REVERSE MERGER

A reverse takeover or reverse merger (reverse IPO) is the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public.

A large company may reverse merge into another smaller company if there is an opportunity to enter new businesses.

To ensure a smooth reverse merger, the public company should be a shell company, that is, the one which simply has an organization structure but negligible business activity. It is only an organizational entity on paper with no significant existence in the market.

Reverse merger is a speedy and cheaper way of becoming a public company within a maximum period of 30 days.

Process of reverse merger

In a reverse takeover, shareholders of the private company purchase control of the public shell company and then merge it with the private company. The publicly traded corporation is called a "shell" since all that exists of the original company is its organizational structure. The private company shareholders receive a substantial majority of the shares of the public company and control of its board of directors. By merging with such an entity, the private company becomes public. After the private company obtains a majority of the public company’s shares and completes the merger, it appoints a new management and elects a new board of directors. The new public corporation thus establishes a base of shareholders sufficient to meet the listing requirements.

Reverse merger as a tool has been used by shell companies in two forms:

 Under the first form, a failed public company is sold to recoup some of the cost of the failed business. Such shell deals are risky as they have the potential for unknown liabilities, lawsuits and dissatisfied shareholders.  Under the second form, companies are created for the specific purpose of being sold as a shell in a reverse merger transaction. Such deals typically carry less risk of having unknown liabilities.

Benefits

The advantages of public trading status include the possibility of commanding a higher price for a later offering of the company's securities. Going public through a reverse takeover allows a privately held company to become publicly held at a lesser cost, and with less stock dilution than through an initial public offering (IPO).

In addition, a reverse takeover is less susceptible to market conditions..

making the completion of an IPO unfavorable. By contrast, a reverse takeover can be completed in as little as thirty days.

Drawbacks

Reverse takeovers always come with some history and some shareholders. Sometimes this history can be bad and manifest itself in the form of currently sloppy records, pending lawsuits and other unforeseen liabilities.

Reverse mergers may have other drawbacks. Private-company CEOs may be naive and inexperienced in the world of publicly traded companies unless they have past experience as an officer or director of a public company.

Future financing

The greater number of financing options available to publicly held companies is a primary reason to undergo a reverse takeover. These financing options include:

 The issuance of additional stock in a secondary offering;  An exercise of warrants, where stockholders have the right to purchase additional shares in a company at predetermined prices. When many shareholders with warrants exercise their option to purchase additional shares, the company receives an infusion of capital;  Other investors are more likely to invest in a company via a private offering of stock when a mechanism to sell their stock is in place should the company be successful.

In addition, the now-publicly held company obtains the benefits of public trading of its securities:

 Increased liquidity of company stock  Higher company valuation due to a higher share price  Greater access to capital markets  Ability to acquire other companies through stock transactions  Ability to use stock incentive plans to attract and retain employees