With the COVID-19 pandemic still limiting liquidity, companies are looking for ways to raise and access capital quickly. The result has been an explosion of IPOs, but not in the conventional sense. More companies are going public this year through an accelerated process known as a reverse merger or reverse IPO. This is where a private company is acquired by an existing public shell company, or special purpose acquisition company (SPAC).
While this is not a new practice, just a few years ago reverse mergers were seen as a sub-standard method of going public. That perception has changed, especially after Virgin Galactic went public through a reverse merger in 2019 with an $800 million investment from a SPAC.
The trend has further exploded this year. More than 50 SPACs have formed so far in 2020, and they have raised more than $22 billion. For example, fantasy sports betting platform DraftKings completed a reverse merger with SPAC Diamond Eagle Acquisition Corp. in April in a deal valued at $2.7 billion. Companies are seeing these successes and looking ahead to how the upcoming presidential election could impact current market trends; many want to act fast to make sure they can complete their transaction while the market is strong.
The reason this option is becoming so popular is that it promises investors a potentially huge return, and it gives private businesses a quick way to get to public markets. Going public through a reverse merger with a SPAC is often much simpler and less costly than conventional IPOs with their often 18-month runway and need to raise capital directly. SPACs can provide a liquidity option in a quarter of that time. And, reverse mergers can present less risk, because there is more due diligence done in the acquisition process. Rather than relying on the state of the market at the time, you have a more negotiated, certain return.
We have found that reverse mergers move quickly (usually only taking a few months), so if you’re considering this route, make sure you’re prepared for the pre-acquisition due diligence that’s involved. Companies tend to get overwhelmed with the sheer amount that must happen quickly and may not be ready to react to any surprises found along the way. There is great opportunity right now in the marketplace, but those that can access extra expertise tend to be able to roll through the process much smoother.
If you have a question about the reverse merger process or what’s involved from a due diligence standpoint, don’t hesitate to reach out.