Examining the basics of reverse mergers

On Behalf of Dunlap Fiore, LLC |

As a previous post suggested, going through a business merger or acquisition can be a complex business transaction. Although it is multifaceted, mergers & acquisitions or M& A, can be a very beneficial and lucrative process for a company in Louisiana and elsewhere. Nonetheless, this process is usually carried out by a public company or among several public companies.

The public status of the company aids the process. However, this is not a requirement for an M& A to occur. In fact, there are similar processes available for private companies, so they can enjoy the same benefits a public company does during a traditional M& A. This process is known as a reverse merger.

What is a reverse merger and what benefits does it offer a company? A reverse merger allows for a private company to become a public company without having to raise capital, thus, simplifying the process. In a reverse merger, investors of the private company are able to acquire the majority of the shares of the public shell company that is then merged with the private company.

In order to complete these deals, investment banks and financial institutions use these public shell companies that are merged with the private entity. These simple shell companies are registered with the Securities and Exchange Commission (SEC) prior to the deal, which makes the registration process fairly straightforward and cost effective for the private company. To complete the deal, the private company will trade shares with the public shell company in exchange for the shell’s stock, helping to transform the acquiring private company into a public company.

A reverse merger is a beneficial process because it allows a private company to enjoy the benefits of being a publicly traded company. The private company will enjoy greater liquidity once it transforms into a public company. While there are many benefits to a reverse merger deal, if a company does not do their homework or does not take the appropriate steps throughout the process, this could result in a failed merger or possible liabilities.

Because a reverse merger is prospectively a profitable process to undergo, it is likely a beneficial transaction for a private company. Like all merger deals, there are risks involved. Therefore, a reverse merger should not be entered into lightly or without enough information. Companies considering this or other M& A processes should take the time to fully understand the process and what measures will benefit their business the most.