05  Reverse takeover or reverse merger  Process of reverse merger  Benefits of reverse merger  Drawback of reverse merger  Future financing  Examples  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.  The publicly traded corporation is known as shell corporation as it has little or no assets.  The private company obtains a shell company by purchasing controlling interest through a new issue of shares.  The private company reverse merges into the already existing public company and an entirely new operating entity comes into existence.  A large company may reverse merge into another smaller company if there is an opportunity to enter new business.  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.  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 publically 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.  After the private company obtains a majority of the public company’s shares and complete 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 met the listing requirements.  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.  Reverse takeover 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.  One way the acquiring or surviving company can safeguard against the “dump: after the takeover is consummated is by requiring a lockup on the shares owned by the group from which they are purchasing the public shell.  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.  Increased liquidity of a company stock  Higher company valuation due to a higher share price  The corporate shell of REO Motor Car company, in what amounted to a reverse ”hostile” takeover, was forced by dissident shareholders to acquire a small publicly traded company, Nuclear consultants. Eventually this company became the modern-day Nucor.  ValuJet Airlines was acquired by Air Ways corp. to form Air Tran Holding with the goal of shedding the tarnished reputation of the former.  Aerospatiale was acquired by Matra to form Aerospatiale-Matra, with the goal of taking the former, a state-owned company, public.  The game company Atari was acquired by JT Storage, as marriage of convenience.  US Airways was acquired by America West Airlines, with the goal of removing the former from Chapter 11 bankruptcy.  The New York Stock Exchange was acquired by Archipelago Holdings to form NYSE Group. With the goal of taking the former, a mutual company, public.  ABC Radio was acquired by Citadel Broadcasting Corporation, with the goal of spinning the former off from its parent Disney.  Frederick’s of Hollywood parent FOH Holding was acquired by apparel maker Movie Star in order to take the larger lingerie maker public.  Eddie Sobart in a reverse takeover with Westbury Property Fund allowing transport by ship, road, rail or boat to and within the UK , using only one company.  Clearwire acquired Sprint’s Xohm division, taking the former company’s name and with Sprint holding a controlling stake, leaving the resulting company publicly traded.