A publicly traded company purchases stock in a private company in a reverse takeover. The private company is now a wholly-owned subsidiary of the shell company following the reverse merger. Reverse mergers can be advantageous for businesses with few assets and no active operations, but they can also be risky. Businesses considering reverse mergers should carefully weigh the risks.
In contrast to a traditional IPO, which can take months or even years to complete, a reverse merger is frequently completed much faster and for much less money. Usually, the target company is a publicly traded business that is having problems. For instance, Jordan's target business was a biotech company that was working to create a drug to treat cramps. Clinical trials for the company ended in 2018, despite a successful IPO in 2015.
Transactions involving reverse takeovers may be advantageous to both parties. Greater liquidity can be advantageous for the private company, and less stock dilution can be advantageous for the public company. The procedure can be completed in two weeks or less, making it a much faster way to convert a business from being private to being publicly traded. Additionally, it avoids the drawn-out and challenging IPO process, which can take up to a year.
The public company's management of its business must now be subject to greater scrutiny, which is yet another drawback of a reverse takeover. Since public companies are subject to stricter regulations, many private company management teams lack the necessary expertise to successfully navigate these challenges. The new business must have enough cash flow and meet certain financial requirements.
Additionally, reverse mergers require more paperwork. To finance the transaction, a SPAC must raise money, typically $200 million. In the case of Jordan, the business needed to raise $70 million. Shareholders must approve the reverse merger as part of a proxy statement and S-4 registration statement process.
Reverse mergers are advantageous for businesses looking to acquire another company or raise capital, despite the fact that they can be risky. A reverse takeover gives businesses the opportunity to lessen their reliance on the market in addition to bringing capital to the table. A reverse takeover is less complicated than an IPO, but the participating companies must still go through a careful due diligence procedure. They must thoroughly investigate the buyer's motivations. Additionally, they must look into any potential liabilities.
An IPO may cost much more money than a reverse takeover. Investment banks' contribution to this transaction is very minimal. Startups have also used reverse takeovers to IPO without following a formal IPO procedure. A private company frequently purchases enough stock in a public company to gain control. The shareholders of the private company then exchange their shares for those of the public company.
In India, reverse mergers are not all that common. One of the first businesses to use this strategy was ICICI, which acquired a stake in ICICI Bank and rebranded the new entity as ICICI Bank. Both parties profit from reverse mergers. The public company has much to gain, while the private company has little to lose. The public company benefits from the reverse merger because it gains access to the capital markets.
Companies that are unable to raise money through IPOs frequently find that reverse takeovers are a better option. They avoid the drawn-out and difficult IPO process and offer a low-risk alternative to going public. However, they do carry some risks. It is significant to note that companies in the financial sector can gain from reverse takeovers. Before choosing to reverse a merger, it is crucial to be aware of its advantages and disadvantages.
