Look familiar->SHELLS & The Reverse Stock SplitPosted in September 29th, 2006 by Ralph Amato in reverse stock splitHow do you determine what the end result of a reverse merger is going to be? At best you are taking an educated guess. Here are some areas to consider. However, before we begin, I want to once again caution readers that Reverse Shell Mergers are for experienced investors only!
Should you purchase shares in the shell before or after the reverse merger takes place? If you are trying to buy before the merger takes place there certain assumptions you must make when considering buying shares in a public company that is in a pre-reverse merger mode. First of all, you are purchasing shares in a company that may or may not complete a reverse merger with another company. Secondly, you do not know what company is going into the shell.
I suggest the best thing to do is to wait until there is an announcement, usually a filing of an 8K, by a company. The filing will usually announce a material change in the Officers and Directors of the company or a sale or exchange of shares. This is your first clue that something is up. The new company will then have to file their financials within 3 business days. Once the new company has filed their financials you can start calculating the value of the new company going into the shell. If you want to play it safe wait until the reverse merger and the reverse split of the stock has taken place before you start buying shares. The most difficult part of this type of transaction is determining if there is going to be a reverse split and, if so, to what degree. The total outstanding shares of the new company are determined by the valuation of the company as measured by management or their investment bankers. The question always remains: Do they want a stock that trades at $.50 or $5.00?
Once you have ascertained the number of outstanding shares and the previous earnings of the company you can calculate the earnings per share. For example if a company has 10 million shares outstanding and it earned $2 million dollars that would translate into $.20 per share earnings. Taking into account a PE multiple of 10X to 20X earnings the stock should trade somewhere $2.00 to $4.00 per share. What we are trying to accomplish is akin to a treasure hunt. If you discover the “treasure” before everyone else does you have a distinct buying advantage and, in most cases, you can purchase shares of the new company that are still trading at the previous company’s pricing. So you are trying to accumulate shares before the word gets out and before the PIPE hits the markeplace.
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