Reverse Merger

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A reverse merger refers to an arrangement where private company acquires a public company, usually a shell company, in order to acquire the status of a public company. Also known as a reverse takeover, it is an alternative to the traditional initial public offering (IPO) method of floating a public company. It is an easier way that allows private companies to change their type while avoiding the complex regulations and formalities associated with an IPO. Also, the degree of ownership and control of the private stakeholders increases in the public company. It also leads to combining of resources thereby giving greater liquidity to the private company.

To ensure a smooth reverse merger, the public company should be a shell company, that is, the one which simply has an organization structure but negligible business activity. It is only an organizational entity on paper with no significant existence in the market.

Reverse merger is a speedy and cheaper way of becoming a public company within a maximum period of 30 days. Alternatively, the IPO route takes almost a year. Moreover, public companies normally have greater valuation due to the greater investor confidence enjoyed by them. Hence acquiring one will push the private company up the growth ladder.

However, it faces stability risk because the owners of the shell company might sell their stakes once the new company decides to raise the market price of its shares. This may lead to a complete operational chaos because the management of private companies have negligible experience of running a public company.


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