Advantages of Going Public Via Reverse Merger with a Public Shell
1. Reverse Merger with a Public Shell: a. A "reverse merger" is a method by which a private company goes public. In a reverse merger, a private company merges with a public company that typically has no assets or liabilities. The publicly traded corporation is called a "public shell" since all that exists is its corporate structure. By merging into such an entity, a private company becomes public. b. The Private company merges into a public company and obtains the majority of its stock (usually 90% or more). 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 private company must have or be able to obtain audited financial statements for the past 2 years. c. 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 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). d. 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.
2. The Private Company which has gone public obtains the benefits of public trading of its securities, namely: a. Increased liquidity of the ownership shares of the company. b. Higher share price and thus higher company valuation. c. Greater access to the capital markets through the possibility of future stock offerings. d. The ability of the company to make acquisitions of other companies using the company's stock. e. The ability to use stock incentive plans to attract and retain key employees.
3. Going public can be a part of a retirement strategy for business owners. a. Simply by merging into a public company, a private corporation can increase its value. b. Considerable tax advantages are available through the reverse mergers, and proper exit strategies. c. The newly created value can become part of an estate providing value not only for the founders, but for generations to come.
4. The Benefits of going public through a reverse merger, as apposed to an IPO: a. The costs are significantly less than the costs required for an IPO. b. The time is considerably less than that for an IPO. c. Additional risk is involved in an IPO in that the IPO may be withdrawn due to an unstable market condition, even after most of the up-frontcosts have been expended. d. IPO's generally require greater time and attention from top management. e. An IPO requires a relatively long and stable earnings history. f. There is less dilution of ownership control. g. The company does not require an underwriter. h. Owners will receive a higher valuation for the company.
5. Once a company is taken public through a reverse merger the financial markets hold the following future prospects in the capital markets for the newly public corporation: a. The market value of a public company is substantially higher than a private company with the same structure in the same industry. b. Capital is easier to raise for public companies because the stock has market value and can be traded. c. The public corporation may be used for special purposes, such as qualifying as a “category two company” for overseas offerings pursuant to Regulation S. d. The trading price of the public company's securities serves as a benchmark for the offer price of a subsequent public or private securities offering. e. Acquisitions can be made with the stock since publicly traded stock is viewed as currency for mergers and acquisitions. f. Form S-8 stock can be issued for consultants.
6. It is essential that public companies, especially newly public companies, actively maintain and manage a financial communications program. a. A newly formed public company must implement a plan and execute a strategy for building and maintaining an active interest in the company within the financial community. b. Investor relations and an ongoing presence on Wall Street must be maintained to increase awareness of the company with investors and to maintain liquidity of its stock.
STRUCTURING THE SHELL TRANSACTION 1. Determine the market capitalization of the private company. Compare the sales and earnings of your company to those companies in the same industry that are not public (example: if your company is earning $5 million per year and the average public P/E ratio of public companies in your industry is 20, then your initial market capitalization should be $100,000,000.). 2. Divide that number by the initial share price you would like to have on your stock. This price should be at least $5.00 per share. (Example: $100,000,000/$5 = 20,000,000 shares.) 3. Multiply that number by the percentage of the shell shares that you have negotiated with the representatives or officers and directors of the shell (example 90 - 10% = 18,000,000 shares) 4. Subtract this number from the total number of shares outstanding as determined in step 2 above. (Example 20,000,000 - 18,000,000 = 2,000,000 shares) 5. The outstanding shares in the shell will then be reverse (or forward) split to equal the number obtained in step 4 immediately above.
Summary Billions of dollars of securities are bought and sold daily in the public securities markets of the world and through a reverse merger the company’s securities can be a part of this market. Blockbuster Video • Waste Management • Occidental Petroleum • Muriel Siebert • Acclaim Entertainment • Turner Broadcasting are just a few of the roaring successes of reverse mergers. After the reverse merger the private company would retain most of the public companies shares and would be trading under the name of the private company prior to the merger. The board members of the trading shell company would resign and the private company would appoint their own board of directors.
A major advantage of a private company doing a reverse merger with a public company is the time it takes to get to public markets. If a private company goes public by way of a reverse merger it can do so in weeks versus up to a year or more for an IPO. Making acquisitions with shares of a public company is often easier, less expensive and saves capital.
Reverse Merger Facts Nearly half of the companies trading on a small cap exchange went public by way of a reverse merger. Most private companies that go public by way of a reverse merger experience higher evaluations once public. Most private companies have an easier time raising capital after going public due to shareholder liquidity and reporting requirements. Ted Turner did a reverse merger with Rice Broadcasting Inc. which became Turner Broadcasting Inc. Blockbuster Video went public by way of a reverse merger.
Recapitalization and stock value appreciation would seem reasons enough to be publicly owned, but there are other advantages that a company can gain. A public company has a broader equity base, thus increasing it's opportunities for obtaining financing for future projects. Increasing the bottom line, net worth of the company, as well as its debt to equity ratio, enables it to borrow at lower interest rates from traditional institutions.
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Going Public Via Reverse Merger with a Public Shell
Access Global Capital utilizes a 90 day process to detail a plan to take a company public via reverse merger with a public shell. The plan establishes financial models with valuation estimates, identifies required resources and establishes timelines and cost estimates. At the conclusion of the 90 day process, the company will have the information and details required to make a Go / No Go Decision. The Twelve Key Components of the 90 Day Process
Build a consolidated, un-audited, proforma financial model. Research comparative public companies. Build estimated valuation models. Identify a proposed accounting firm. Create an accounting action plan with timelines and cost estimates. Identify potential market-makers. Identify a proposed public relations firm. Create a public relations action plan with timelines and cost estimates. Identify a proposed investor relations firm. Create an investor relations action plan with timelines and cost estimates. Identify a proposed law firm. Create a legal action plan with timelines and cost estimates. Identify available public shells. Build financial models and valuation summaries for the top three targeted shells. Develop a consolidated corporate structure. Define the structure and roles and responsibilities of the Board of Directors and Management Team. Identify regulatory reporting requirements and schedules. Build a detailed action plan including a timeline and cost estimates from launch through six months after the company is publicly traded.
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