REVERSE

MERGERS
Submitted By:
Aditi - 500085324, R760220051
Anish Raj - 500085321, R760220055
BBA LLB (Corp.) Batch 1
Semester 7, School of Law
UPES
 MERGERS AND ACQUISITIONS
As per the website of Ministry of Corporate Affairs

Mergers and acquisitions are manifestations of an inorganic growth process. While mergers can be defined to
mean unification of two players into a single entity, acquisitions are situations where one player buys out the
other to combine the bought entity with itself.

Mergers and acquisitions are used as instruments of momentous growth and are increasingly getting accepted
by Indian businesses as critical tool of business strategy.

They are widely used in a wide array of fields such as information technology, telecommunications, and
business process outsourcing as well as in traditional business to gain strength, expand the customer base, cut
competition, or enter into a new market or product segment.

Mergers and acquisitions may be undertaken to access the market through an established brand, to get
market share, to eliminate competition, to reduce tax liabilities or to acquire competence or to set off
accumulated losses of one entity against the profits of other entity.
 TYPES Horizontal Merger
OF
Vertical Merger
MERGERS
Conglomerate Merger

Cogeneric Merger

Reverse Merger
 REVERSE MERGER
A reverse merger is the acquisition of a public company by a private company so that the private
company can bypass the lengthy and complex process of going public.

A reverse merger is when a private company becomes a public company by purchasing control of
the public company.

The shareholders of the private company usually receive large amounts of ownership in the
public company and control of its board of directors.

Once this is complete, the private and public companies merge into one publicly traded company.

When a company plans to go public through an IPO, the process can take a year or more to
complete, but with a reverse merger, a private company can go public in as little as 30 days.

The term “reverse” refers to the idea of a private company acquiring an already public
company, which is the opposite of a typical IPO scenario.
 WHY DO COMPANIES CHOOSE A
REVERSE MERGER?
It’s important to understand why a company may choose to go public to begin with.

Companies sell shares to the general investing public to raise their name recognition and access more sources
of financing than are generally available to private firms. Traditionally, this is done through an initial public
offering, or IPO.
IPOs, however, are complicated, time-consuming endeavours.
There’s also an extensive due diligence process, tons of paperwork and regulatory reviews.
What’s more, even after all of that is the unfavourable market conditions beyond any company’s control.
But none of the costs and complications of a standard IPO apply in a reverse merger, which means they
provide private companies a quick way to go public.
This is especially important for companies that might not have the funding or abilities to handle an IPO.
REVERSE
MERGER:
SWOT
ANALYSIS
STRENGTHS

Cost and Time: The process of reverse merger costs less and depends on the cost of the shell company. The
process involves less of formal procedure. Typically, average time taken to complete the reverse merger is 3-4
months , in some of the cases it can be completed within 30 days as well

Listing Requirements: As the public company is already listed, the private company need not bother about
the listing procedure.

Market Dependency: Market conditions at the time of reverse merger play small role as there is not much
trading involved immediately after the merger.

WEAKNESSES

Complicated Shell: It might be possible that the private company while merging with the public company can
face issues of liability lawsuits and poor record keeping. Hence, the company needs to be very careful while
choosing a public company.

Feeble Trading: Initial trading of the company after the merger is very low. Companies have to work on
building the stock value and increase the prospects of trading after certain period of time.
No underwriter certification: There is no underwriter approval required hence, the companies which go
through reverse mergers do not receive any underwriter certificate; which might reduce a company‘s
credibility.

Auditing Conflicts: In the case of cross border reverse mergers, especially in the case of Chinese firms; it has
been found out that there have been conflicts between the auditing reports of Chinese audit firms and US
audit firms which hampers the investors‘ interest.

OPPORTUNITIES

Beneficial to small companies: Small companies which are growing and need additional source of capital can
go through the process of reverse merger which is faster and cheaper and does not need to meet the minimum
underwriting requirements.

PIPE Financing : PIPE refers to Private Investment in Public Equity which helps a public company to get
financing from small sophisticated investors. Hence, if a company goes through reverse merger, it can open
its doors to PIPE financing.

Alternative Ways to raise money: Additional shares can be issued in a secondary offering.
THREATS

Market Reputation: A company going public through reverse merger might run the risk of dented reputation
as the market will perceive that the company failed to pass underwriter standards and is of low quality.

Discounted Stock Value: Since the company is not backed up by underwriters and is merged with a shell
company hence, the stock might be traded at a lower value and company may face relative stock illiquidity.

Reverse Stock Split : They are quite common when a company goes public through reverse merger and may
lead to reduced number of tradable stocks.
 CASE STUDY:
McDonalds franchisee Hardcastle Went Public through Westlife Development Limited

Private Company: Hardcastle Restaurants Private Limited (HRPL)

Public Listed Company: Westlife Development Ltd.

Hardcastle Restaurants Private Limited (HRPL), master franchisee for south and west India operations of
burger chain McDonald's Corporation, merged with its parent Westlife Development Ltd. which is listed on
Bombay stock exchange .

After the merger, HRPL became a wholly owned unit of Bombay Stock Exchange-listed Westlife Development,
giving investors a chance to participate in the growth of McDonald's in India. In the process, poorly performing
Westlife merged with HRPL, and the company is listed in the name of Westlife Developments Ltd. Its strategy
after the merger has been to increase McDonald's retail footprint to strengthen its presence in the existing
market and enter newer ones.
The process was quite simple and took very less time to materialize.

Little-known Westlife Developments rose the stock market overnight, with its shares
rising 75% in virtually three trading days after McDonalds' franchisee Hardcastle
Restaurants became its direct subsidiary.

Shares of Westlife Developments closed at Rs 153.90 on the Bombay Stock Exchange

three days after the merger, up from Rs 86.20 on the day of merger.
 EXAMPLES
Vedanta Resources: In 2018, Vedanta Resources, a London-based mining and metals company, completed a
reverse merger with its Indian subsidiary, Vedanta Limited. The merger involved Vedanta Limited issuing new
shares to Vedanta Resources shareholders, giving them a 50.1% stake in the merged entity.

Adani Power: In 2015, Adani Power, a subsidiary of the Adani Group, completed a reverse merger with its
subsidiary Adani Enterprises. The merger allowed Adani Power to become a publicly traded company without
going through an IPO.

IDFC Bank: In 2015, IDFC Bank completed a reverse merger with Capital First, a non-banking financial
company (NBFC). The merger allowed IDFC Bank to diversify its business by acquiring Capital First's retail
lending and housing finance operations.
 REFERENCES
Statutes
The Companies Act, 2013

Websites
https://www.indiacode.nic.in
https://www.scconline.com
https://www.mca.gov.in/MinistryV2/mergers+and+acquisitions.html
https://www.forbes.com/advisor/investing/reverse-merger/

Books
Mergers, Acquisitions and Takeovers. (2007). India: New Age International (P) Limited.

Articles
Ojha, S., Maherhwari, R., & Jain, S. (2013). Reverse mergers: The way forward. IOSR Journal of Business and
Management, 10.
Beena, P. L. (2014). Mergers and acquisitions: India under globalisation. Routledge.
Thank You!