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 health care institutions receive $22M to attract top recruits

coming to Hou

Houston’s Baylor College of Medicine has received a total of $12 million in grants from the Cancer Prevention & Research Institute of Texas to attract two prominent researchers.

The two grants, which are $6 million each, are earmarked for recruitment of Thomas Milner and Radek Skoda. The Cancer Prevention & Research Institute of Texas (CPRIT) announced the grants May 14.

Milner, an expert in photomedicine for surgery and diagnostics, is a professor of surgery and biomedical engineering at the Beckman Laser Institute & Medical Clinic at the University of California, Irvine and the university’s Chao Family Comprehensive Cancer Center

In 2013, Milner was named Inventor of the Year by the University of Texas at Austin. At the time, he was a professor of biomedical engineering at UT. One of his major achievements is co-development of the MasSpec Pen, a handheld device that identifies cancerous tissue within 10 seconds during surgical procedures.

Skoda is a professor of molecular medicine in the Department of Biomedicine at the University of Basel and the University Hospital Basel, both in Switzerland. He specializes in developing treatments for myeloproliferative neoplasms, which are a group of blood diseases including leukemia.

Other recruitment grants provided by the institute to Houston-area organizations are:

  • $4 million for recruitment of Susan Bullman to the University of Texas M.D. Anderson Cancer Center. She was an assistant professor at Seattle’s Fred Hutchinson Cancer Center, where she studied the connection between microbes and cancer.
  • $4 million for recruitment of Oren Rom to the University of Texas M.D. Anderson Cancer Center. Rom is an assistant professor of pathology and translational pathobiology at Louisiana State University Shreveport.
  • Nearly $2 million for recruitment of Lauren Hagler to conduct RNA cancer biology at Texas A&M University. She is a postdoctoral scholar in biochemistry at Stanford University.

The institute also awarded grants to five companies in the Houston area:

  • $4.7 million to 7 Hills Pharma for development of immunotherapies to treat cancer and prevent infectious diseases.
  • $4.5 million to Indapta Therapeutics for the Phase 1 trial of a cell therapy for treatment of multiple myeloma and non-Hodgkin’s lymphoma.
  • $2.75 million to Bectas Therapeutics for development of antibodies and biomarkers to overcome a type of resistance T-cell checkpoint therapy.
  • $2.69 million to MS Pen Technologies for development of technology that differentiates between normal tissue and cancerous tissue during surgery.
  • $2.58 million to Crossbridge Bio for development of an antibody-drug combination to treat certain solid tumors.

Houston startup secures $10M to expand into rural communities

ready to grow

A Houston company that is working on a value-based model for primary care has fresh funding to support its mission.

Hamilton Health Box announced the completion of a $10 million series A funding round led by 1588 Ventures with participation from Memorial Hermann Health System, Impact Ventures by Johnson & Johnson Foundation, Texas Medical Center Venture Fund, and the Sullivan Brothers.

The company, founded in 2019 by Dr. Toby R. Hamilton, will use the funding to fuel its expansion into rural areas to help assist those living in Health Professional Shortage Areas, or HPSAs.

The company has pioneered a proprietary “small footprint primary care delivery model,” which is considered suitable for rural markets, employer worksites, office buildings, schools, and university campuses. The cost-effective microclinics are “prefabricated facilities” that are designed for primary care services, and employ a hybrid in-person and telemedicine care approach.

Hamilton began his career as a physician before founding Emerus Holdings, which is a micro-hospital system in the Houston area that later moved to private equity.

The recently acquired funding will help expedite the high-touch care model to 98 million Americans in HPSAs, which was a goal for when the company was established during the Covid-19 pandemic. HHB has made partnerships with Federally Qualified Health Centers (FQHCs) to provide primary care services both at existing FQHC centers and through new sites in rural areas.

"Hamilton Health Box that was designed to deliver the lowest possible price of primary and preventative care," Hamilton said in a previous interview with Innovation Map. "We built that to be able to take that care to the jobsite and meet the customer where they are at."