How Reverse Merger Firms Raise Capital in PIPEs: Search Costs and Placement Agent Reputation
59 Pages Posted: 28 Jun 2019
Date Written: June 23, 2019
We examine the role of placement agents in private investments in public equity (PIPE) deals of firms that went public via a reverse merger (RM). We find that reputable placement agents with greater expertise (expert agents) help RM firms to complete their PIPE deals in a smaller number of financing rounds (closings) and raise funds from a larger base of private investors. However, RM firms advised by expert agents agree to more investor-friendly contract terms and pay higher cash compensation to their placement agents. Further, RM firms are not able to negotiate more attractive pricing when they agree to more investor-friendly contract terms in PIPEs placed by expert agents. Overall, our evidence indicates that, while expert PIPE agents use their superior networking capabilities to reduce the search costs of RM firms, they also exercise more bargaining power against RM firms compared to non-expert PIPE agents. Finally, compared to the PIPE offerings of IPO firms, the PIPE offerings of RM firms are more likely to involve deals with multiple closings and substantially larger offer price discounts. This suggests that raising new capital in PIPEs entails significantly higher costs for RM firms than IPO firms.
Keywords: Private Investment in Public Equity; Reverse Mergers; Financial Intermediaries; PIPEs with multiple closings; Financial Contracting; IPOs; Going Public
JEL Classification: G23; G32; G34
Suggested Citation: Suggested Citation