Reverse Merger

Reverse merger transactions
Reverse merger transactions


Reverse Merger

Engineering a successful initial public offering can be a time consuming and difficult process. It’s common knowledge that a botched IPO can spell the death of a company, making it suboptimal to try to see one through if every factor doesn’t point to success. One of the main reasons an IPO is so difficult is because it seeks to accomplish two things at once: Bringing the company public, and acquiring capital. Keeping these two tasks separate would greatly simplify things, but is not possible for corporations taking the traditional route. Executing a reverse merger makes it possible, however.

What is a Reverse Merger?

A reverse merger (also known as a reverse takeover or reverse IPO) is a process in which a private company buys a controlling interest in a publicly traded company, which it then integrates with itself, maintaining nothing of the public company (called the “shell company”) beyond its organizational structure. This allows the private company to transition to public status without having to go through the trouble of setting up a standard IPO. This can save a lot of time, money, and trouble for the private company.

Why Would a Company Consider a Reverse Takeover?

The main reason a company would consider a reverse takeover is that mentioned above – it simplifies the process of going public by eliminating the need for a lengthy planning process and flawless execution. In addition, it separates the tasks of raising capital and going public, making the entire process easier by allowing managers to focus on one task at a time. Another reason the reverse takeover can be useful is that the shell company the private entity purchases can be selected or engineered to have just the organizational structure the private entity wants its publicly traded incarnation to have, further simplifying long-term business prospects.

What Can Go Wrong?

Sometimes, a reverse merger can go wrong, just like a normal IPO. There are a variety of ways this can happen, but the most common include poorly kept books on the part of the acquired company, unseen liabilities the private company must manage upon acquisition (including lawsuits and other such issues), and the risk that a large number of shareholders of the public company will dump their stock after the reverse merger finalizes. This leaves the new company with quite a bit of financial hassle to address, and since the reverse merger usually doesn’t raise a ton of capital, this can be a serious problem at times.

Last Things to Keep in Mind

One of the last things to keep in mind with reverse mergers is the fact that their aftermath can be rather difficult to navigate for CEOs and officers accustomed to running private companies. A publicly traded entity is entirely different different entity as compared to a private one, so it’s important to bring people who understand the differences onboard as soon as possible. Once you’ve got that done, however, the reverse merger is sure to do its job.