David Bukzin, Tax & Business Partner, Quoted in CFO.com Article - Turning the IPO on Its Head By Vincent Ryan - CFO Magazine
Any transaction with the words reverse and shell in its description can give CFOs the willies. But through the first 10 months of 2010, close to 200 companies had entered the equity markets via a technique known as the "reverse merger."
A reverse merger is the bargain-basement way to go public: a private company sells itself to a publicly traded "shell" company and then takes control of the shell. The transaction is usually done in conjunction with an infusion of money from private investors. The private company's owners end up holding as much as 95% of the shell company.
Reverse mergers don't supplant traditional initial public offerings. They typically raise only $3 million to $5 million. But the private company gets a public listing without paying hefty underwriting fees.
Many of these transactions get done through the over-the-counter securities market, so the newly public company has time to "season itself" before the stricter corporate-governance regulations of large exchanges, says David Bukzin, a founding partner of accounting firm Marcum LLP.
Reverse mergers could be an excellent strategy for companies "that are in industries Wall Street typically loves or that want common stock for acquisitions," Bukzin says. Financial sponsors also use them to increase the liquidity of their investments.
A key to such transactions is to raise enough capital to get to the next phase of the company's growth plan, says Bukzin. If the market sees the potential, the price and liquidity of the stock improve and a larger share offering and an uplisting to Nasdaq or the NYSE become possible.
Still, taking over a failed company (which is what many shell companies are) is filled with potential minefields. The shell company may come with pending litigation, for instance, or a damaged balance sheet. That could take months to clean up, adding expenses the reverse merger was supposed to avoid.