A reverse merger is a method by which a private company can become a publicly traded company without the expense and time requirements involved in an initial public offering (IPO).

Mechanics

The mechanics of a reverse merger are as follows: a publicly traded but dormant company, called a shell company, offers to buy out the active private company by issuing enough stock to the private company so that after the transaction, the private company will own 90% or more of the total shares outstanding. This transfers ownership of the shell company to the private company, which effectively makes the private company a publicly traded company.

Reason

The benefits of a reverse merger are that the private company does not have to pay the large underwriting fees associated with an IPO, nor does it take nearly as long. The main drawback is that this method does not bring any money into the firm, and so a firm must continue fundraising activities following the reverse merger.

See also

• Merger