WHAT IS A REVERSE MERGER? A reverse merger is a s
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Posted On: 06/18/2017 8:50:08 AM
WHAT IS A REVERSE MERGER?
A reverse merger is a simplified, fast-track method by which a private company can become a public company. A reverse merger occurs when a public company that has no business and usually limited assets acquires a private company with a viable business. The private company "reverse merges" into the already public company, which now becomes an entirely new operating entity and generally changes name to reflect the newly merged company's business. Reverse mergers are also commonly referred to as reverse takeovers, or RTO's.
Going public (in any way) is attractive to companies because after going public, the company can use its stock as currency to finance acquisitions and attract quality management; capital is easier to raise as investors now have a clearly defined exit strategy; and insiders can create significant wealth if they perform.
The reverse merger is an alternative to the traditional IPO (initial public offering) as a method for going public. Many people don't realize there are numerous other ways for private company to become publicly traded outside of the IPO. One widely used method is the "Reverse Merger".
The reverse-merger method for going public is more prevalent than many investors realize. One study estimates that 53% of all companies obtaining public listings in 1996 did so through the "Reverse Merger". The same study concluded about 30% of newly publicly listed companies got there through Reverse Mergers in 1999. Percentages have recently dropped because Wall Street Investment Banking firms have had a huge appetite for IPOs in the late 90s. This led to many marginal companies receiving enormous financial windfalls.
In a reverse merger, the original public company, commonly known as a "shell company," has value because of its publicly traded status. The shell company is generally recapitalized and issues shares to acquire the private company, giving shareholders and management of the private company majority control of the newly formed public company.
The RTO (reverse take over) method for going public has numerous benefits for the private company when compared to the traditional IPO:
* Initial costs are much lower and excessive investment banking fees are avoided.
* The time frame for becoming public is considerably shorter.
There are also several disadvantages of going public through the RTO as compared to an IPO:
* There is no capital raised in conjunction with going public.
* There is limited sponsorship for the stock.
* There is no high powered Wall Street Investment Banking relationship.
* The stock generally trades on a low exposure exchange.
A reverse merger is a simplified, fast-track method by which a private company can become a public company. A reverse merger occurs when a public company that has no business and usually limited assets acquires a private company with a viable business. The private company "reverse merges" into the already public company, which now becomes an entirely new operating entity and generally changes name to reflect the newly merged company's business. Reverse mergers are also commonly referred to as reverse takeovers, or RTO's.
Going public (in any way) is attractive to companies because after going public, the company can use its stock as currency to finance acquisitions and attract quality management; capital is easier to raise as investors now have a clearly defined exit strategy; and insiders can create significant wealth if they perform.
The reverse merger is an alternative to the traditional IPO (initial public offering) as a method for going public. Many people don't realize there are numerous other ways for private company to become publicly traded outside of the IPO. One widely used method is the "Reverse Merger".
The reverse-merger method for going public is more prevalent than many investors realize. One study estimates that 53% of all companies obtaining public listings in 1996 did so through the "Reverse Merger". The same study concluded about 30% of newly publicly listed companies got there through Reverse Mergers in 1999. Percentages have recently dropped because Wall Street Investment Banking firms have had a huge appetite for IPOs in the late 90s. This led to many marginal companies receiving enormous financial windfalls.
In a reverse merger, the original public company, commonly known as a "shell company," has value because of its publicly traded status. The shell company is generally recapitalized and issues shares to acquire the private company, giving shareholders and management of the private company majority control of the newly formed public company.
The RTO (reverse take over) method for going public has numerous benefits for the private company when compared to the traditional IPO:
* Initial costs are much lower and excessive investment banking fees are avoided.
* The time frame for becoming public is considerably shorter.
There are also several disadvantages of going public through the RTO as compared to an IPO:
* There is no capital raised in conjunction with going public.
* There is limited sponsorship for the stock.
* There is no high powered Wall Street Investment Banking relationship.
* The stock generally trades on a low exposure exchange.
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