You’ve probably heard of a merger – these happen between companies all the time, and the result is almost always a much larger company. However, most people are not familiar with the workings of a reverse merger. This is not a name for one company splitting into two parts, even though that is what the name sounds like at first. Instead this is actually another method that private companies use in order to become publicly traded.
This is one of the quickest and easiest ways for a company to go public. For that reason, the reverse merger was very popular during the mid 1990’s and may become popular again.
The reverse merger means that a public company basically buys a private company. Usually the public company is more of a shell than anything else – it generally has very little in the way of assets. The private company is one that is looking to be traded publicly, which is why it agrees to the purchase.
Usually at this point, after the reverse merger has taken place, the private company will change its name to reflect the merger, and the new company is publicly tradable.
There are some other terms that are also used to refer to a reverse merger, which include “reverse takeover”. The reason for the “reverse” part of the terms is that even though it looks like the public company is buying out the private business, in fact it is the private business that will end up in charge of the merged company.
There are a few major disadvantages to going public through this method, which is one reason why some companies decide to choose another route. For one thing, most of the companies that go public through reverse mergers are not traded on Wall Street. Instead, these merged companies are traded on lower level stock exchanges, which makes it hard for the business to pick up a lot of value in the stocks.
Finally, you should also realize that IPO is a much safer way for a company to go public. If you are looking to invest in a company that is thinking of going through a reverse merger, you should beware. It is far more likely for companies that have been through reverse mergers to fail, which can lead to a loss of your investment.