Put It In Reverse

Flip Side

Perhaps the best use of a reverse merger was made by LCA-Vision Inc. The company's founder, Stephen N. Joffe, already had a profitable hospital-based management business. But he saw an opportunity in freestanding centers offering laser refractive eye surgery, a procedure that corrects nearsightedness. The process for the surgery was awaiting FDA approval, so the company laid plans for financing the rollout of centers in the United States and bought part of a laser surgery center in Toronto, where the process was already legal.

Considering financing alternatives, Joffe believed he could cobble together an IPO, but he concluded it was highly unlikely for a new and untested concept. He didn't think there would be much problem convincing an underwriter of the business's potential, but could an underwriter convince other investors? What if FDA approval was delayed?

Next Joffe considered a reverse merger. For this type of arrangement, he only had to convince the controlling shareholder of a public shell that the reward was worth the risk. And the controlling shareholder of a shell company Joffe was talking with happened to agree.

In the resulting deal, Joffe bought stock in the shell company in exchange for LCA-Vision's assets. At the end of the day, Joffe had a majority position in the shell company, and the shell company had the operating assets of his company.

Two months after the deal, the FDA approved the laser procedure used by LCA-Vision, and Joffe was off and running. Almost immediately, he raised nearly $500,000 privately. He also used his publicly traded common stock to buy the remaining interest in the Toronto facility. The private capital he'd raised, combined with favorable lease terms on surgical laser equipment, helped Joffe roll out seven new surgery centers in the South and Midwest. After a brief honeymoon on Bulletin Board, LCA-Vision moved up to Nasdaq's SmallCap market.

In a climaxing deal, LCA-Vision used its stock to purchase a chain of refractive surgery centers from another company. To acquire the company, LCA-Vision issued several million of its own shares and in return got the other company's 19 wholly owned and operated refractive surgery centers around the country. As a final bonus, the company that LCA-Vision bought had $10 million in the bank when the deal was inked.

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This article was originally published in the June 1999 print edition of Entrepreneur with the headline: Put It In Reverse.

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