowers. Initially,
Godrej soaps were profitable with a turnover of Rs. 437 crore. Later on, the company decided
on the reverse Merger with a loss-making Gujarat Godrej Innovative chemical Limited. This
new firm under Godrej was having a turnover of Rs. 60 crore, and therefore, the Merger led
to a Company named Godrej soaps Limited which was turned profitable.

Cross-border reverse Merger occurs once an unlisted public company is attempting to be


listed in the foreign stock exchange by merging in that foreign country with a public
company.

Features of Reverse Mergers

 The value of the large company’s assets must surpass the value of the small
company’s assets.
 The net income attributable to the assets of the large company (after all costs are
excluded, excluding taxes and except exceptional items) would surpass those of the
small business.
 The share capital to be provided as an acquisition fee shall surpass the small
company’s equity share capital before the acquisition.
 Reverse merger priorities are well established before joining the deal.
 The fair purchasing value must be met.
 When the Merger has been reversed, the small corporation is to continue its activities,
and the large business ceases to exist.
 The Merger will be of public concern
 Ensure that the transaction results in the tax benefits in compliance with the 1961
Income Tax Act.

Reverse Merger benefits from a Tax Perspective


By making these organizations tax benefits, the income tax act of 1961 attempts to promote
reverse Merger.
Once Section 72A has been inserted, the body created by the amalgamation of the sick
company will benefit from the losses and depreciation allowances accrued to the sick
company.

Any conglomeration scheme involving the Merger of a sick company with a safe, profitable
business can benefit by continuing losses in compliance with section 72A. Section 72A
makes it clear that a financially stable corporation is combined or combined with another
corporation. Section 72A is, therefore aimed at making it easier for sick industrial enterprises
to reinvigorate by Merger with healthy business enterprises by providing tax-savings
opportunities. This can ensure greater employment opportunities and income generation in
the public interest.

Challenges of Reverse Merger


1. Risks to shareholders: Foreign experience indicates that shareholders of public
corporations often sell their shares with wrong intentions. These can involve intentional
failure to report major liabilities, such as ongoing litigation and dishonest corporate
governance. Further due diligence is required to defend.

2. Failure to make public disclosure: If retroactive takeovers comply with these disclosure
requirements, management flexibility could be reduced, and the business could be harmed by
leaking valuable information to competitors, suppliers, customers, and business partners.

3. Organizational transformation problems: Management of an unlisted company may not


have enough or no experience in managing the affairs of a listed company. New domestic and
external problems will also be faced after the Merger.

Advantages of Reverse Merger


1. A simplified process: Reverse mergers enable a private company to become a public
company without increasing capital, simplifying the process dramatically. Although it can
take months for traditional IPOs to materialize, reverse Mergers take a few weeks. This saves
a lot of management time and money.

2. Minimizes the risk: In the traditional IPO model, the business will not be made public
eventually. Managers are willing to spend hundreds of hours planning a typical IPO, but if
the conditions on the stock market are unpredictable, the IPO will have to be revoked. The
reverse Merger reduces the risk.

3. Less Market Dependent: Because reverse Merger is just a mechanism for the merge
between a private company and a public body, or vice versa, the process is less dependent on
market conditions. 

Disadvantages of a Reverse Merger


1. Due diligence required: Due diligence of the acquisition company, its management,
shareholders, operations, financial institutions, and possible outstanding liabilities (i.e.,
litigation, environmental issues, safety hazards, labor hazards) must be carried out.

2. Regulatory and enforcement costs: Reverse Merger may place new regulatory and
compliance requirements on the acquired entity’s managers who may not be experienced, and
this burden can be substantial, and the initial attempt to enforce additional regulations may
result in a business that has weak results if managers spend far more time on administrative
problems than on running.

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