Reverse Mergers

By July 11, 2016 Resources

A reverse merger, also referred to as a reverse takeover, is a business transaction that converts a private company into a public company without having to go through the traditional paperwork and initial public offering processes. A reverse merger starts by a privately held company establishing a public shell company. The shareholders of the private company then sell their shares in the private company to the public shell company for shares in the public company. By going public in this manner the shareholders of the private company are able to maintain their ownership and control of the company after it goes public. There are many reasons why private companies go public. The first reason is that it gives them more financing options to choose from. To raise money a public company can offer investors a secondary stock offer or they can exercise warrants. In addition to providing the company with additional funding opportunities going public also has many other business benefits. First it increases the liquidity of the company’s stock, secondly it allows the valuation of the company to increase based on the performance of the stock, next it allows the company to acquire other companies via stock transactions and finally it allows the company to attract new employees by offering stock incentives. There are several ways reverse merger funding can be accomplished. The first way is through an all shares deal. This funding process basically uses company shares to complete mergers and acquisitions. The second method of funding reverse mergers is to use cash. The final method is to use a combination of cash and company shares to finance the transactions needed for the merger or acquisition.