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Reverse Mergers
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 NAMC Worldwide 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:
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The issuance of additional stock in a
secondary offering
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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.
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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:
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Increased liquidity of company stock
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Higher company valuation due to a higher
share price
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Greater access to capital markets
-
Ability to acquire other companies
through stock transactions
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Ability to use stock incentive plans to
attract and retain employees
Some Examples of 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.
How Can NAMC Worldwide Be an Asset in
Your Reverse Merger Efforts?
Years ago reverse mergers were very
popular, they allowed a privately held company to go public
quickly avoiding various hurdles.
But what they soon learned was that
attached to these reverse mergers into a publicly traded shell
carried with it more than they anticipated. From stock
promoters selling their free trading shares in the open market
to past legal issues, more hurdles were in their path than if
they were to facilitate a traditional IPO.
NAMC Worldwide does work with companies
that find a need to facilitate a reverse merger, but we make
sure that they are situations that would benefit the private
company and its shareholders. The publicly traded shell
company would need to be free of legal issues and very limited
promoter interest. We not only facilitate the reverse merger
we stay with our clients for the long haul, consulting them on
funding options, capital raising, public relations and
marketing efforts, mergers/acquisitions, organic growth and
employee/management team acquisition and retention.
So if you find that a traditional IPO is not for your
company and made a choice to seek out potential reverse merger
situations then contact us at 646-837-0878 or
Click below to find out more
GO PUBLIC VIA A REVERSE
MERGER
NAMC Worldwide
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