Final yr noticed a report variety of reverse merger transactions, with 398 reverse mergers valued at almost $135 billion, in keeping with Bloomberg Regulation. Though 2021 marked the primary time that many such transactions concerned particular function acquisition corporations (SPACs), which totaled 246 out of the 398 transactions, it nonetheless marked a record-high variety of non-SPAC reverse mergers (152).
In a reverse merger, a privately held firm acquires a publicly traded firm, enabling the non-public firm to achieve entry to public fairness markets with out going by way of the prolonged means of an IPO submitting. Though a reverse merger sometimes has the benefit of a shorter timeline over an IPO, corporations ought to take into accout some necessities, significantly as SEC scrutiny has just lately elevated round reverse mergers, each of the SPAC and non-SPAC selection.
Amongst these necessities are truthful worth measurements associated to ASC 805, Enterprise Combos. In a reverse merger, as in all acquisitions, ASC 805 requires the allocation of the acquisition consideration to recognized tangible and intangible belongings. Nevertheless, in a reverse merger, the institution of the acquisition consideration to be allotted will be tougher to perform. Usually, shares of the buying (non-public) firm are issued as consideration, so the shares of the buying firm might should be valued. The worth of personal firm shares to be issued won’t at all times align precisely with the worth of the acquired publicly traded firm; market situations and different forces might result in modifications within the respective inventory costs between the time the transaction is introduced and the time it closes. The valuator ought to hold in shut communication with the administration of the acquirer, and the respective auditor, to make sure there aren’t any surprises when the transaction closes and the ultimate buy value allocation is carried out.
Points to think about in a reverse merger
Typically in a reverse merger, a query might come up as as to if a management premium must be utilized to the consideration being paid. This can require the valuator to know the phrases of the acquisition settlement and whether or not a management factor has already been priced into the transaction. For instance, within the acquisition of a restricted partnership, a common associate might have additionally been acquired within the transaction. Usually, the quantity paid for this common partnership curiosity might characterize the “management” issue, i.e., the power to have an effect on change within the projected money flows, above and past the acquisition of the restricted partnership.
One other situation which will come up in a reverse merger is the existence of noncontrolling curiosity. In some cases, sure shareholders might elect to not take part within the alternate transaction. In such cases, the worth of the noncontrolling curiosity would should be measured, and this worth can be based mostly on the worth of the standalone firm during which the noncontrolling curiosity is held, not on the worth of the mixed entity.
Within the occasion of a reverse merger, these concerns, together with the related accounting concerns, make it extra essential than ever to have a powerful, defensible valuation supporting the acquisition value allocation.