What Is a Reverse Merger?

Reverse mergers, also known as reverse takeovers, are an alternative to more traditional forms of raising capital. A reverse merger is when a private company goes public by purchasing control of another public company. The private company's shareholders usually receive large ownership stakes in the public company and control of its board of directors.

Once this is complete, the privaꦰte a🐼nd public companies merge into one publicly traded company.

Facto🌱rs to Consider When Investing in Reverse Mergers

There are many benefits and disadvantages to investing in reverse mergers. To be successfu𒉰l, you must ask yourself if you can handle investing in a company that could take a long time to turn around.

You should also learn how the merger works and in what ways the reverse merger would benefit shareholders for the private and public company. While this can be a time-consum𓃲ing process, the rewards can be tremendous—especially if you find the diamond in the rough that becomes a large, successful publicly traded company.

Signals of Reverse Mergers

To be successful in identifying reverse mergers, s꧂tay alert. By paying attention to the financial me💮dia, it is possible to find opportunities in potential reverse mergers.

It is also wise to participate in opportunities that are trying to raise at least $500,000 and are expected to do sales of at least $20 million during the first year as✱ a🔯 public company.

Some potential signals to follow if you're looking to find your own reverse-merger candidates:

• Look for appropriate 澳洲幸运5开奖号码历史查询:capitalization. Generally, reverse mergers succeed for companies that don't need the capital right away. Normally, a successful publicly traded company will have at least sales of $20 million and $2 million in cash.
• The best companies for a possible reverse merger are those that are looking to raise $500,000 or more as 澳洲幸运5开奖号码历史查询:working capital. Some good examples of successful reverse mergers include: Armand Hammer successfully merging into Occidental Petroleum, Ted Turner's completion of a reverse merger with Rice Broadcasting to form Turner Broadcasting, and Muriel Seibert taking her brokerage firm public by merging with J. Michaels, a furniture company in Brooklyn.

Advantages of Reverse Mergers

There are many a🐻dvantages to performing reverse merg💯ers, including:

• The ability for a private company to become public for a lower cost and in less time than with an initial public offering. When a company plans to go public through an IPO, the process can take a year or more to complete. This can cost the company money and time. With a reverse merger, a private company can go public in as little as 30 days.
• Public companies have higher 澳洲幸运5开奖号码历史查询:valuations compared with private companies. Some of the reasons for this include greater 澳洲幸运5开奖号码历史查询:liquidity, increased transparency and publicity, and most likely faster growth rates compared to private companies.
• Reverse mergers are less likely to be canceled or put on hold because of the adverse effects of current market conditions. This means that if the equity markets are performing poorly or there is unfavorable publicity surrounding the IPO, 澳洲幸运5开奖号码历史查询:underwriters can pull the offering off the table.
• The public company can offer a 澳洲幸运5开奖号码历史查询:tax shelter to the private company. In many cases, the public company has taken a series of losses. A percentage of the losses can be carried forward and applied to future income. By merging the private and public company, it is possible to protect a percentage of the merged company's profits from future taxes.

Disadvantages of Reverse Mergers

Reverse mergers also have some 💃inherent disadvantages, such as:

• Some reverse mergers come with unseen circumstances, such as 澳洲幸运5开奖号码历史查询:liability lawsuits and sloppy record keeping.
• 澳洲幸运5开奖号码历史查询:Reverse stock splits are very common with reverse mergers and can significantly reduce the number of shares owned by stockholders.
• Many 澳洲幸运5开奖号码历史查询:chief executive officers of private companies have little or no experience running a publicly traded company.
• Many reverse mergers do little of what is promised and the company ends up trading on the 澳洲幸运5开奖号码历史查询:OTC bulletin board and providing shareholders with little to no additional value or liquidity.

The Bottom Line

Reverse mergers are an alternative route to going public that avoids the lengthy, expensive process of launching an IPO. Because the typical targets of a reverse merger tend to have low valuations, they can be profitable to savvy investors who can spot the signs of a potential acquisition.