SPAC VS "Ordinary" Reverse Merger

Long before SPACs became a big hit on Wall Street, there were "ordinary" Reverse Mergers on the Nasdaq & NYSE with small operating companies that no longer had a need to be public.

Generally these mainboard listed "shell" companies were older companies which no longer awarded the same valuations as they did in their glory days 20-30 years ago. Although there are still few "ordinary" Reverse Mergers — approx. 10-15 each year conducted on both the Nasdaq & NYSE — since all the media attention is focused on SPACs today, they mostly go unnoticed by the media.

SPACs look and sound great from the outside, but to insiders that truly understand how they work, it may not look as attractive.

Cons of SPACs

• SPACs come with a lot of dilution — usually 20% just for the Sponsors of the SPAC and another 10-15% between the Underwriters and the SPAC investors.
• Although a SPAC might have $500M in the company, a high majority of that money ends up going back to the original investors when they redeem their shares prior to the merger.
• SPAC investors are not very incentivised to actually stay in the deal post-merger as they usually get free warrants (typically at $10) regardless if they actually keep their money in the deal.

Pros of "Ordinary" Reverse Mergers

• Maximum dilution of 5-10% upon the merger.
• No need to worry about Warrants or Options adding to future dilution post-merger.
• Once merger is completed, the company can raise money at a much higher valuation with less dilutive terms.

There have been some pretty famous "ordinary" Reverse Mergers over the years, most notably Berkshire Hathaway, New York Stock Exchange, Texas Instruments, VM Ware, Jamba Juice etc.

Fortune recently reported: "Looking at it another way, Renaissance Capital's Kennedy notes that based on his data, 70% of SPAC IPOs so far this year are trading below their $10 offer price. And of the SPACs that have completed mergers in 2021, 58% trade below their original offer price, according to Renaissance data. Moving forward, 'the SPACs in the pipeline will have a harder time raising IPO capital compared to early 2021, due to a broad-based decline in SPAC returns and greater regulatory scrutiny from the SEC.'"