Panda Ethanol Case Study

Purpose of the Case StudyIllustrates how• A private firm can use a reverse merger in lieu of

an IPO to go public• Private investment in public equity (PIPES) may

be used to finance ongoing operations following the reverse merger

• Reverse splits can be used to achieve agreed upon ownership distributions

• Purchasing stock in the prior to a merger proposal can be used to influence the outcome

Key Participants

• Panda Ethanol

• Grove Street Investors

• Grove Panda LLC

• Cirracor

Merger Terms• One share of Panda Ethanol common for each share of Cirracor

common• Cirracor shareholders to own 4% of newly issued and outstanding

common stock of the surviving company• Panda Ethanol shareholders to own remaining 96%• Panda Ethanol to issue 15 million new shares through a private

placement valued at $90 million• Total Panda Ethanol shares outstanding:

--13.8 million existing shares

--15.0 million new shares• Total Cirracor shares outstanding: 3.5 million

Applying Reverse Splits

Shares

Outstanding

(Millions)

Ownership

Distribution (%)

Shares Outstanding

(Millions)

Ownership Distribution

(%)

(Before Reverse Merger) (After Reverse Merger)

Panda Ethanol

28.8 89.21 28.8 96

Cirracor Inc. 3.5 10.82 1.23 4

128.8/(28.8/3.5)23.5/(28.8+3.5)3A result of a 3 for 1 reverse split. 1.2 million shares subject to rounding.

Discussion Questions

1. Discuss the pros and cons of a reverse merger versus an initial public offering for taking a company public.

2. Why did Panda Ethanol undertake a private equity placement totaling $90 million shortly before implementing the reverse split?

3. How were the Panda Grove investment holdings used to influence the outcome of the proposed merger?