Final yr noticed a document variety of reverse merger transactions, with 398 reverse mergers valued at almost $135 billion, based on Bloomberg Regulation. Though 2021 marked the primary time that many such transactions concerned particular goal acquisition firms (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 the prolonged means of an IPO submitting. Though a reverse merger sometimes has the benefit of a shorter timeline over an IPO, firms ought to take note some necessities, significantly as SEC scrutiny has lately elevated round reverse mergers, each of the SPAC and non-SPAC selection.
Amongst these necessities are honest worth measurements associated to ASC 805, Enterprise Mixtures. 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 may be tougher to perform. Usually, shares of the buying (non-public) firm are issued as consideration, so the shares of the buying firm could must 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 circumstances and different forces could result in adjustments within the respective inventory costs between the time the transaction is introduced and the time it closes. The valuator ought to maintain in shut communication with the administration of the acquirer, and the respective auditor, to make sure there are not any surprises when the transaction closes and the ultimate buy worth allocation is carried out.
Points to think about in a reverse merger
Generally in a reverse merger, a query could come up as as to whether a management premium ought to be utilized to the consideration being paid. It will require the valuator to grasp 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 basic companion could have additionally been acquired within the transaction. Usually, the quantity paid for this basic partnership curiosity could characterize the “management” issue, i.e., the flexibility to have an effect on change within the projected money flows, above and past the acquisition of the restricted partnership.
One other subject which will come up in a reverse merger is the existence of noncontrolling curiosity. In some cases, sure shareholders could elect to not take part within the trade transaction. In such cases, the worth of the noncontrolling curiosity would must 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 issues, together with the related accounting issues, make it extra important than ever to have a robust, defensible valuation supporting the acquisition worth allocation.
