Go Public Via a Reverse Merger

What is a Reverse Merger?

A Reverse Merger can be viewed as a reverse Initial Public Offering (IPO) and basically it is the acquisition of a public company by a private company to bypass the lengthy and complex process of going public. The transaction typically requires reorganization of capitalization of the acquiring company.

What is The Process?

The Reverse Merger process is not that complex, in short the 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. The transaction can be accomplished within a short time frame. If the shell is an SEC-registered company, the private company does not go through an expensive and time-consuming review with state and federal regulators because this process was completed beforehand with the public company.

What Are The 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). While the process of going public and raising capital is combined in an IPO, in a reverse takeover, these two functions are separate. A company can go public without raising additional capital. Separating these two functions greatly simplifies the process.

In addition, a reverse takeover is less susceptible to market conditions. Conventional IPOs are risky for companies to undertake because the deal relies on market conditions, over which senior management has little control. If the market is off, the underwriter may pull the offering. The market also does not need to plunge wholesale. If a company in registration participates in an industry that’s making unfavorable headlines, investors may shy away from the deal. In a reverse merger, since the deal rests solely between those controlling the public and private companies, market conditions have little bearing on the situation.

The process for a conventional IPO can be at least a year and if market conditions aren’t stable then a lot longer than that. When a company transitions from an entrepreneurial venture to a public company fit for outside ownership, how time is spent by strategic managers can be beneficial or detrimental. Time spent in meetings and drafting sessions related to an IPO can have a disastrous effect on the growth upon which the offering is predicated, and may even nullify it. In addition, during the many months it takes to put an IPO together, market conditions can deteriorate, making the completion of an IPO unfavorable. By contrast, a reverse takeover can be completed fairly quickly as opposed to the lengthy IPO process. Granted if you are a multi-billion entity an IPO may be beneficial but bear in mind that the NYSE went public via a Reverse Merger.

What are the Pitfalls?

Reverse mergers 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. Additionally, these public shells may sometimes come with angry or deceitful shareholders who are anxious to “dump” their stock at the first chance they get. One of the largest caveat is that most CEO’s that go the reverse merger route are naive and inexperienced in the world of publicly traded companies, unless they have past experience as an officer or director of a public company. This is why Falcon global Acquisitions takes a hands on approach with our clients, from inception to the growth process, we are there every step of the way.

Is It Simpler to Raise Capital Being Publicly Traded?

Actually the answer is YES, as there are a greater number of financing options available to publicly held companies as opposed to a privately held company, this is a primary reason why privately held companies undergo a reverse merger. 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

Some Examples of Historic Reverse Mergers/Takeovers

• ValuJet Airlines was acquired by AirWays Corp. to form AirTran Holdings.

• Aérospatiale was acquired by Matra to form Aérospatiale-Matra.

• Video game manufacturer Atari was acquired by JT Storage

• US Airways was acquired by America West Airlines.

• The New York Stock Exchange was acquired by Archipelago Holdings to form NYSE Group.

• Frederick’s of Hollywood parent FOH Holdings was acquired by apparel maker Movie Star.

So if you have a viable company where a traditional IPO is not in the cards and made an informed choice to seek out potential reverse merger situations then give us a call in confidence 646-397-0588.