Defination Or Explanation:

In a Reverse Merger, a privately held company buys a publicly traded, but usually dormant, company. By doing so, the private company becomes public.

Appropriate For:

Reverse Mergers are appropriate for companies that do not need capital quickly and that will experience enough growth to reach a size and scale at which they can succeed as a public entity.

Supply:

There are thousands of dormant public companies, sometimes called shells, that might be viable merger candidates. By becoming public, a company becomes a more attractive investment opportunity to a wider range of investors. The supply of equity capital is more abundant for public companies than for private ones.

Best Use:

Reverse Mergers can be used to finance anything from product development to working capital needs. However, they work best for companies that do not need capital quickly. Not that reverse mergers take long to consummate, but the intial transaction is usually just the halfway point. Once public, a company generally must still find capital. Also, this financing technique works better for companies that will experience substantial enough growth to develop into a "real" public company.

Cost:

Compared with a conventional initial public offering (IPO), fees and expenses are not that high for a reverse merger. Deals can be completed for $85,000 to $150,000, which might be 25 percent of the out-of-pocket costs that come with a full-blown IPO. In the process of making the deal, however, the acquiring company might give up 10 to 20 percent of its equity. This may be very expensive, depending on the outcome of the deal. After all, it means a company is surrendering ownership just for the privilege of being public. More equity will probably disappear when the company actually raises money.

Ease Of Acquisition

Very easy when compared to the inherant difficulties encountered by conventional initial public offering. Perhaps the most challenging aspect of a reverse merger is trying to create a real trading market for the company's shares once the deal is done.

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