David Feldman's book, Reverse Mergers: Taking a Company
Public Without an IPO, now in its third printing, was published in 2006
by Bloomberg Press (available on http://www.amazon.com).
View David Feldman's reverse merger blog at www.reversemergerblog.com.
Joseph Smith and David Feldman are coauthors of PIPES:
Revised and Updated Edition - A Guide to Private Investments in Public Equity
(Bloomberg Press, 2005) available on http://www.amazon.com.
In the News
David
Feldman quoted in an article from The
Reverse Merger Report on January 10,
2008, titled "Shell Mergers: Year
in Review"
Shell
Mergers: Year in Review
By:
Megan Leerskov
The
shell merger market grew steadily in
2007, buoyed by the U.S. Securities
and Exchange Commission's approval of
regulations that improve access to capital
for small companies. The rules, approved
late in the year, are generally thought
to be a boon to reverse merger companies
and investors, and many believe they
will positively impact future deal flow.
They included a highly circumscribed
codification of regulatory perspective
stemming from the infamously opaque
"Worm/Wulff letters" regarding
shell stock that is also encouraging
for the market.
Chinese companies eagerly in search
of U.S. capital and en vogue energy
plays also helped drive up the deal
count for the year to 222 completed
transactions, a meager increase of about
5% compared to the previous year's 211
deals. In fact, no month saw any less
than double-digit deal totals during
2007, a first for any annual period
going back to 1993.
Merger deal flow has remained fairly
consistent since 2004, fluctuating from
a low of 203 deals that year to a high
of 222 in 2005 and 2007.
The year's deals were collectively valued
at $8.36 billion in total market cap
at year's end, a 14% increase from the
$7.33 billion value created in 2006.
The average merger during the year was
valued at $52.55 million, down from
$59.77 million in 2006.
The fourth quarter, typically a period
of accelerated merger activity, was
the most prolific of 2007. The quarter's
71 mergers generated about $1.75 billion
in value, or an average of $37.37 million
per deal, which was down about 16% from
the previous quarter.
For comparison, the traditional public
offering market continued to dig itself
out of post-bubble doldrums, racking
up 234 offerings worth $54 billion,
according to Renaissance Capital. Those
are the heartiest figures the market
has been able to produce in seven years.
Many industry watchers credit capital-hungry
Chinese companies, as well as technology
and healthcare firms for the IPO volume.
It is these same regions and sectors
that have supported much of the reverse
merger deal volume. Demand for small,
fast growing companies has been tremendous,
according to Renaissance; however, the
average deal size for a traditional
public offering jumped about 6% from
the previous year. Essentially orphaned
by mainstream IPOs, small companies
looking to go public have continued
to find a viable option in reverse mergers
for this reason.
Shell Stock Clarifications Boost APOs
About 45% of mergers in 2007 also included
a private placement completed concurrently
with the transaction, raising a total
of $866.42 million, or an average of
$9 million each. The fourth quarter
raised the least of any similar period
during the year, with just $190 million
in proceeds. More than one-third of
fourth-quarter deals included a PIPE.
Pinnacle China Fund was among 31 investors
in a $20.52 million private placement
that closed concurrently with a reverse
merger between shell Discovery Technologies
and Green Agriculture Holding Corp.,
the soon-to-be holding company for a
Chinese fertilizer maker. The placement
was the largest concurrent with a merger
in December, as well as the second largest
in the fourth quarter. In August, Green
Agriculture acquired the right to purchase
Shannaxi TechTeam Jinong Humic Acid
Product Co. and Techteam for $4 million.
The company expects the purchase to
be completed shortly.
Another noteworthy placement during
the last quarter was let by Vision Opportunity
Master Fund, a New York private equity
firm increasingly active in the reverse
merger space. Vision and other investors
injected $13 million in needle-stick
prevention company MedPro Safety Products.
Private placement investors acquired
a total of 6.66 million units for a
purchase price of $1.95 each. The company's
stock closed at $4.95 on Jan. 3.
It is likely that an increase in placement
activity surrounding mergers will get
a boost going forward, now that rules
governing the holding periods and resale
in such deals has been clarified by
the commission.
"This is a big change from
the Worm/Wulff letters, which said shell
owners never can sell under Rule 144
and must be registered to sell, "
said David Feldman, a founding partner
with Feldman Weinstein & Smith.
"But they now say that anyone buying
stock after the merger also can't sell
under 144 until one year after merger
and Form 10 filing."
In a merger where a PIPE closes simultaneously,
Feldman says that PIPE investors will
have to hold shares a year or get them
registered. "In the end, though,
this is still a huge improvement. Before
this change, after the first year shareholders
could only sell 1% of the company every
90 days until the second anniversary.
Now investors will be able to sell with
no volume restrictions after a year."
Feldman also says the commission has
been much more flexible in allowing
a higher number of shares to be registered
following a reverse merger.
Circ. 106 All Bark, No Bite
Circular 106, issued by China's State
Administration of Foreign Exchange and
effective this summer, created some
panic among reverse merger practitioners.
Many speculated the rules, which require
companies setting up offshore entities
for domestic investment to get approval
from Chinese regulators, could reduce
merger activity to a trickle if not
bring it to a complete halt. Such fears
have not been realized, however. Deal
data for the year, especially the fourth
quarter, illustrates that mergers are
getting through in record numbers.
During 2007, more than one-third of
all reverse mergers involved a Chinese
venture and a U.S. shell company. A
total of 69 Chinese companies reverse
merged with U.S. shells during the year,
a 30% increase from 53 deals in 2006
and a 115% jump from 2005. Activity
more than doubled during the fourth
quarter alone to 28 mergers up from
12 the prior quarter. The year's Chinese
mergers were valued at $1.47 billion,
with $555 million of value created just
by fourth-quarter transactions.
A merger between shell company Jade
Mountain Corp. and waste treatment company,
Dalian Innomind Environment Engineering,
was the largest Chinese deal of the
last quarter. At the end of October,
it was valued at $144 million. Investors
in Jade have seen their stock rise dramatically.
Closing at $2.40 the day after the merger,
Jade shares have risen 338% to $10.50
in early January. The merger also included
a $24.5 million private placement, making
it the largest PIPE concurrent with
a merger in the last quarter.
A merger creating Protalix, an Israeli
biotechnology company, was by far the
heftiest deal in all of 2007. Valued
at $1.05 billion after its close in
January 2007, Protalix was more than
twice as large as the next biggest deal,
Manas Petroleum Corp., which was valued
at $417 million.
