When a privately-held company in California gains a majority stake in a publicly-traded company, this is known as a reverse merger. This is typically undertaken so that they can bypass the traditional initial public offering process, which tends to be expensive and takes a lot of time.
It’s important to note that a reverse merger should make shareholder value for every stakeholder and it also should offer access to capital markets when the merger is done well.
What are some common elements of reverse mergers?
A public company that is part of a reverse merger usually is a shell company. This means that it is an empty company that exists solely on paper and it doesn’t conduct active business operations. However, there are those times when the public company does operate on an ongoing daily basis.
The private company will acquire the target company upon exchanging a large majority of shares with that company, known as a stock swap. This causes the private company to become a subsidiary that belongs to the publicly-traded company. After the merger is complete, the private company gains control of the public company.
What does a reverse merger accomplish?
The reverse merger is a corporate tactic private companies use to get on the public list on an exchange without needing to undergo the initial public offering process. It’s considered a more convenient and cost-effective way to access capital markets, mainly debt investors and public equity.
This process can be completed in only a few weeks, because the shell company is registered with the U.S. Securities and Exchange Commission. All parties involved need to be diligent about this proposed transaction. Still, as long as everyone is transparent about what is happening, it’s truly an efficient and beneficial process that can lead to success.