What is a Reverse Merger?
Most investors are familiar with the traditional IPO (initial public offering) as a method for going public. Many people don't realize there are numerous other ways for private company to become publicly traded.
One widely used method is the "Reverse Merger", a simplified, fast track method by which a private company can become a Public Company.
This method for going public is more prevalent than most investors realize. One study estimates 53% of all companies going public in 1996 did so through the "Reverse Merger". The same study concluded about 30% of newly publicly listed companies got there through Reverse Mergers in 1999. Percentages dropped because Wall Street Investment Banking firms had a huge appetite for IPOs in the late 90s, and many marginal companies were able to find their way to the public market through traditional IPOs. We expect the Reverse Merger to make a come back in today's climate with very few IPOs being filed by Wall Street firms.
The reverse merger occurs when a public company which has no business and usually limited assets acquires a private company with a viable business. The Private company "Reverse Merges" into the already public company, which now becomes an entirely new operating entity and generally changes name to reflect the newly formed company's business.
The original public company, commonly known as a Shell company, has value because of its publicly traded status. The shell company is generally recapitalized and issues shares to acquire the private company, giving shareholders and management of the private company majority control of the newly formed entity.
Reverse Mergers are also commonly referred to as Reverse Takeovers, or RTO's.
