EXPLAINED: What is a reverse merger & how do cos gain from it

Moneycontrol BureauRecently, Yatra Online was in the news for agreeing to be bought by US-based Terrapin3 Acquisition Corp in what is called a ‘reverse merger.’ As Terrapin is already a public company, the Indian travel portal will get to list on Nasdaq. Yatra has scored a backdoor entry into the stock exchange without suffering any of the hassles of an initial public offer. So, what is a reverse merger and what do the companies involved in such a merger stand to benefit or lose from it? Here is a look.

When an active private company merges with a dormant public company, it is called a reverse merger. The acquiring company is usually a weaker one, with poorer financials than the company it merges with.  

A merger is between two companies which are level-pegged, where all things being equal, they compete for similar clients and market share. Such a merger is undertaken through an exchange of shares or cash.

The private entity buys majority shares of its smaller publically listed company, after which both merge.

In the Yatra example, Terrapin3 is what they call a 'blank cheque' company.  Also called a shell corporation, a dormant company doesn’t have real assets or net worth. Their only claim to existence is that they had gone through an IPO.

For a number of reasons. First, the weaker company’s losses will be carried forward and the combined entity will have to pay lower taxes.

Another benefit is the private company can go public without raising money. 

A standard-issue IPOs can take months (even over a calendar year) to materialise. But reverse mergers can take only a few weeks to complete and hence they are preferred.

Other than Yatra, there have been three so far. ICICI (Industrial Credit and Investment Corp of India) and two of its wholly-owned subsidiaries, ICICI Personal Financial Services and ICICI capital Services, reverse-merged with ICICI Bank in 2002.

Three years later, Industrial Development Bank of India (IDBI) was reverse-merged with its commercial banking arm, IDBI Bank, and has since become IDBI Bank.

In 2013, Indiabulls Financial Services reverse-merged into its wholly-owned subsidiary Indianbulls Housing Finance.

They are more popular in the US. It has seen around 200 reverse mergers happen per year since 2004. China has witnessed 150 companies getting publicly listed through this route.