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Reverse mergers: Houston expert shares valuation considerations for an IPO alternative

Reverse merger transactions seem to be trending upward. Here's what you need to know. Photo via Getty Images

Last year saw a record number of reverse merger transactions, with 398 reverse mergers valued at nearly $135 billion, according to figures tracked by Bloomberg Law.

Although 2021 marked the first time that many of such transactions involved special purpose acquisition companies (SPACs), which totaled 246 out of the 398 transactions, it still marked 152 — a record-high number — non-SPAC reverse mergers.

What is a reverse merger?

The concept of a reverse merger, in short, holds that a privately held company acquires a publicly-traded company. In so doing, the private company can gain access to public equity markets without going through the lengthy process of an IPO filing. Although a reverse merger typically has the advantage of a shorter timeline over an IPO, there are still some requirements that companies involved in a reverse merger should keep in mind. This is particularly true as SEC scrutiny has recently increased around reverse mergers, both of the SPAC and traditional non-SPAC variety.

Among these requirements are the fair value measurements related to ASC 805, Business Combinations. In a reverse merger, like with all acquisitions, ASC 805 requires the allocation of the purchase consideration to identified tangible and intangible assets. However, in a reverse merger, the establishment of the purchase consideration to be allocated can be more difficult to accomplish.

Often, shares of the acquiring (private) company are issued as consideration, so the shares of the acquiring company may need to be valued. The value of private company shares to be issued might not always align exactly with the value of the acquired publicly-traded company; market conditions and other forces may bring about changes in the respective stock prices between the time that the transaction is announced and the time that it closes. The valuator should keep in close communication with the management of the acquirer, and the respective auditor, to ensure that there are no surprises when the transaction closes and the final purchase price allocation is performed.

What to consider about a reverse merger

Sometimes in a reverse merger, a question may arise as to whether a control premium should be applied to the consideration being paid. This will require the valuator to understand the terms of the purchase agreement and to understand whether a control element has already been priced into the transaction. For example, in the acquisition of a limited partnership, a general partner may have also been acquired in the transaction. Often, the amount paid for this general partnership interest may represent the “control” factor, i.e., the ability to affect change in the projected cash flows, above and beyond the acquisition of the limited partnership.

Another issue that may arise in a reverse merger is the existence of non-controlling interest. In some instances, certain shareholders may elect not to participate in the exchange transaction. In such instances, the value of the non-controlling interest would need to be measured, and this value would be based on the value of the stand-alone company in which the non-controlling interest is held, not on the value of the combined entity.

In the event of a reverse merger, these considerations, along with the associated accounting considerations, make it more critical than ever to have a strong, defensible valuation supporting the purchase price allocation.

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Kevin Cannon is a director in Opportune’s Valuation practice based in Houston. He has 17 years of experience performing business and asset valuations and providing corporate finance consulting.

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With this new grant, UH has a new center for researching bioactive materials crystallization. Photo via UH.edu

A new hub at the University of Houston is being established with a crystal-clear mission — and fresh funding.

Thanks to funding from Houston-based organization The Welch Foundation, the University of Houston will be home to the Welch Center for Advanced Bioactive Materials Crystallization. The nonprofit doled out its inaugural $5 million Catalyst for Discovery Program Grant to the new initiative led by Jeffrey Rimer, Abraham E. Dukler Professor of Chemical Engineering, who is known internationally for his work with crystals that help treat malaria and kidney stones.

“Knowledge gaps in the nascent and rapidly developing field of nonclassical crystallization present a wide range of obstacles to design crystalline materials for applications that benefit humankind, spanning from medicine to energy and the environment,” says Rimer in a news release. “Success calls for a paradigm shift in the understanding of crystal nucleation mechanisms and structure selection that will be addressed in this center.”

The Welch Foundation, which was founded in 1954, has granted over $1.1 billion to scientists in Texas. This new grant program targets researchers focused on fundamental chemical solutions. Earlier this year, the organization announced nearly $28 million in grants to Texas institutions.

"Support from the Welch Foundation has led to important advances in the field of chemistry, not only within Texas, but also throughout the United States and the world as a whole,” says Randall Lee, Cullen Distinguished University Chair and professor of chemistry, in the release. “These advances extend beyond scientific discoveries and into the realm of education, where support from the Welch Foundation has played a significant role in building the technological workforce needed to solve ongoing and emerging problems in energy and health care.”

Rimer and Lee are joined by the following researchers on the newly announced center's team:

  • Peter Vekilov, Moores Professor, chemical and biomolecular engineering
  • Alamgir Karim, Dow Chair and Welch Foundation Professor, chemical and biomolecular engineering;
  • Jeremy Palmer, Ernest J. and Barbara M. Henley Associate Professor, chemical and biomolecular engineering
  • Gül Zerze, chemical and biomolecular engineering
  • Francisco Robles Hernandez, professor of engineering technology.

The University of Houston also received another grant from the Welch Foundation. Megan Robertson, UH professor of chemical engineering, received $4 million$4 million for her work with developing chemical processes to transform plastic waste into useful materials.

“For the University of Houston to be recognized with two highly-competitive Welch Foundation Catalyst Grants underscores the exceptional talent and dedication of our researchers and their commitment to making meaningful contributions to society through discovery,” Diane Chase, UH senior vice president for academic affairs and provost, says in the release.

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