Reverse Merger: Is It A Back-Door Way For Businesses To IPO?

    Meaning of Reverse Merger

    The term “reverse merger” refers to a method by which a private company can be merged into an existing publicly traded company (often a shell company). The reverse merger process can be used to make an unlisted company public, or to allow a private firm to acquire another firm without needing to file for an initial public offering (IPO).

    A reverse merger is usually used as a way for smaller companies and startups to enter the public market. It’s also called an “RTO” or reverse takeover because it involves taking control of a publicly-traded company rather than creating one from scratch.

    The process starts with one company acquiring another, often through stock purchase and/or some form of debt financing. Then the second company is merged into the first, after which shares are issued on behalf of the newly formed entity. Since this already-existing entity already has shares available on exchanges, it’s easier for shareholders who own them to transfer them over into their new holding companies.

    Think of a shark devouring a fish. Normal, yes? Imagine a fish consuming a shark—not quite typical, is it? I’ll tell you a story while you hold onto that notion. The account of an Indian shark that used a “YATRA” to list itself on the stock market without really investing any money or effort on the prohibitively costly Reverse Merger IPO route.

    You guys have probably figured it out by now, and you are correct! Actually, we’re going to discuss “YATRA,” the second-largest online travel agency in India. Let’s learn a little bit more about our hero “Yatra” and the plot of the novel as we begin.

    In order to help tourists in India book hotels and flights, Yatra was introduced in that country in 2006. The world economy experienced a significant uptick in the travel and tourism sector from 2013–2014. As a result, aviation began to transition from an “elite-only” to a mass-market commodity. And our very own Yatra was attempting to capitalise on the trend and establish itself as a major player in the online travel industry.

    The portion of the global GDP that is generated by travel and tourism has significantly increased.

    Yatra, however, faced a difficult and difficult journey ahead. 

    • Make My Trip (MMT), Yatra’s main rival was quickly expanding its presence. By offering steep discounts, it was stealing Yatra’s current market share. 
    • By putting money into emerging technology, Make My Trip was also outpacing Yatra in terms of the number of unique visitors.
    • of China has committed to providing $180 million to MMT.
    • There have been discussions of MMT merging with competitor Ibibo group, one of the greatest consolidations in India’s startup sector. This combination could have captured more than 60% of the market for internet travel. (The merger did, however, take place in January 2017)

    How did the Reverse Merger impact Yatra?

    Yatra was bleeding and need a quick injection of cash to get back in the game. To compete with MMT and other competitors like Cleartip, Trip Advisor, and others, it needed to build brand recognition, reclaim market share, and make investments in new technologies.

    (drum roll) Enter TRTL with a blank check.

    Nathan Leight, an asset manager, publicly listed TRTL on NASDAQ. further supported by Macquarie Group and Terrapin Partners, LLC, both of US origin. In July 2014, they had raised $212.75 million. The exact amount Yatra required to enter the game again.

    But why would TRTL invest in Yatra in that case? Because it was a marriage made in heaven, I suppose. Additionally, TRTL lacked any operational structure of its own, and the whole amount of funds it had gathered ($212.75 million to be exact) was intended to be used to buy any firm and receive a stake in it. Investment in Yatra made it reasonable for TRTL given the global travel growth at the time (see figure above).

    You see, the earth needs to preserve homeostasis. What was in it for Yatra? Yatra received a back-door admission to NASDAQ with a $218 million Enterprise value. The newly listed firm kept the same management team. Last but not least, Yatra received the crucial cash that was imperative to compete in the Indian marketplace.

    Let’s examine the hypothesis presently. What then is a reverse merger?

    A reverse merger occurs when a private firm goes public by acquiring the public company’s management. The majority of ownership in the public firm and power over its board of directors are often given to the private company’s shareholders.

    One or more of the benefits of a reverse merger are as follows:

    • Backdoor stock market listing without the high expenditures associated with an IPO
    • It gives businesses easy access to different financial markets.
    • Because of taxes, rules, and the legal system, reverse merger results in lesser tax payments (Applicable if one of the merging entities has losses in the books)
    • Private businesses might still maintain more ownership and control of the company that is newly merged.

    On the other hand, a reverse merger resembles a union of two entities. The merged entities take on each other’s obligations, debts, and any unresolved legal matters. In some cases, reverse mergers are also claimed to eventually deplete the wealth of shareholders. Because of this, doing your homework is essential. We would state that a reverse merger is a possibility if:

    It produces benefits for the shareholders:

    • Protects the interests of current stakeholders
    • Fosters the long-term viability of the company
    • The creation of value also takes place for the stakeholders

    However, a reverse merger is not a particularly well-known notion in India. Reverse mergers are implicitly prohibited under the Companies Act of 2013 since it places limitations on listing to discourage backdoor listing. 

    Decide why. The reverse merger has been employed by companies all over the world to commit billion-dollar fraud. Several hundred Chinese businesses were allowed to list on American markets shortly after the financial crisis thanks to a reverse merger. In actuality, the majority of these businesses were inactive or had no activities. Before they understood it, investors lost billions.

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