Reverse Merger
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 merger
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 merger, these two functions are separate. A
company can go public without raising additional capital. Separating
these two functions greatly simplifies the process. |
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In addition, a reverse merger
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.
Reverse Merger
Financial Benefits
The process for a conventional IPO can
last for a year or more. 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 in as little as thirty days.
For a conventional IPO, it can cost as much as $200,000 just to release
a preliminary prospectus. A reverse merger, however, can be done
for $95,000 to $150,000.
Additionally, many shell companies carry forward what is known as a
tax-loss. This means that a loss incurred in previous years can be
applied to income in future years. This shelters future income from
income taxes. Since most active public companies become dormant public
companies after a string of losses, or at least one large one, it is
more likely that a shell company will offer this tax shelter.
The greater number of financing
options available to publicly-held companies is a primary reason
to undergo a reverse merger. These financing options
include:
- The issuance of additional
stock in a secondary offering
- 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.
- 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:
- Increased liquidity of
company stock
- Higher company valuation due
to a higher share price
- Greater access to capital
markets
- Ability to acquire other
companies through stock transactions
- Ability to use stock
incentive plans to attract and retain employees
Source: Wikipedia |