How to value a formerly private company coming out of a reverse merge - Part II
Having set the stage, there are basically two ways one can value the private entity which is being acquired in a reverse merger.
1. Without getting into a number of complexities of private company valuation (e.g., minority and marketability discounts), one uses the price per share the day prior to the closing, multiplying that by the number of shares held by the formerly private company after the closing.
Normally this value would be construed as Fair Market Value, which is generally defined as the cash or cash equivalent price that a transaction would occur between a willing buyer and willing seller, both in possession of all relevant facts, and neither acting under compulsion to transact.
Unfortunately, the OTC-BB is almost invariably a market where the general public cannot get all the relevant facts hence this method would often fail to qualify as Fair Market Value.
or
2. Calculate the total net asset value of the public company the day prior to the merger. Divide that by the fully-diluted share count prior to the merger to derive a value per share. Multiply the derived value per share by the number of shares represented by the former private company the day after the merger.
In this particular instance, method 2 is far more appropriate.
I have seen estimates here on SI that the cash price for a "clean" OTC-BB shell range from $50 to $250 thousand dollars.
What do we have in this instance? This merger transaction created a "clean" shell; no assets except a listing, no liabilities.
For that clean shell, the owner(s) of hitsgalore.com had to give away 24% of their ownership of their pre-merger company.
8.0 millions shares to SCMI equity holders
4.0 million shares to in transactions cost (consultants et al)
12.0 Total
12.0 million shares (the cost) divided by post merger, combined company 49.675 million shares outstanding = 24% of the equity of the new company.
Well, the 24% of the equity of the post merger company was worth (giving the high side estimate) $250K. That means that the private company was worth (by the private owner's own calculation)
$791 thousand.
i.e., $250K * ( (1-.24)/.24)
If one attempts to calculate the value of the private hitsgalore.com using the method described in (1) (a market cap calculation based upon the closing share price) you get an irrational number. Irrational because no sane person who held 100% of a private something would pay many more times, in terms of their percentage ownership, for the "clean" shell. When you factor in the fact the former owners of the pre-reverse company now have liquidity, while the new majority owners are generally sitting on restricted shares, the calculation becomes more absurd.
So in the case of HITT, we have a company that it could be fairly argued had a worth of $1.04 (.791+.250= 1.041) million approx 6-8 weeks ago, and is now worth $1 billion.
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