How Does a Reverse Merger Work

The choice between an IPO and an M&A transaction may be determined by the specifics of the market, namely the level of monopolization and the degree of innovation. So, how does a reverse merger work, and what is the difference with SPAC? Here is more about it.

What is a reverse merger?

Today, the idea of introducing innovations in the financial world is reflected in the creation of various practices that save time, increase existing benefits, and speed up the processes associated with various transactions. Mergers and acquisitions are one of the consequences of introducing such innovative practices into the already traditional path of acquiring public status in the global securities markets through an IPO. This scenario is called backdoor listing when a private company uses alternative ways to enter the international stock exchange. An M&A deal helps a private company avoid the problems associated with an IPO process and speeds up a public listing. For now, M&A may be the go-to option for companies rushing to go public without meeting the complex listing requirements of an IPO.

A reverse merger is a transaction in which the shareholders of a private company acquire control over a public company, and the public company acquires the assets of a private company. It is one of the most effective methods of acquiring public status: this method is used by companies that do not feel the need to apply for investments immediately, however, has the potential for development and expansion in the future.

Reverse merger vs SPAC: what is the difference?

A reverse merger is a method of obtaining public status, in which a private company merges with a public company, the so-called shell company. As a result of the merge:

  • the owners of a private company own a significant part of the shares of the shell company (approximately 85-90%).
  • the shell company changes its name – usually to the name of a private company.
  • private company management becomes shell company management to ensure its further activities in the form of a public company.

SPAC listings are increasingly making headlines in technology media. Recently it became known that the Payoneer payment system and the manufacturer of electric cars Lucid Motors will become public in this way. SPAC is an acronym for Special Purpose Acquisition Company. This is the name of a special type of blank company that is created to bring a business to the stock exchange. This tool was invented back in the 1990s. Although he began to gain popularity in 2014, and in 2020 there was a real boom. More than 162 SPAC IPOs held in the USA and raised over $55 billion.

Everything works very simply. An “empty” company is created and applies for an IPO. Its creators are holding roadshows to find investors. Since the company does not have a product, its team and background are presented in the process. Therefore, for a successful SPAC, well-known, reputable participants are needed. After a successful roadshow, the company conducts an IPO. Investors are offered to buy units, which usually cost $10. They include a share and part of a warrant. This is a security that allows you to buy a certain number of shares at a set price.

SPAC then searches the market for a company that wants to go public without an IPO. SPAC conducts the merger. Thus, the interested company becomes public without an IPO. SPAC has 24 months to find a company for a deal. If this fails, then the investors will have to return the money.