Reverse Mergers – When Private Companies Want to Go Public Quickly
Many people have never heard the term “reverse mergers” before. However, if you are in the corporate or finance world, you surely have because these events are a big deal. What are they? In essence, reverse mergers are what happens when a company that is privately held wants to go public quickly, without having to go through all of the hurdles in which to do so. What happens is that the privately held company acquires or takes over a publicly held company. This process usually means that changes have to be made at the publicly held company, such as reorganization – which is rarely ever good for the current employees of the acquired company.
When reverse mergers happen, the newly acquired publicly held company is called a shell. The reason it is called a shell is because nothing but the barebones of that company continues to exist. Everything that was once “inside” the original company either no longer exists or has changed so drastically that it is no longer recognizable as that acquired company. This shell company is then merged into the private company and the shareholders of that company have control over its stock on the stock market.
As previously mentioned, reverse mergers happen so that a privately held company can become public without having to go through all of the hurdles in which to do so. This is a way for the company to go public quicker – as long as the acquired company is already registered with the SEC to be traded on the stock market. Even so, the privately held company still must submit some documentation pertaining to their financial matters to the SEC immediately after the reverse merger is completed. This is so that, even with the privately held company not having to go through the extensive interviews with the SEC, they are still being held accountable for their business dealings.
There are some benefits to reverse mergers, like being able to have higher priced stock on the exchange. There are also, however, some pitfalls to reverse mergers. For instance, the company that is being acquired is going to have a history of some sort. This history could be good or it could be bad. Either way, you will have to take the bad with the good and work through it. There is also the threat of it coming with some shareholders who are angry about the merger. If this is the case, the acquiring company needs to do whatever it can to placate these shareholders to prevent them from selling out their stock as quickly as possible. That is really the only way that the merger can be a successful one for both companies involved.