Reverse Mergers

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A Reverse Merger is a transaction by which a private company goes public by merging with a public company. In a reverse merger the private company merges with a public company that usually has no assets or liabilities. The public company is usually referred to as a "shell company". After completing the reverse merger the private company retains most of the public company's shares of stock and trades under the name of the private company. The Board of Directors of the shell company resigns and the private company appoints their own Board of Directors.

Although not always true, perhaps the biggest advantage of a reverse merger is the reduced time required to get to the public markets. A private company can usually go public, by way of a reverse merger, within several months compared to a year or even more for an IPO.

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We have credible principals looking for a private company wanting to do a reverse merger into a clean Shell. The company must have at least $1,000,000 of net income, $5,000,000 stockholders' equity Growing organically by 20-30% And have experienced and credible management team in place capital@bizfin.com.
 

Reverse Mergers

By Sharon McDonnell, a freelance writer

Sharon is a freelance writer in Brooklyn, N.Y. sharonfmc@compuserve.com

A reverse merger is a faster, easier and cheaper alternative to going public than filing an IPO. How it works: A private company buys the empty shell of a dormant public company, creating a new company whose stock can be traded on public markets.

It sounds like a match made in heaven. A small, private firm that's hungry for capital and eager to go public hooks up with a public company with no assets or operations to speak of but desperate to create some value for unhappy shareholders.

If the private firm acquires the shell of the defunct public company, voila - it can become a public company almost overnight.

It's much cheaper, easier and faster (two to four months, compared with about a year) than issuing a prospectus and landing an underwriter to file an IPO, which involves registration statements that require detailed disclosures.

That's how Ted Turner launched Atlanta-based Turner Broadcasting System Inc. in the mid-1970s. During the past few years, reverse mergers, popular in the early 1980s and mid-1990s, have enjoyed a comeback, particularly among technology and Internet firms that were eager to cash in on the IPO bonanza before the stock market began heading south last year.

Happily ever after? Not necessarily. The shell company that's acquired may be no bargain if it's saddled with debts, liens or lawsuits. Shareholders may sell their shares to cash in soon after the deal is completed, thereby sinking the stock. Creditors may also appear, demanding payment.

An unsavory reputation also haunts reverse mergers. Shady stock promoters often hype the stocks, then sell them off in what are referred to as "pump-and-dump" schemes.

Because of the many fraud cases, the Securities and Exchange Commission (SEC), which takes a dim view of reverse mergers as a backdoor route to going public, toughened its policies on them in the mid-1990s and again last year. Many financial experts also say they tend to suspect the motives of firms involved in reverse mergers.

"I certainly always looked with a jaundiced eye at them, since they didn't undergo the scrutiny other companies did that went public in the usual way. And the past history has not been good," says Charles Hill, director of research at First Call/Thomson Financial, a financial research firm in Boston. "A perfectly legitimate company may feel it's a good way to do it, but it's a tougher row to hoe in getting attention from reputable analysts."

Reverse mergers have certainly produced some odd couples. For example, Piranha Inc., a Richardson, Texas-based maker of digital compression products for streaming video and prepress publishing, merged with a public company, Chicago-based comic book and games retailer Classics International Entertainment Inc., in 1999.

Piranha managed to acquire three small firms after the reverse merger with Classics International, which stopped operating in the 1990s and whose stock reached its nadir at a half-cent per share in early 1998 on the "pink sheets." The lowest regulatory rung of all stocks, pink sheets refer to stocks that aren't listed on any exchange or Nasdaq, although quotes are provided to traders.

Classics Chairman Richard Berger, scouting for opportunities, met Ed Sample, Piranha's CEO, through colleagues. A deal was struck, and Berger is now Piranha's chief financial officer.

"Our technology is now fully developed in two of the three areas we do business in and selling, and we're in business just 15 months," says Berger, who notes that Piranha's stock peaked at $38 per share last March, though it has since plummeted to $1.65 per share as of last week due to market conditions.

Indeed, private firms that think going public through a reverse merger is an automatic way to raise money often find out the hard way that it's not that simple.

"A shell merger is not a way to raise money. It's a way to create a capital tool effectively with the stock you acquire" that allows companies to do such things as create liquidity for investors that want to profit from their investment and offer stock options to employees, says Eric Stevenson, president of Axiom Capital Corp., a Phoenix-based consulting firm that assists companies with reverse mergers.

"Going public is like getting married - a very serious commitment. You have to start reporting regularly, disclosing information about your firm. You're ready to develop your firm, and you better not go into it alone," Stevenson adds.

Some of the pros for conducting reverse mergers include tax benefits and the added value they bring to a company. While IPOs can be withdrawn by underwriters because an industry is getting hammered in the stock market, a reverse merger simply needs two willing and able partners.

Another perk with reverse mergers: Many shells have tax loss carry-forwards, which means future income may be sheltered from income taxes. As for added value, "if an entrepreneur has something viable, he can gain about 30% in market value by [going] public, compared to 10% by [staying] private," says Stevenson.

Shell Shopping

Reverse mergers typically cost $150,000 to $200,000 to execute, not counting the equity given up to the shell's principals. Last year, however, some shells with zero balance sheets listed on the OTC Bulletin Board (called the Nasdaq Stock Market Inc.'s "poor stepchild") sold for at least $500,000, Stevenson says.

"Three-quarters of reverse mergers will be traded only on the Bulletin Board or the pink sheets, since they can't qualify for the Nasdaq SmallCap," Stevenson adds. Nasdaq SmallCap requirements include having at least $4 million in assets.

Private firms can go shell hunting by scanning ads touting shells for sale in The Wall Street Journal and other business journals and Web sites. But experts recommend referrals from attorneys with securities practices, accountants or financial consultants who can share helpful information about the shells as the best way to go.

While a company formed by a reverse merger may go public nearly overnight, don't expect its value to skyrocket as quickly.

"You can't fool Wall Street," Stevenson cautions. "You can't take a company that has poor financial performance and represent it as wonderful just because it's now public."