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. How long does it take for a merger to go through?

    Corporate mergers and acquisitions can vary considerably in the time they take to be completed. There are a number of individual ... Read Answer >>
  2. What is a back door listing?

    A back door listing, sometimes referred to as a reverse takeover, reverse merger, or reverse IPO, occurs when a privately-held ... Read Answer >>
  3. How does a merger affect the shareholders?

    Explore the effect of a merger and understand how the process affects shareholders of the newly merged firm in terms of stock ... Read Answer >>
  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 ... Read Answer >>
Related Articles
  1. Investing

    A Guide To Spotting A Reverse Merger

    This corporate action can be profitable for investors who know what to look for.
  2. Investing

    Reverse Mergers: The Pros And Cons

    Reverse mergers can provide excellent opportunities for companies and investors, but there are still some downsides and risks.
  3. Investing

    The Merger - What To Do When Companies Converge

    Learn how to invest in companies before, during and after they join together.
  4. Investing

    The Merger: What To Do When Companies Converge

    Mergers occur when it’s beneficial for two companies to combine business operations. The question is; if you’re invested in a company that’s involved in a merger, will it benefit you?
  5. Investing

    IPOs Are Becoming Less Attractive for Companies

    U.S. companies are choosing to be acquired instead of going public
  6. Investing

    Do Mergers Save Or Cost Consumers Money?

    A merger or acquisition can actually be beneficial to the customer - find out how, in this article.
  7. Investing

    What is a Public Company?

    A public company has sold stock to the public through an initial public offering (IPO) and that stock is currently traded on a public stock exchange.
  8. Small Business

    What Merger And Acquisition Firms Do

    The merger or acquisition process can be intimidating. This is why merger and acquisition firms step in to facilitate the process.
RELATED TERMS
  1. Reverse Takeover - RTO

    A type of merger used by private companies to become publicly ...
  2. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies ...
  3. Horizontal Merger

    A merger occurring between companies in the same industry. Horizontal ...
  4. Merger Mania

    A period of time with significant merger and acquisition activity ...
  5. Mergers and Acquisitions - M&A

    A merger is a combination of two companies to form a new company, ...
  6. Merger Of Equals

    The combination of two firms of about the same size to form a ...
Hot Definitions
  1. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  2. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
  3. Ex-Dividend

    A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be ...
  4. Debt Security

    Any debt instrument that can be bought or sold between two parties and has basic terms defined, such as notional amount (amount ...
  5. Taxable Income

    Taxable income is described as gross income or adjusted gross income minus any deductions, exemptions or other adjustments ...
  6. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly AIMR) that measures the competence and integrity of financial ...
Trading Center