|
REVERSE LISTING MODELS
Reverse listings generally fall into one of several common types of transaction structures:
- Stock-for-stock
- Convertible preferred stock-for-stock
- Equity combination
- Simultaneous private placement
- Foreign company
Many cases involve a reverse stock split right before the transaction takes place. The reverse split maintains the same ownership proportions, but reduces the outstanding shares. There could be several reasons for doing this. The stock will trade at a higher price, which can be important for the post-transaction company to get more support in the market and may help the company qualify to trade on certain exchanges. Also, the authorized amount of shares sometimes restricts the number of shares that can be issued for the reverse listings. So by reducing the outstanding shares with a reverse split, the company does not have to change the authorized number of shares.
Stock-for-Stock
This is the most basic and common transaction structure. A company issues new shares in exchange for 100% of the shares of the private company, and the private company becomes a subsidiary of the public company. Example: On January 30, 2003, National Health & Safety Corporation approved a 1-for-100 reverse stock split and a name change to ADS Media Group (ADMS), which took place on February 6. On February 18, ADSM issued 15,000,000 post-reverse split shares to shareholders of Alternative Delivery Solutions (ADS) in exchange for their shares of ADS. To pay off existing debt holders, 1,128,921 shares were also issued. This transaction resulted in former ADS shareholders owning 74% of the 20,332,940 outstanding shares of ADSM. For accounting purposes, this transaction was treated as a reverse acquisition under APB 16 with ADS as the acquirer. Alternative Delivery Solutions is now a wholly owned subsidiary of ADSM, with former Alternative shareholders controlling the parent company.
Convertible Preferred Stock-for-Stock
Similar to the stock-for-stock transaction, the public company exchanges preferred stock for 100% stock of the private company. The preferred stock is convertible into shares of the public company, representing the usual majority ownership. PSPP Holdings underwent a reverse on April 6, 2002. Oxford Knight International underwent a reverse with a company in Chapter 7 bankruptcy, Urbana Collaboration Inc. For 10,000,000 common shares, Oxford received 1,000,000 shares of convertible preferred stock, which converts into 51% ownership and 2/3 vote of PSPP.
Equity Combination
A combination of common stock, preferred stock, and warrants may be used to acquire the private company. Generally, if there are outstanding warrants for stock of the private company, these will be exchanged for warrants of the new public corporation that are deemed similar in value. For example, when LiquidGolf Holding Corporation went public through a reverse listing with Nomadic Collaboration International, stock and warrants were both involved in the transaction. Prior to the transaction, Nomadic underwent a 150-for-1 reverse stock split in January 2003, reducing the outstanding shares to 220,016. June 3, Nomadic then exchanged 5,784,162 shares for all of the shares of LiquidGolf, giving former private owners a 96.4% ownership of the merged company. Also, 2,540,000 warrants were traded for similarly-termed warrants in the private company.
Simultaneous Private Placement
Some reverse listings are structured quite differently from the standard model demonstrated above. A simultaneous private placement may dilute the ownership of private company shareholders such that they don't have the usual majority ownership directly from the transaction. Example: On November 15, 2002, Viewlocity went public via a reverse with SynQuest. In this transaction, SynQuest issued 2,946,857 common shares to all of the Series F preferred stockholders of Viewlocity, and paid cash for all other classes and series of Viewlocity stock. This resulted in Viewlocity and SynQuest shareholders owning the same proportion, 17.3%, of the combined company. The reason for this low proportion is that there was a concurrent private placement of equity. 11,106,828 shares of Series A preferred stock was sold for $24.6 million cash and $3.2 million in loan conversions. Much of this private placement went to large shareholders of Viewlocity, the CEO of Viewlocity (who is now CEO of the combined company), and a shareholder of SynQuest. Assuming full conversion, this convertible preferred stock represents 65.4% ownership in the company.
Foreign Company
Foreign companies can get listed on US exchanges through a Reverse Listing. Any of the above transaction structures may be used. In the following example, since the public, SEC reporting company is not an actual business, this share exchange is treated as a recapitalization of the private company's stock, rather than a business purchase. OpenLimit Holdings, a private Swiss company, went public in the US with this type of transaction. On April 25, 2003, Jure Holdings issued 42,000,000 shares in exchange for all 4,200,000 outstanding shares of OpenLimit Holdings, a private Swiss company.
Other possibilities - there are often various terms to be completed pursuant to the transaction agreement. These provisions might involve raising capital with loans or private placements by either the private or public company before the close date. Every agreement can be adjusted to the needs of the companies and shareholders. These variations are usually just an extra part of one of the standard acquisition structures outlined above.
Accounting Treatment
APB Opinions 16 and 17 used to cover the accounting rules of mergers and acquisitions. Companies were given a choice between the pooling-of-interests method and the purchase method. However, recently the FASB modified this area of accounting in an attempt to better reflect economic reality.
FASB Statements 141 and 142 govern the accounting treatment of business combinations. SFAS 141, "Business Combinations," eliminates the use of the pooling-of-interests method, where the book values of the assets are combined, with goodwill resulting from the difference between the purchase price and the book value. All mergers and acquisitions after July 1, 2001 are accounted for with the purchase method. This accounting method books all tangible and intangible assets at "fair value." Goodwill is still recorded, but is no longer amortized - it is now subject to impairment tests pursuant to SFAS 142, "Goodwill and Other Intangible Assets."
Reverse acquisitions use the purchase method as with any other type of acquisition. However, since control changes hands, there are nuances in the reporting of the transaction. A reverse acquisition is generally treated as an issuance of equity by the private company and a recapitalization of the private company under the capital structure of the public company in exchange for that public company's net assets. In a reverse acquisition, the private company's historical results are carried forward while the public company's results are included at commencement of the transaction.
To make sure the transaction qualifies as tax-free, several conditions under Section 368 of the Internal Revenue Code must be met. At Lion Capital Management Group, we advise our clients to use the service of an experienced consultant in the applicable tax code and accounting rules.
|
