A reverse take over (also known as reverse takeover, reverse merger, reverse acquisition or reverse IPO) is a superb market entry alternative to the traditional IPO (initial public offering), since it can save the closely held private company seeking to go public in that manner not only time but money as well, while following the roadmap to becoming a publicly traded company.
Although the reverse take over offers a very short execution time period, often less than 3 weeks, the same strategic reasons that are part and parcel of other going public vehicles apply here as well. These considerations include stock options, acquisition financing, retaining a controlling stake in the company, and last, but not least, the lower risk factor when compared to the average IPO (Initial Public Offering). Still, a reverse take over is not without its share of risks, so prudence and caution are well recommended private company is exploring the feasibility of a reverse take over.
Perhaps the biggest drawback to a reverse take over is the baggage that comes with the acquisition company. Whether the target company is a struggling, active business or a shell company that no longer performs day-to-day business operations, the acquisition target company could come with its own specific circumstances, its own set of strings attached, and not all for the better. The
company may have a soiled reputation, such as when AirWays acquired the struggling airline ValuJet, after one of its flights crashed in the Everglades, killing over a hundred passengers.
Legal and Financial Considerations
The company itself could have pending lawsuits, liabilities, sloppy records, or shareholder disputes. For example, there could be unforeseen issues involving labor relations between the two merger candidates. A sobering consideration, at least for the acquiring company, is that once the purchase is complete it thereby accepts legal and financial responsibility for the acquired company’s past, present, and future! All the previous reasons should more than advice to listen to the counsel of your own merger experts, and not the platitudes and assurances of the shell company promoter! Doing otherwise could cause a lot of angst not just among company principals and directors, but an ill-conceived reverse take over could also become a big media story, providing negative publicity when it’s the least needed!
The United States Securities and Exchange Commission (SEC) issued a caution in 2011 warning investors who were thinking about doing reverse mergers. The issuing statement mentioned the high likelihood of exposure to abuse and fraud. The above action was necessitated on account of the less-than-honest practices of certain Chinese companies’ reverse merger activities, which legally allowed Chinese corporations to buy up American shells to bypass federal and state regulators. They were also able to avoid annual reviews, but enjoyed the perks of being publicly traded American companies without abiding by the laws and regulations pertaining to the above-board accounting and bookkeeping practices employed by responsible publicly traded companies.
Investors considering a reverse take over should also ponder the chance that shareholders from the acquired company may “dump” their stock at any time. This often happens when shareholders are angry about the merger, are trying to be deceitful, or simply lack confidence in the merger. Stock dumping happens frequently, but is less likely when using a blank check company, a type of shell company created with the specific intent of finding a suitable candidate to merge with.
Lack of Experience
In the traditional IPO process, CEOs and upper management endure a very hands-on approach in the goal of becoming publicly traded, requiring extra attention and resources. The former scenario isn’t the case with a reverse take over, encouraging the participation of private company management staff and CEOs that may come to the public company arena with little practical experience. Oftentimes, they could be downright naïve unless they have prior experience working in the higher echelons of public company leadership. As a parting caution, it’s important to research every detail, not only pertaining to the reverse take over, but the pros and cons of public company administration to ensure complete readiness once the process comes to fruition.