A reverse takeover or reverse merger (reverse IPO) is the acquisition of a public company by a private [1] company so that the

private company can bypass the lengthy and complex process of going public. The transaction typically requires reorganization of capitalization of the acquiring company.
Contents
[hide]

1 Process 2 Benefits 3 Drawbacks 4 Future financing 5 Examples 6 See also 7 References 8 External links

[edit]Process In a reverse takeover, shareholders of the private company purchase control of the public shell company and then merge it with the private company. The publicly traded corporation is called a "shell" since all that exists of the original company is its organizational structure. The private company shareholders receive a substantial majority of the shares of the public company and control of its board of directors. The transaction can be accomplished within weeks. If the shell is an SEC-registered company, the private company does not go through an expensive and time-consuming review with state and federal regulators because this process was completed beforehand with the public company. However, a comprehensive disclosure document containing audited financial statements and significant legal disclosures is required by the Securities and Exchange Commission for reporting issuers. The disclosure is filed on Form 8-K and is filed immediately upon completion of the reverse merger transaction. The transaction involves the private and shell company exchanging information on each other, negotiating the merger terms, and signing a share exchange agreement. At the closing, the shell company issues a substantial majority of its shares and board control to the shareholders of the private company. The private company's shareholders pay for the shell company by contributing their shares in the private company to the shell company that they now control. This share exchange and change of control completes the reverse takeover, transforming the formerly privately held company into a publicly held company. [edit]Benefits The advantages of public trading status include the possibility of commanding a higher price for a later offering of the company's securities. Going public through a reverse takeover allows a privately held company to become publicly held at a lesser cost, and with less stock dilution than through an initial public offering (IPO). While the process of going public and raising capital is combined in an IPO, in a

reverse takeover, these two functions are separate. A company can go public without raising additional capital. Separating these two functions greatly simplifies the process. In addition, a reverse takeover is less susceptible to market conditions. Conventional IPOs are risky for companies to undertake because the deal relies on market conditions, over which senior management has little control. If the market is off, the underwriter may pull the offering. The market also does not need to plunge wholesale. If a company in registration participates in an industry that's making unfavorable headlines, investors may shy away from the deal. In a reverse takeover, since the deal rests solely between those controlling the public and private companies, market conditions have little bearing on the situation. The process for a conventional IPO can last for a year or more. When a company transitions from an entrepreneurial venture to a public company fit for outside ownership, how time is spent by strategic managers can be beneficial or detrimental. Time spent in meetings and drafting sessions related to an IPO can have a disastrous effect on the growth upon which the offering is predicated, and may even nullify it. In addition, during the many months it takes to put an IPO together, market conditions can deteriorate, making the completion of an IPO unfavorable. By contrast, a reverse takeover can be completed in as little as thirty days. [edit]Drawbacks Reverse takeovers always come with some history and some shareholders. Sometimes this history can be bad and manifest itself in the form of currently sloppy records, pending lawsuits and other unforeseen liabilities. Additionally, these shells may sometimes come with angry or deceitful shareholders who are anxious to "dump" their stock at the first chance they get. One way the acquiring or surviving company can safeguard against the "dump" after the takeover is consummated is by requiring a lockup on the shares owned by the group from which they are purchasing the public shell. Other shareholders that have held stock as investors in the company being acquired pose no threat in a dump scenario because the number of shares they hold is not significant. On June 9, 2011, the United States Securities and Exchange Commission issued an investor bulletin cautioning investors about investing in reverse mergers, stating that they may be prone to fraud and other [1] [2] abuses. Reverse mergers may have other drawbacks. Private-company CEOs may be naive and inexperienced in the world of publicly traded companies unless they have past experience as an officer or director of a public company. In addition, reverse merger transactions only introduce liquidity to a previously private stock if there is bona fide public interest in the company. A comprehensive investor relations and investor [citation needed] marketing program may be an indirect cost of a reverse merger. [edit]Future

financing

The greater number of financing options available to publicly held companies is a primary reason to undergo a reverse takeover. These financing options include: The issuance of additional stock in a secondary offering

An exercise of warrants, where stockholders have the right to purchase additional shares in a company at predetermined prices. When many shareholders with warrants exercise their option to purchase additional shares, the company receives an infusion of capital. Other investors are more likely to invest in a company via a private offering of stock when a mechanism to sell their stock is in place should the company be successful.

In addition, the now-publicly held company obtains the benefits of public trading of its securities: Increased liquidity of company stock Possible higher company valuation Greater access to capital markets Ability to acquire other companies through stock transactions Ability to use stock incentive plans to attract and retain employees

[edit]Examples In all of these cases - except for US Airways and America West Airlines - shareholders of the acquiree controlled the resulting entity. With US Airways and America West Airlines, US Airways creditors (not shareholders) were left with control. The corporate shell of REO Motor Car company, in what amounted to a reverse "hostile" takeover, was forced by dissident shareholders to acquire a small publicly traded company, Nuclear Consultants. Eventually this company became the modern-day Nucor. ValuJet Airlines was acquired by AirWays Corp. to form AirTran Holdings, with the goal of shedding the tarnished reputation of the former. Arospatiale was acquired by Matra to form Arospatiale-Matra, with the goal of taking the former, a state-owned company, public. The game company Atari was acquired by JT Storage, as marriage of convenience.
[3]

US Airways was acquired by America West Airlines, with the goal of removing the former from Chapter 11 bankruptcy. The New York Stock Exchange was acquired by Archipelago Holdings to form NYSE Group, with the goal of taking the former, a mutual company, public. ABC Radio was acquired by Citadel Broadcasting Corporation, with the goal of spinning the former off from its parent, Disney. Frederick's of Hollywood parent FOH Holdings was acquired by apparel maker Movie Star in order to [4] take the larger lingerie maker public. Eddie Stobart in a reverse takeover with Westbury Property Fund allowing transport by ship, road, rail or boat to and within the UK, using only one company. Clearwire acquired Sprint's Xohm division, taking the former company's name and with Sprint holding a controlling stake, leaving the resulting company publicly traded.

[edit]See

also

Capital formation Initial public offering Private company

Public company Private Investment in Public Equity Limited company

[edit]References
a b

1. 2.

"Investor Bulletin: Reverse Mergers". U.S. SEC Office of Investor Education and Advocacy. June 2011.

^ Gallu, Joshua (June 9, 2011). "Reverse-Merger' Stocks May Be Prone to Fraud, Abuse, SEC Says in Warning". Bloomberg.

3.

^ Bloomberg Business NEws (February 14), "Atari Agrees To Merge With Disk-Drive Maker", New York Times: 1

4.

^ "Frederick's of Hollywood goes public with merger." Reuters. December 19, 2006.

[edit]External

links

William K. Sjostrom, Jr., The Truth About Reverse Mergers, Entrepreneurial Business Law Journal

The Advantages and Disadvantages of Going Public "Going public" is an expensive process and a public company faces many new responsibilities it did not have as a privately held business. While there are benefits to going public, the owners of a business should seriously consider all the options and potential new responsibilities and obligations in order to make an informed decision that is in the best interest of their business. A securities attorney can help you analyze the advantages and disadvantages of an initial public offering (IPO). What is "Going Public," and is it Right for Your Company? When a company registers securities so that it can offer and sell them, the company's status shifts from privately held to public. Most companies that opt to go public do so to raise money; however, a private company with successful operations has other alternatives for raising money. For example, the company could obtain private financing from a venture capital group through a Regulation D offering to accredited investors. Another alternative is for the business to be financed through a joint venture with an established company. It is important for a business to consider its growth potential and the advantages and disadvantages of going public before deciding how to proceed. Advantages of Public Offerings

Going public will result in increased capital for the issuer. A public offering places a value on your company's stock and insiders who retain stock may be able to sell their shares or use them as collateral. Going public also creates a type of currency in the form of its stock that the business can use to make acquisitions. In addition, the company will likely have access to capital markets for future financing needs. Generally, a company's debt-to-equity ratio improves after an initial public offering, which means that the company may be able to obtain more favorable loan terms from lenders. By offering securities publicly, the company and its management may be able to retain a certain degree of control. If a privately held company decided to sell common stock to venture capitalists to raise money rather than doing an initial public offering, the purchasers would generally require some decision-making authority. For example, the venture capitalist may require that a person of its choosing be put on the board of directors. With a public offering, these sorts of obligations are avoided. For some individuals, the prestige associated with public companies or being a director or officer of a public company has a certain allure. In addition, going public will generally result in the ability to better promote the company. Publicly traded businesses are usually better known than non-publicly traded businesses. The company can gain publicity and an image of stability by trading publicly. Along with prestige and the ability to better promote the company, going public may allow the company to attract better personnel, including high-level executives and officers. Public companies are able to offer stock options, which have the potential to substantially increase in value. Disadvantages There are a number of reasons why a company may opt not to go public, especially if it has another way to raise capital. Going public is an expensive process (costs can range from $250,000 to $1 million), and if the offering does not go through, the company will lose that money. Typical expenses associated with a public offering include legal and accounting fees, filing fees, travel costs, printing costs and underwriter's expense allowance. Going public can also be an extremely difficult process, especially if the business and its management are not familiar with the registration process. The company will need to put all its business affairs in order and the day-to-day business operations will likely be disrupted. Another disadvantage of going public is that public companies operate under close scrutiny. The prospectus reveals substantial information about the company including transactions with management, executive compensation and prior violations of securities laws. This may be information the company would rather not reveal. In addition, the decision-making process must become more formal and less flexible when there are shareholders. This may be hardest for companies that previously were run by a small number of individuals who made decisions as they wished. Public companies must comply with reporting requirements under the Exchange Act of 1934 as soon as the registration statement becomes effective. Complying with these reporting requirements can be expensive.

There is also an increased risk of exposure to civil liability for public companies, executives and directors for false or misleading statements in the registration statement. In addition, officers may face liability for misrepresentations in reports filed with the SEC, for disclosing false information about the company or for insider trading. There is a new pressure on public companies to increase earnings. Even successful businesses will face this pressure as shareholders become extremely focused on the company's current earnings. Because shareholders are often only investing for the short term, they want to see quick, steep rises in the stock's price so they can sell their shares for a profit. Thus, there is tremendous pressure to increase current earnings. Public companies are also at risk of takeover attempts. It is generally advisable for the company to implement certain anti-takeover measures such as a staggered board of directors. Conclusion Any business that is considering going public must know the advantages and disadvantages of such a decision. Those listed above are only some of the relevant considerations. An attorney with experience in securities law can assist you with analyzing these considerations and making a decision that suits your company. Copyright 2012 FindLaw, a Thomson Reuters business DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.