guest column

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.

------

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.

Trending News

Building Houston

 
 

Calling all Houston innovators — now's your time to shine. Graphic by Naomi Galvez

Update: The deadline for nominations have been extended to midnight on Sunday, October 2.

InnovationMap is back to honor local startups and innovators — and this time, we've upped the ante.

Houston Exponential and InnovationMap have teamed up to combine their annual awards and event efforts to premiere a brand new program. The Houston Innovation Awards Gala on Wednesday, November 9, at The Ion will be a comprehensive event honoring Houston founders, innovators, investors, and more. InnovationMap and HX, which was acquired earlier this year, are in the same network of ownership.

Nominations are open online until midnight October 2, and nominees will have until October 11 to complete an additional application that will be emailed to nominees directly. A group of industry experts and Houston innovation leaders will review those submissions and determine finalists and winners across 11 categories. The categories for this year's awards are:

  • BIPOC-Owned Business honoring an innovative company founded or co-founded by BIPOC representation
  • Female-Owned Business honoring an innovative company founded or co-founded by a woman
  • Hardtech Business honoring an innovative company developing and commercializing a physical technology across life science, energy, space, and beyond
  • B2B Software Business honoring an innovative company developing and programming a digital solution to impact the business sector
  • Green Impact Business honoring an innovative company providing a solution within renewables, climatetech, clean energy, alternative materials, and beyond
  • Smart City Business honoring an innovative company providing a tech solution within transportation, infrastructure, data, and beyond
  • New to Hou honoring an innovative company, accelerator, or investor that has relocated its primary operations to Houston within the past three years
  • DEI Champion honoring an individual who is leading impactful diversity, equity, and inclusion initiatives and progress within Houston and their organization
  • Investor of the Year honoring an individual who is leading venture capital or angel investing
  • Mentor of the Year honoring an individual who dedicates their time and expertise to guide and support to budding entrepreneurs
  • People's Choice: Startup of the Year selected via an interactive voting portal during of the event
Nominees can be submitted to multiple categories.

Additionally, the awards gala will honor an innovator who's made a lasting impact on the Houston innovation community. While you may nominate an individual for the Trailblazer Award via the online form, the judging committee will not require applications or nominations for this category and will be considering potential honorees from the ecosystem at large. If you are interested in sponsorship opportunities, please reach out to cbuckner@houstonexponential.org.

Last year, InnovationMap introduced its awards program and named 28 finalists and honored the nine winners on September 8. Click here to see more from last year's event.

Tickets for the November 9 event are available online. Early bird tickets will be $60 per person and startup founders will be able to attend for $25.

Click here to submit a nomination or see form below.


Trending News