Reverse Mergers

Reverse Merger with a Public Shell

A "reverse merger" is a method by which a private company goes public. In a reverse merger, a private company merges with a publicly traded company with no assets or liabilities. (The public company is also called a "shell" corporation). The publicly traded corporation is called a "shell" since all that exists of the original company is its corporate shell structure. By merging into such an entity, a private company becomes public.

The private company merges into a public company and obtains the majority of its stock (usually 90%). The private company normally will change the name of the public corporation (often to its own name) and will appoint and elect its management and Board of Directors. The new public corporation would ideally have a base of shareholders sufficient to meet the 300 shareholder requirement for admission to quotation on the NASDAQ Small Cap Market.

• The advantages of public trading status, which are outlined in greater detail below, include the possibility of commanding a higher price for a later offering of the company's securities. Going public through a reverse merger allows a private company to go public, typically at a lesser cost and with less stock dilution than through an initial public offering (IPO).
  
  
• In an IPO, the process of going public and raising capital is combined. In a reverse merger, these two functions are unbundled - a company can go public without raising additional capital. Through this unbundling operation, the process of going public is simplified greatly.

Reverse Merger vs. IPO
Initial Public Offering

The other and more common method of going public is through an Initial Public Offering (IPO). The process involves attracting and retaining an underwriter, along with securities lawyers and auditors. A registration statement is prepared and filed with federal and state regulators after which the company goes through an extensive review process that may take as long as 6 to 8 months to complete. Following the review process, the company goes on a road show and is presented to brokers and investors. The underwriter seeks subscriptions to purchase the company’s shares. If the subscriptions are sufficient, the underwriting becomes “firm”. The IPO is then closed, the company is public, and the company receives its portion of the offering proceeds.

The typical costs and time associated with doing an IPO are substantial, and typically include:

• Legal fees for corporate and underwriter’s counsel, including "blue sky" state registration: $100,000 - $200,000
  
• Audit work prepared by an SEC CPA, with historical years, performed to the SEC's SX requirements: $75,000 - $125,000
  
• Transfer Agent and Filing Fees: $20,000 - $40,000
  
• Printing and Road Show costs: $50,000 - $100,000
  Underwriting sales commissions for a small financing are 7 - 10% of proceeds
  
• Underwriting expenses: Typically 4% of the offering proceeds, plus free stock options/warrants.
  
• In addition to third party costs, the company’s CEO and CFO will each spend 700 - 1,000 hours on the IPO process.

An IPO typically takes approximately 12-18 months, start to finish with no guarantee of success.

If an IPO is successfully completed the private company becomes publicly traded and with a business plan funded.

The inherent risk of the IPO process is the fact that the IPO Market, particularly for smaller firms, is very volatile, going through extended periods when capital is simply not available for emerging firms, leaving a prospective IPO candidate with a big investment of capital in legal, accounting, and underwriting costs, with only an aborted IPO to show for it.

Summary Comparison with IPO

Certain private companies may find a reverse merger with a public shell more attractive than an initial public offering of their securities. Reasons for this may include the following:

• inability to obtain an underwriter
  
• larger costs, fees and expenses with an IPO
  
• possible delays in the public offering process with an IPO
  greater dilution of their outstanding securities with an IPO
  

Certain private companies may find a reverse merger with a public shell less attractive than an initial public offering of their securities. Reasons for this may include the following:

• no investment capital raised through a business combination or reverse merger
  
• no underwriter support of after-market trading

A reverse merger is not a source for immediate capital. While a company can “go public” very quickly and substantially increase shareholder value, the transaction does not raise capital.

To raise capital, the reverse merger needs to be followed by a public offering. If a merger is with a company that is both fully-reporting with the SEC and publicly trading, a public offering can be accomplished in 90 days from the time audits on the private company are available. If the shell company is not reporting or not publicly trading, the time to funding is substantially longer.

Famous Reverse Mergers

Did you know Turner Broadcasting, Blockbuster Video and Waste Management all became public through reverse mergers?

Ted Turner - Media Mogul

In 1970 with little investment cash, Ted Turner acquired through reverse merger, the once publicly traded Rice Broadcasting (WJRJ-TV) in Atlanta. He subsequently created TBS, the first national UHF super station, CNN, and The Cartoon Network. Later he purchased the MGM/UA film library and launched Turner Film Classics. Turner then struck further gold buying a national baseball franchise, which he moved to Atlanta. After an unsuccessful attempt to purchase CBS Network, Turner Broadcasting was itself acquired by the Time Warner Corporation. Today, Ted Turner's personal worth is in the billions.

Anthony Robbins - A $276 Million Stake

To Anthony Robbins, success is a matter of "Awakening the Giant Within.". The broad-jawed spokesman for self-esteem pulls in more than $80 million from sales of books, tapes, and seminars annually. Trading on little more than name and charisma, the 39-year-old became chairman and majority owner of a publicly traded company whose value at one point exceeded $480 million. "We are developing the eBay of personal and professional empowerment," said Robbins.

The company has existed only as an obscure provider of medical services which, through what's known as a reverse merger, gave Robbins a publicly traded stock without the time-consuming and disclosure-intensive process of an initial public offering.

GHS's medical business is being spun out to shareholders in a separate company. That leaves a public shell company from which Robbins will launch a yet-to-be-named self-improvement web site that hopes to include many of the brand names in the industry.

The deal has proved to be very lucrative for both banker and motivator. When Wall Street got word that Robbins was coming aboard GHS stock soared from 75 cents to $12. That gave some of its executives a $48 million paper gain on their original $250,000 investment in GHS 15 years ago.

Robbins, who put in no cash, wound up with a stake worth $276 million. What justifies that kind of gain? Not much. The self-help guru gave the new venture exclusive online rights to his name, which it will use to develop Internet self-help seminars, chat rooms, and E-commerce sites. And Robbins' current Web site, anthonyrobbins.com, will be folded into GHS, while his $80 million-plus business selling books and seminars remained private. The increased value of GHS stock enabled the group to purchase additional assets, including the rights to San Francisco-based "The Learning Access" which had more than 700 not-for-credit courses

Muriel Siebert - Wall Street Mogul

In 1967 college dropout Muriel Siebert made history by becoming the first woman to purchase a seat on the New York Stock Exchange (NYSE). She founded her own brokerage, Muriel Siebert & Co. in 1970.

By February of 1996, Wall Street's top woman executive took her brokerage firm public utilizing a reverse merger with J. Michaels Inc., a defunct, but publicly traded Brooklyn furniture company. By 1999 her firm, Muriel Siebert & Co., Inc. (SIEB) was rated the number one discount brokerage by Money Magazine (June, 1999). Her company's stock reached a 52-week high of over $70 per share.