Reverse merging is a process by which a private firm can be converted into a public firm. This can save this private firm from the complicated procedure as well as costly compliance of gaining the position of a public firm. Instead, it can acquire any public firm for investments and changes itself to the public firm.
But, here is another aspect of this concept. As a small or weak firms gain the bigger firm, it becomes a reverse merger. Moreover, as the parent firm merges with the smaller or subsidiary firm, it became a high profile firm and known as the reverse merger. Reverse merging is a tactic which many private firms use for becoming public without undergoing the process of IPO.
During this process of merging, a private firm takes full control over the public range of a firm by a current hierarchical assembly. The first thing is that the shareholders of the private firm buy the sufficient shares from the public firm for catching the control as well as merging the two firms together. After that, the name of the public firm, corporate frame, and the stock sign are generally converted for corresponding with the private firm.
Advantages of reverse merging
Usually, the IPOs are quite expensive and need a lot of time; they may take more than one year for completion. Within this period, the overall market conditions may vary adversely while developing the risk propositions. Contrary to that, the reverse mergers are very cheap and most often, can be ended within few weeks. For instance, if the shell of public firms has already been registered with the securities and exchange of the US commission, the private firm doesn’t require repeating the procedure, and this saves a lot of paperwork and time.
This shows that the reverse merging is often a finer solution for the small firms which require a fast method of raising the capital. Moreover, the foreign private firms can use this process with the public firms of the US as the easy passage of entering the market of the US. By using the shell of a public firm as the tax shelter can also be a big advantage of the reverse merging. The shell firms are generally being in the condition due to series of the losses they face and the presently operating with the name only. Resultantly, the merged firm can utilize these losses for tax statements in future, securing few of its benefits from the taxation.
Disadvantages of reverse merging
Other than the advantages of reverse merging given above, the reverse mergers also face some hardships in the way of going public from private. There are many risks included in doing the reverse merging. The shell firms often have a lot of issues which cause the financial decline, like the pending lawsuits and worse record-keeping. The shareholders of the shell company may also take a strong stance opposite to the mergers, making the process difficult and longer.
Another thing related to the reverse mergers for the shareholders is the likelihood of the process for doing the stock split. For the process of reverse merging, the shareholders can also choose to decrease the amount of the shares and issuing the new shares later, while diluting the values of the genuine shares. Along with this, the pace of accomplishing the reverse merging can cause the detriment. Although, the public firms generally carry high value this can cause greater complications. The CEOs of the private firms which have no or less experience with the public trading may require some time for providing the IPO to make the lead in the market.