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RMT & Reverse Mergers RMT & Reverse Mergers Rui Jie Sim Overview n Fundamental Questions n Types of Strategic Transactions n Reverse Morris Trusts – Examples of RMT – Structure of RMT n Reverse Mergers – Examples of Reverse Mergers 4/22/15 Wall Street Club 2 Fundamental Questions Strategic Rationale Does the transaction help the strategic plan? Does the transaction fit into the company’s equity and growth? Does the transaction expand the company’s geographic coverage or footprint? Financial Impact Does the transaction create value for shareholders? Does transaction increase growth profile at an acceptable risk? 4/22/15 Wall Street Club 3 Types of Strategic Transactions Joint Ventures & Strategic Alliances Partnership between two companies Divestitures Disposition or sale of an asset, division or subsidiary Acquisitions Purchase of an asset, division or subsidiary Sale of Company and Mergers Combination of two independent companies Recapitalizations Major change to a company’s capital structure Restructurings Major change to the structural organization of a company 4/22/15 Wall Street Club 4 Types of Strategic Transactions Joint Ventures & Strategic Alliances Partnership between two companies Divestitures Disposition or sale of an asset, division or subsidiary Acquisitions Purchase of an asset, division or subsidiary Sale of Company and Mergers Combination of two independent companies Recapitalizations Major change to a company’s capital structure Restructurings Major change to the structural organization of a company 4/22/15 Wall Street Club 5 Reverse Morris Trust n Original Morris Trust was established in 1966 (IRS v. Morris Trust) n Main goal: to effectuate a sale of a division or divisions without incurring any corporate tax in the transaction n Reverse Morris trust: assets to be acquired are spun off and merged with Buyer n Shareholders of Seller must receive over 50% of the vote and value of surviving entity in the merger n Acquirer must be smaller than target company 4/22/15 Wall Street Club 6 Examples of RMT 2013 2001 $2.5B $52B 2015 2008 $5B $3.3B 4/22/15 Wall Street Club 7 Structure of the Deal (Axiall) Structure Before the Merger Structure After the Merger PPG Georgia Gulf PPG Georgia Gulf Shareholders Stockholders Shareholders Stockholders 50.5% 49.5% PPG Georgia Gulf AXIALL PPG CORPORATION SPLITCO SPLITCO 4/22/15 Wall Street Club 8 Reverse Mergers 4/22/15 Wall Street Club 9 Fundamental Questions Strategic Rationale Does the transaction help the strategic plan? Does the transaction fit into the company’s equity and growth? Does the transaction expand the company’s geographic coverage or footprint? Financial Impact Does the transaction create value for shareholders? Does transaction increase growth profile at an acceptable risk? 4/22/15 Wall Street Club 10 Reverse Mergers n Simpler, shorter, and less expensive process of becoming public without raising capital n Involves an active private company that takes control and mergers with a dormant public company (shell corporations) n Shorter process than an IPO (IPOs can take from six to 12 months) n Less expensive (Shell companies are already registered with the SEC) n Simpler (Timings, Complexity, less dependent of market conditions) 4/22/15 Wall Street Club 11 Examples of Reverse Merger 2013 2006 $1.4B $358M 2015 $70B 4/22/15 Wall Street Club 12 Summary of Reverse Merger Advantages n Greater Liquidity: – Though securities trading in on an exchange – Public companies often trade at higher multiples n Increase in M&A currencies n Stock incentives for management and employees n Less time-consuming, cost saving alternative than IPO Disadvantages n Conducting appropriate due diligence n More transparencies and disclosures n Expectations of investors might limit long-term growth planning 4/22/15 Wall Street Club 13 Summary of RMT n Advantages of RMT – Permanently tax-free disposition of business – Shareholders get benefits of synergies of merger and potentially a control premium – Buyer can retain effective control of Board of directors and senior mangement n Disadvantages of RMT – Monetization limited by market capacity subject to regulations – Limited universe of merger partners – Post-transaction equity issuance may be limited 4/22/15 Wall Street Club 14 Appendix n http://blogs.law.harvard.edu/corpgov/2012/02/22/spin-offs-and- reverse-morris-trusts/ n https://www.macabacus.com/strategies/morris-trust n http://www.marketwatch.com/story/smuckers-pg-sign-merger- agreement n http://abcnews.go.com/Business/story?id=87476 n http://news.pg.com/press-release/pg-corporate-announcements/j-m- smucker-company-merge-pgs-folgers-business-company-all- n http://www.investopedia.com/articles/stocks/09/introduction-reverse- mergers.asp n http://www.thestreet.com/story/12856055/1/how-burger-kings- brilliant-brazilian-billionaire-turned-12b-into-22b.html n http://dealbook.nytimes.com/2006/03/28/is-jamba-juice-deal-getting- frothy/ 4/22/15 Wall Street Club 15 Questions? .
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