How to define Reverse Mergers and how to make big Profits from them!

Written by: Milanie Torralba

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Opting to Reverse Mergers

The corporate world today welcomes reverse mergers. Privately owned companies enter the trade market by merging in to the shell of dormant public companies. Due to complexities entailed in resorting to an Initial Public Offering (IPO), the reverse merger has grown an increasingly popular method for private companies to go public. Private firms looking for more capital are increasing in number.

What is Reverse Merger?

Reverse merger, also known as a reverse takeover , is the way of acquiring a public company by a private company , allowing the private company to become public without undergoing the usually lengthy and complex process . A private company finds a public company, usually one that's almost defunct or is dormant.

The dormant public companies acquired by private companies in reverse mergers are called "shell corporations" simply because rarely have assets or net worth aside from the fact that they previously had opted through an Initial Public Offering (IPO) or alternative filing process, and are non-operating. Even though these shell companies continue as publicly traded corporations, their assets have evaporated due to bankruptcy or liquidation and all that continues to be are their internal structures and shareholders. These shells, also known as shell stocks, do not have any on-going operations, and the only reason behind their existence shall be used for a merger.

In substitution for cash from the private company, the public company issues a multitude of shares, which it uses to purchase the operating private company. The public company transfers a majority of its stocks to the private company. Because the private company now has a majority of the shares, it then controls the public company and retains great ownership in the new company. In effect, even though private company was taken over, the owners of the private company now own and control the public company's stocks.

In reverse merger, a private company is permitted to become public without having to raise much capital . The reason being a reverse merger is cheaper, saving the private company owner a considerable amount of money, and takes a shorter period to process, giving him additional time to thinking about growing its new company, rather than if the company opts to go public through an Initial Public Offering or IPO.

The price tag on a shell is low, and also the fees for the reverse merger's processing are comparably much cheaper than that relating to the IPO's. In addition, conventional IPO requires extensive paperwork and this can take up to a year or more to materialize, while a reverse merger may be possible just in weeks or monthsat the most.

Undergoing the traditional IPO (Initial Public Offering) doesn't even guarantee that the company are able to finish the process. If market conditions do not become favourable to the company's proposed offering, all the time spent in processing an IPO will just be wasted effort. A reverse merger, however, minimizes that risk.

Reverse merger, then, is selected by private companies if they want toattract more investors by going public.

When the reverse merger deal closes, the private company effectively owns the combined company formed from the merger, which is public. It then appoints its own board of directors and officers. The combined company generally takes the name of the private company.

The company that has now become public after reverse merger are able to use the public companies' stocks as currencies to finance acquisitions of other businesses, and to grow using these acquisitions. Before the reverse merger, this private company's acquisitions were limited to the amount of its cash available, or itsaccess to financing. The private company's owner can now sell the shares of the public company to investors.

Before going into the reverse merger deal, the private company's management first identifies those public companies which are similar in size, industry and development, to understand which pre funding market valuation to expect.

By becoming public, a company becomes an increasingly attractive investment opportunity to a wider assortment of investors . Usually, the companies that have applied reverse mergers to go public will develop their businesses first prior to making any acquisition. By building up their business these businesses can increase their stock price and leverage its value based on their future acquisitions.

Since the shells that the private companies used for reverse merger do not have a net value, the price of stockmay be very low. Should the public company acquires a private company, its stock value starts appreciating, with regards to the market status on the private company it has merged with. If the private company has a very viable business that has high market status or demand, investors are drawn to purchase the new public company's shares of stock.

The increase of investments the organization has gained will then send the shell's stock price up. Investors who buy stocks early can earn more money in this scenario. When the private company does well on the market, its shares of stock will appreciate considerably quicker, and the investors who bought at the begining will earn more profit. The shell company stocks became valuable by means of reverse merger, and also the investors who bought in early now own valuable stock, thus earning them more money.

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