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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Axiom Space-tested cancer drug advances to clinical trials

mission critical

A cancer-fighting drug tested aboard several Axiom Space missions is moving forward to clinical trials.

Rebecsinib, which targets a cancer cloning and immune evasion gene, ADAR1, has received FDA approval to enter clinical trials under active Investigational New Drug (IND) status, according to a news release. The drug was tested aboard Axiom Mission 2 (Ax-2) and Axiom Mission 3 (Ax-3). It was developed by Aspera Biomedicine, led by Dr. Catriona Jamieson, director of the UC San Diego Sanford Stem Cell Institute (SSCI).

The San Diego-based Aspera team and Houston-based Axiom partnered to allow Rebecsinib to be tested in microgravity. Tumors have been shown to grow more rapidly in microgravity and even mimic how aggressive cancers can develop in patients.

“In terms of tumor growth, we see a doubling in growth of these little mini-tumors in just 10 days,” Jamieson explained in the release.

Rebecsinib took part in the patient-derived tumor organoid testing aboard the International Space Station. Similar testing is planned to continue on Axiom Station, the company's commercial space station that's currently under development.

Additionally, the drug will be tested aboard Ax-4 under its active IND status, which was targeted to launch June 25.

“We anticipate that this monumental mission will inform the expanded development of the first ADAR1 inhibitory cancer stem cell targeting drug for a broad array of cancers," Jamieson added.

According to Axiom, the milestone represents the potential for commercial space collaborations.

“We’re proud to work with Aspera Biomedicines and the UC San Diego Sanford Stem Cell Institute, as together we have achieved a historic milestone, and we’re even more excited for what’s to come,” Tejpaul Bhatia, the new CEO of Axiom Space, said in the release. “This is how we crack the code of the space economy – uniting public and private partners to turn microgravity into a launchpad for breakthroughs.”