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 in popularity of reverse mergers, the vast majority of public companies were created through the initial public offering process.

A reverse merger is also sometimes called a reverse takeover or a reverse IPO. 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. (See also: What Is a Reverse Merger With a Public Shell?)

It can take a company from just a few weeks to up to four months to complete a reverse merger. By comparison, the IPO process can take anywhere from six to 12 months. A conventional IPO is a more complicated process and tends to be considerably more expensive, as many private companies hire an investment bank to underwrite and market shares of the soon-to-be public company.

Flexibility and Control

In most cases, a reverse merger is solely a mechanism to convert a private company into a public entity without the need to appoint an investment bank or to raise capital. Instead, the company aims to realize any inherent benefits of becoming a publicly listed company, including enjoying greater liquidity. There may also be an opportunity to take advantage of greater flexibility with alternative financing options when operating as a public company.

The process is also usually less dependent on market conditions. If a company has spent months preparing a proposed offering through traditional IPO channels and the market conditions become unfavorable, it can prevent the process from being completed. The result is a lot of wasted time and effort. By comparison, a reverse merger minimizes the risk, as the company is not as reliant on raising capital.  

The expediency and lower cost of the reverse merger process can be 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 could be seen as a huge benefit to owners looking to raise capital without diluting their ownership. For managers or investors of private companies, the option of a reverse merger could be seen as an attractive strategic option. 

This question was answered by Ken Clark.

RELATED FAQS
  1. What is a back door listing?

    A back door listing occurs when a privately held company that may not qualify for the public offering process purchases a ... Read Answer >>
  2. What is the difference between a merger and a takeover?

    In a general sense, mergers and takeovers (or acquisitions) are very similar corporate actions - they combine two previously ... Read Answer >>
  3. How does a merger affect the customer?

    Learn how a merger may affect customers of the industry. The effects of mergers may be positive or negative, but there's ... Read Answer >>
  4. What are some of the key reasons a large corporation might prefer to remain a private ...

    Understand the reasons why a large corporation would want to remain as private instead of going public through an initial ... Read Answer >>
Related Articles
  1. Investing

    IPOs Are Becoming Less Attractive for Companies

    U.S. companies are choosing to be acquired instead of going public
  2. 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.
  3. 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.
  4. Financial Advisor

    Reverse Mortgages: Has Their Time Arrived?

    The perception of reverse mortgages is changing. They can be an integral part of a carefully crafted retirement plan.
  5. Personal Finance

    Is a Reverse Mortgage Right for You?

    There are pros and cons to consider before taking out a reverse mortgage on your home.
  6. Personal Finance

    5 Reverse Mortgage Scams

    Reverse mortgages can be a valuable financial tool, but the mortgage market is fraught with scams and schemes.
  7. Small Business

    Why Companies Stay Private

    Many private companies prefer to stay private and find alternate sources of capital. Find out what firms have to gain by eschewing the windfall from a flashy IPO.
  8. Retirement

    Reverse Mortgages Really Can Help

    Discover another way to fund your retirement without having to make payments on a loan.
RELATED TERMS
  1. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies ...
  2. SEC Form 425

    The prospectus form that companies must file to disclose information ...
  3. Reverse Mortgage Initial Principal Limit

    Reverse mortgage initial principal limit is the amount of money ...
  4. Privatization

    1. The transfer of ownership of property or businesses from a ...
  5. Conglomerate Merger

    A merger between firms that are involved in totally unrelated ...
  6. Mean Reversion

    A theory suggesting that prices and returns eventually move back ...
Hot Definitions
  1. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations.
  2. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  3. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  4. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  5. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
Trading Center