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Tue, Jun 16 2015. 06 45 PM I

Hemant Mishra/Mint

De-jargoned: reverse merger Through a reverse merger, a private company can get listed without having to go through the entire process of listing

Tania Kishore Jaleel

On 14 June, it was announced that Cairn India will be merged with

Vedanta Ltd. Their parent company, Vedanta Resources PLC, too,

released a statement on this. While mergers are one way to get

companies under the same group together, another way to do so is

through a reverse merger.

WHAT IS IT?

A reve rse me rger is a lso known as a reverse takeover or a re verse

initial public offering (IPO). In this, a larger private company

purchases majority shares of its smaller publically listed company,

after which it is merged into the private company. The private

company will then have control of the listed company’s board, and

the listed company will cease to exist.

A reve rse me rger also happe ns w hen a su bsidiary is merged with i

parent. The companies may not be in the same business. For a

reverse merger to go through, shareholder approval is required.

Through a reverse merger, a private company can get listed without having to go through the entire process of listing as the shares of the

company being merged with it are already listed. For instance, New York Stock Exchange had reverse-merged into Archipelago Holdings t

go public in 2005. In India, ICICI (Industrial Credit and Investment Corp. of India, which was the parent company) and two of its wholly-owne

subsidiaries, ICICI Personal Financial Services Ltd and ICICI capital Services Ltd, reverse-merged with ICICI Bank Ltd, in 2002. In 2005,

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

Bank Ltd. More recently, in 2013, Indiabulls Financial Services Ltd reverse-merged into its wholly-owned subsidiary, Indianbulls HousingFinance Ltd.

PROS AND CONS

Reverse mergers are not as expensive as IPOs; and the process is shorter. The companies do not have to depend on market conditions.

However, the purpose of taking such an approach may not always be to avoid IPOs. For example, if the companies are in different

businesses, they may come together to diversify, and use each other’s assets such as sales network, cash reserves, plants or machinery.

However, being a single entity also means that risks and problems get combined. Companies will be taking on each other’s debt, liability

lawsuits, poor balance sheets, and so on.

WHAT SHOULD YOU DO?

Ignore any knee-jerk reactions in the market when a reverse merger is announced. Investors can take a decision once the swap ratio is

announced. If it is not favourable, then it is advisable to sell or vote against the proposal. If you are not convinced of the fundamentals,

financials and future plans of the merged entity, you could exit. But if the prospects of merged company are better than the entity in which

one has shares, you could hold on and sell when the price has risen.