A reverse merger or reverse takeover is defined as the acquisition of a publicly-traded company by a privately held company so that the privately held company can shorten an otherwise lengthy and difficult process of going public. Usually, this requires a reorganization of the private company capitalization structure.

Benefits of a Reverse Merger

The biggest advantage of a reverse merger is the reduction in cost and decreased the time it takes for a privately held company to become publicly held. In addition, there is a significant benefit of reduced stock dilution versus an IPO. In the reverse merger process, going public and raising capital are treated as separate functions. First, a company will reverse merge, and then as a second phase, the company will raise capital. This two-step process enables much more flexibility by simplifying the steps necessary for eventual funding. With a reverse merger, market conditions have less influence on the situation. Conventional IPO’s rely on market conditions and therefore have risk, which is out of management’s control. As market conditions diminish, management may pull a public offering in order to avoid depressing the initial issue. By using a reverse merger, only those involved in the public and private companies make fundamental decisions. A conventional IPO usually will take at least one year to complete. A reverse merger can be done in as few as four weeks. Additionally, since this timeframe is so quick, management can focus on running the company versus spending time in the IPO process. This means that important things like sales, revenue, and profit remain top of mind for management versus the arduous process of an IPO. In any event, it is critical to make sure that if your firm is considering a reverse merger, special purpose acquisition company (SPAC), IPO, or other complex financings, you should consult with experts in the field as there are no do-it-yourself projects here.

Reverse merger financing options

A reverse merger opens a variety of opportunities for additional financing:

  • Liquidity  – since a reverse merger brings near-term liquidity, initial investors are more likely to fund your company since they will have the ability to trade their stocks in the near-term
  • With a reverse merger, the company may issue additional stock by creating a secondary offering
  • Reverse mergers can use warrant structures where stockholders can purchase additional shares at predetermined prices. This creates more capital for your company
  • Once your company is public you may receive a higher company valuation due to a higher share price
  • You can use liquidity to acquire other companies through stock transactions
  • Also, once your company is publicly held, you can use stock options and incentive plans to attract and retain employees. This reduces the amount of cash you need to use in order to gain the highest level of talent