What is a Reverse Merger?

So, what is a reverse merger? If you have heard about reverse takeover or reverse IPO, then you must distinguish that these procedures are all the same. It is an actual fact a private company’s acquisition or acquirement of a public company that circumvent the usual complex and extensive procedure of going public. This procedure generally calls for reorganization of the acquiring company’s capitalization.

The process of reverse takeover or reverse merger strategy falls under a simple ruling; this takes place when a private company’s shareholders buy the management or control of the public company and eventually merge and incorporate it with the private company. The term “shell” stands for the publicly traded company or corporation for the reason that the only thing that is left out with the original company is the organizational structure of its employees. To put it simpler, the shareholders of the private-owned company acquire the majority of the public company’s shares and even the management of the board of directors.

After researching about what is a reverse merger, you will understand that this transaction can be finished and completed within weeks. Moreover, if the shell that is going to be purchased is registered with Securities and Exchange Commission, the private company will not undergo the lengthy and costly reviews of the federal and state regulators, since this procedure was already accomplished by the public company prior to the acquisition. The merging process entails exchange of pertinent information and data of the shell company and the private corporation, merging terms negotiation and signing a contract called the share exchange agreement.

When the transaction is almost finished, the public or shell company will issue the considerable majority of its shares in the corporation together with the board control and management to the private company’s shareholders. The remuneration happens through the contribution of the private company’s shares to the public company, which is now under their control. The change of control and management including the exchanges of shares accomplish the reverse triangular merger or reverse takeover process, whereas the former private-owned company transforms into a public corporation or company.

Reverse Merger Benefits

There are many benefits that a private company can obtain after the completion of the reverse IPO procedure (see What are IPO’s for more information). These advantages include; the right of imposing a higher cost on later offering or transactions of the company’s securities and the former privately held company’s ability to go public at a lesser price that may include less dilution of stocks than by transacting through IPO or initial public offering. In traditional IPO, the method of raising funds and going publicly held is combined while in reverse IPO, the two procedures are separately carried out, wherein a privately held company can go public without the requirement of raising additional capital.

What’s more appealing about the reverse merger is that it is less vulnerable to the varying market conditions. Conventional IPOs on the other hand, are susceptible to market changes since they solely rely on market conditions. In the reverse triangular merger, market conditions have almost no bearing on the transactions simply because the deal depends ultimately between the private and public companies’ management.

When a private company becomes publicly held, it gets hold of the benefits of its securities’ public trading, which include; increased company valuation brought about by higher share cost, higher liquidity of the company’s stock, easier access to capital markets, opportunity to utilize stock incentive plans to draw and sustain employees and ability to obtain other companies by stocks transactions. Learn how a company goes public and the costs of going public.

When studying about what is a reverse merger definition, you should also research about its drawbacks, so you’ll be prepared when one takes place. For the most part, reverse mergers have different histories, which are not all good. These are most of the time evidenced by pending lawsuits, sloppy data and records and even unforeseen legal responsibilities. Sometimes, these public companies are even held by dishonest shareholders, who are very apprehensive to pass their mess to other people. One of the chief setbacks of reverse merger is that this transaction only presents liquidity to a former private stock when there is legitimate public interest in the corporation.

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