Reverse Merger- Advantages and Disadvantages

by Melissa W. Content Writer

The process of reverse merger also known by the term of reverse IPO or reverse takeover is the method of converting private limited companies to public. Lots of companies transiting from the private to public tag in order to raise capital, or to grow their operations. This in turn is leading to take care of the techniques that are required to convert from private to public. 

The entire process of reverse merger does the same job but with an exception that it does not involve raising capital. Thus, companies that are willing to go public without raising capital can take the route of reverse merger.  The conventional method of going public is gone and new techniques are getting involved into it. Companies are hiring investment bank that can take care of the entire process.

Helping authorities come in the form of consultants and can help to reduce the burden involved in the process. Shell Company is used by financial institutions and investment banks in order to take care of the reverse IPO process. The investors of private company takes the major numbers of shares of the shell company and which is later combined to it.

The process of reverse merger has following advantages:

Saves management time: The idea of reverse merger has clicked due to numerous reasons. One of the major reason is time saving of management team.  This entire process saves time as well as energy of the management team who in return can devote their time for other operations. Time plays a very crucial role in each and every business, which the reverse merger process saves and diverts to the main operations.

Guaranteed conversion to public:  The general process of going public does not guarantee the success rate as it is dependent on external factors. If the external factors do not support the conversion, then the entire process is going to be failure. The idea of reverse takeover will surely provide the results without any risk. Thus it minimizes the entire risk that is involved in the process.

Independent from market conditions: Reverse merger idea is independent from market conditions and hence there is no risk involved in it. Negative market conditions can sometime halt the entire process of going public in the case of traditional public offering.

Disadvantages of reverse merger

1. In case of reverse merger, the managers of the private company must take care of the shell company investors. Managers must make due diligence prior to the conversion process to public. There is risk involved in the process as the investor in the shell company need to be clean and clear.

2. Disclosure between the private company and the investors of the shell company should be properly disclosed and it should be transparent to both the parties. Any sort of misunderstanding can create trouble in future that will hamper the reputation of the company.

3. The stock price of the shares will be hampered if the investors of the shell company sell their shares soon after becoming public. This should be avoided as it will create negative sentiments and it will also hamper the reputation of the company.

4. Capital cannot be raised in case of reverse merger.  The company will simply acquire the public title in short time without any access to capital requirement.

It has thus become the best requirement for the private companies to take proper suggestions from management partners who can be hired on a temporary basis. These management and advisory partners will perform the due diligence on the investors of the shell company and can thus reduce the risk of due diligence. There are lots of benefits of hiring the advisory team, which must be noted first and steps should be taken according to it.

Both reverse merger and traditional method of going IPO can prove to be better as per the market requirement. Traditional method of IPO helps to raise capital that can be utilized for business process. It is time taking, yet better process to take the business to the next level. Most of the companies are willing to go public in order to have more liquidity options.  Proper advisors can help to decide the best step as per the business requirement. 

To know more about our merger advisory, be a part of our company Trends Mergers & Acquisitions.

Trends Mergers & Acquisitions.

President & Spokes Person,

Mr. Clinton Greyling,

Phone: 954-802-9119

Cell: 646-734-1916

Fax: 800-594-9991



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About Melissa W. Innovator   Content Writer

30 connections, 0 recommendations, 90 honor points.
Joined APSense since, November 2nd, 2017, From Saint John, Virgin Islands, U.S..

Created on Mar 1st 2019 04:27. Viewed 393 times.


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