Reverse merger defined: A privately held company acquires a
publicly traded, but usually dormant, company. By doing so, the
private company becomes public.
Appropriate for: Companies that don't need capital
quickly and will experience enough growth to reach a size and scale
at which they can succeed as a public entity. Minimum sales and
earnings to reach this plateau are $20 million and $2 mil-lion,
respectively.
Supply: There are thousands of dormant public companies,
sometimes called shells, that might be viable merger candidates. By
becoming public, a company becomes a more attractive investment to
a wider range of investors. The supply of equity capital is more
abundant for public companies than for private ones.
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Best use: Reverse mergers can be used to finance anything
from product development to working capital needs. However, they
work best for com-panies that don't need capital quickly. Not
that reverse mergers take long to consummate, but the initial
transaction is usually just the halfway point. Once public, a
company generally must still find capital. Also, this financing
technique works better for companies that will experience
substantial enough growth to develop into a "real" public
company.
Cost: Expensive, but compared with a conventional initial
public offering, fees and expenses are not that high for a reverse
merger. Deals can be completed for $50,000 to $100,000, which might
be 25 percent of the out-of-pocket costs that would come with a
full-blown IPO. In the process of making the deal, however, the
acquiring company might give up 10 percent to 20 percent of its
equity. This is very expensive. After all, it means a company is
surrendering ownership just for the privilege of being public. More
equity will probably disappear when the company actually raises
money.
Ease of acquisition: Difficult, but not as difficult as a
conventional IPO. Perhaps the most challenging aspect of a reverse
merger is trying to create a real trading market for the
company's shares once the deal is done.
Range of funds typically available: $500,000 and
greater.
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