Why would a company do a reverse merger instead of an IPO?

By Ken Clark AAA
A:

Reverse mergers are often the most expedient and cost-efficient way for private companies that hold shares that are not available to the public to begin trading on a public stock exchange. Prior to the rise of reverse mergers, the vast majority of public companies were created through the initial public offering (IPO) process.

In a reverse merger, an active private company takes control and merges with a dormant public company. These dormant public companies are called "shell corporations" because they rarely have assets or net worth aside from the fact that they previously had gone through an IPO or alternative filing process.

It can take a company from a matter of weeks to four months to complete a reverse merger. By contrast, the IPO process can take from six to 12 months and cost significantly more. The expediency and lower cost of the reverse merger process is beneficial to smaller companies in need of quick capital. Additionally, reverse mergers allow owners of private companies to retain greater ownership and control over the new company, which is a huge benefit to owners looking to raise capital without giving their companies away.

(For more on reverse mergers, read What Is a Reverse Merger With a Public Shell?)

This question was answered by Ken Clark.

RELATED FAQS

  1. What are some ways of financing an acquisition?

    Learn about how business acquisitions are financed, from using private equity funds to receiving huge acquisition loans from ...
  2. Why would a company want to do an acquisition of another company?

    Review some of the reasons why business acquisitions take place, and how the acquiring company is looking to benefit from ...
  3. What was the largest company Warren Buffett ever bought through Berkshire Hathaway?

    Explore Warren Buffet's rationale for the record setting Berkshire Hathaway acquisition of the Burlington Northern Santa ...
  4. What is the difference between a merger and an acquisition?

    Read about the legal and practical differences between a corporate merger and corporate acquisition, two terms often used ...
RELATED TERMS
  1. Asset Valuation Review (AVR)

    A process that establishes an estimate of the value of a failed ...
  2. Assisted Merger

    The merger of two or more financial institutions undertaken with ...
  3. Assuming Institution

    A healthy financial institution that purchases the assets of ...
  4. Acquisition

    A corporate action in which a company buys most, if not all, ...
  5. Roll-Up Merger

    A rollup (also known as a "roll up" or a "roll-up") ...
  6. Revlon Rule

    The legal requirement that a company’s board of directors make ...

You May Also Like

Related Articles
  1. Investing

    Facebook's Most Important Acquisitions

  2. Investing

    Top 10 Largest Global IPOs Of All Time

  3. Stock Analysis

    Breaking Down the Halliburton Baker ...

  4. Investing News

    5 IPOs That Broke The Markets In 2014

  5. Investing Basics

    Alibaba IPO: Why List In the U.S.?

Trading Center