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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Houston's Ion District to expand with new research and tech space, The Arc

coming soon

Houston's Ion District is set to expand with the addition of a nearly 200,000-square-foot research and technology facility, The Arc at the Ion District.

Rice Real Estate Company and Lincoln Property Company are expected to break ground on the state-of-the-art facility in Q2 2026 with a completion target set for Q1 2028, according to a news release.

Rice University, the new facility's lead tenant, will occupy almost 30,000 square feet of office and lab space in The Arc, which will share a plaza with the Ion and is intended to "extend the district’s success as a hub for innovative ideas and collaboration." Rice research at The Arc will focus on energy, artificial intelligence, data science, robotics and computational engineering, according to the release.

“The Arc will offer Rice the opportunity to deepen its commitment to fostering world-changing innovation by bringing our leading minds and breakthrough discoveries into direct engagement with Houston’s thriving entrepreneurial ecosystem,” Rice President Reginald DesRoches said in the release. “Working side by side with industry experts and actual end users at the Ion District uniquely positions our faculty and students to form partnerships and collaborations that might not be possible elsewhere.”

Developers of the project are targeting LEED Gold certification by incorporating smart building automation and energy-saving features into The Arc's design. Tenants will have the opportunity to lease flexible floor plans ranging from 28,000 to 31,000 square feet with 15-foot-high ceilings. The property will also feature a gym, an amenity lounge, conference and meeting spaces, outdoor plazas, underground parking and on-site retail and dining.

Preleasing has begun for organizations interested in joining Rice in the building.

“The Arc at the Ion District will be more than a building—it will be a catalyst for the partnerships, innovations and discoveries that will define Houston’s future in science and technology,” Ken Jett, president of Rice Real Estate Company, added in the release. “By expanding our urban innovation ecosystem, The Arc will attract leading organizations and talent to Houston, further strengthening our city’s position as a hub for scientific and entrepreneurial progress.”

Intel Corp. and Rice University sign research access agreement

innovation access

Rice University’s Office of Technology Transfer has signed a subscription agreement with California-based Intel Corp., giving the global company access to Rice’s research portfolio and the opportunity to license select patented innovations.

“By partnering with Intel, we are creating opportunities for our research to make a tangible impact in the technology sector,” Patricia Stepp, assistant vice president for technology transfer, said in a news release.

Intel will pay Rice an annual subscription fee to secure the option to evaluate specified Rice-patented technologies, according to the agreement. If Intel chooses to exercise its option rights, it can obtain a license for each selected technology at a fee.

Rice has been a hub for innovation and technology with initiatives like the Rice Biotech Launch Pad, an accelerator focused on expediting the translation of the university’s health and medical technology; RBL LLC, a biotech venture studio in the Texas Medical Center’s Helix Park dedicated to commercializing lifesaving medical technologies from the Launch Pad; and Rice Nexus, an AI-focused "innovation factory" at the Ion.

The university has also inked partnerships with other tech giants in recent months. Rice's OpenStax, a provider of affordable instructional technologies and one of the world’s largest publishers of open educational resources, partnered with Microsoft this summer. Google Public Sector has also teamed up with Rice to launch the Rice AI Venture Accelerator, or RAVA.

“This agreement exemplifies Rice University’s dedication to fostering innovation and accelerating the commercialization of groundbreaking research,” Stepp added in the news release.

Houston team develops low-cost device to treat infants with life-threatening birth defect

infant innovation

A team of engineers and pediatric surgeons led by Rice University’s Rice360 Institute for Global Health Technologies has developed a cost-effective treatment for infants born with gastroschisis, a congenital condition in which intestines and other organs are developed outside of the body.

The condition can be life-threatening in economically disadvantaged regions without access to equipment.

The Rice-developed device, known as SimpleSilo, is “simple, low-cost and locally manufacturable,” according to the university. It consists of a saline bag, oxygen tubing and a commercially available heat sealer, while mimicking the function of commercial silo bags, which are used in high-income countries to protect exposed organs and gently return them into the abdominal cavity gradually.

Generally, a single-use bag can cost between $200 and $300. The alternatives that exist lack structure and require surgical sewing. This is where the SimpleSilo comes in.

“We focused on keeping the design as simple and functional as possible, while still being affordable,” Vanshika Jhonsa said in a news release. “Our hope is that health care providers around the world can adapt the SimpleSilo to their local supplies and specific needs.”

The study was published in the Journal of Pediatric Surgery, and Jhonsa, its first author, also won the 2023 American Pediatric Surgical Association Innovation Award for the project. She is a recent Rice alumna and is currently a medical student at UTHealth Houston.

Bindi Naik-Mathuria, a pediatric surgeon at UTMB Health, served as the corresponding author of the study. Rice undergraduates Shreya Jindal and Shriya Shah, along with Mary Seifu Tirfie, a current Rice360 Global Health Fellow, also worked on the project.

In laboratory tests, the device demonstrated a fluid leakage rate of just 0.02 milliliters per hour, which is comparable to commercial silo bags, and it withstood repeated disinfection while maintaining its structure. In a simulated in vitro test using cow intestines and a mock abdominal wall, SimpleSilo achieved a 50 percent reduction of the intestines into the simulated cavity over three days, also matching the performance of commercial silo bags. The team plans to conduct a formal clinical trial in East Africa.

“Gastroschisis has one of the biggest survival gaps from high-resource settings to low-resource settings, but it doesn’t have to be this way,” Meaghan Bond, lecturer and senior design engineer at Rice360, added in the news release. “We believe the SimpleSilo can help close the survival gap by making treatment accessible and affordable, even in resource-limited settings.”