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Why Shares of Eros International Both Rose 42% and Fell 23% in One Day

By Jon Quast - Updated Apr 20, 2020 at 4:09PM

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STX Entertainment is going public via a reverse merger.

What happened

It was a wild Monday for shareholders of Indian movie studio Eros International (ESGC). The stock initially rose 43% before cratering as much as 22.6%. By market close, investors were still down a painful 18%.

It appears that investors aren't certain how to process the news that Eros International is merging with privately held STX Entertainment. 

A bull and a bear.

It was an up and down day for Eros stock. Image source: Getty Images.

So what

STX Entertainment is listed as the surviving corporation in the merger agreement, meaning this is what is commonly called a reverse merger, which allows a company to go public without the pressures of an initial public offering (IPO) process.

Eros International has generated $206 million in trailing-12-month revenue, down 24% from the comparable 12-month period. By contrast, STX Entertainment generated $400 million in 2019 revenue, not bad for a studio only founded in 2014. With more revenue and growth, it makes sense that STX Entertainment would be the surviving corporation.

The new company name will be Eros STX Global Corporation and will continue to trade on the New York Stock Exchange. STX Entertainment founder Robert Simonds will assume the CEO role in the new company.

Now what

The press release is understandably bullish on the merged companies' prospects, using terminology like "leading" and "powerhouse." But reverse mergers don't give investors as much transparency as a traditional IPO. While there are some successful companies that went public this way, it's best to wait until more is disclosed after the completion of the merger.

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