The Hindu Business Line : Going `reverse' forward

There are more ways to go public than through the traditional IPO (initial public offering). "The two most popular alternatives to IPOs are reverse mergers and self-filings," write David N. Feldman and Steven Dresner in Reverse Mergers, from Bloomberg (www.bloomberg.com).

Reverse merger examples that the book's dust jacket speaks of include Berkshire Hathaway, Turner Broadcasting System, Texas Instruments, and New York Stock Exchange.

Closer home, we have the prominent example of ICICI that reverse merged with ICICI Bank in 2002 to set a trend for the conversion of all-India financial institutions into universal banks.

Purchasing Control

What happens in a reverse merger? "A private company merges into a public one," explains the intro. "The private company purchases control of a public one, merges into it, and when the merger is complete becomes a publicly traded company in its own right." Where the public company has minimal operations, it is called a shell.

"The public company may be the remnant of a bankrupt or sold organisation or specially formed for the purpose of investing in a private company."

Reverse mergers have a chequered past, note the authors. "In the early days of the practice — the 1970s and 1980s — a number of unsavoury players used the technique fraudulently... Some shady dealers would form new public shells, raise money from investors, and then take that money in the form of `fees', salaries, and perks in exchange for `running' the shell. In many cases, these shells were simply milked for the cash they had until it was gone." Another malpractice was to manipulate stock prices by leaking false information into the marketplace.

The book discusses the many advantages of reverse mergers — such as lower cost, speedier process, less dilution, and doing away with underwriting.

"Most reverse mergers can be completed for under $1 million (this includes the cost of acquiring the public shell). Total costs can be much less than $1 million, depending on the cost of the shell and whether or not the private company has already completed proper audits of its financial statements."

Underground Economy

A shell is a company that exists in name only and which has ceased to trade, defines www.finance-glossary.com. "Shell companies are at their most interesting when they are listed on a stock exchange, because they provide a cheap way for another company to acquire a listing by `reversing' into the shell.

Rumours perpetually surround listed shells, and their share prices can be quite volatile as investors get excited at the prospect of a reversal." Take care, therefore.

According to the US Securities and Exchange Commission (SEC) shell company is one with `no or nominal operations, and with no or nominal assets or assets consisting solely of cash and cash equivalents.' Shell corporations are not in themselves illegal, and they may have legitimate business purposes, clarifies Wikipedia.

"However, they are a main component of underground economy, especially those based in tax havens. They may also be known as International Business Corporations (IBCs), Personal Investment Companies (PICs), front companies, or `mailbox' companies."

A chapter in the book, on `shells and deal structures', discusses `reverse triangular merger' and `reverse stock splits'. In the former, the public shell creates `an empty, wholly owned subsidiary', which then merges into the private company. And the latter becomes necessary when in the process of completing a reverse merger, a public shell finds itself with `too many issued and outstanding shares and not enough authorised shares'.

The last three to five years have seen growth in reverse mergers, say the authors. Companies outside the US see reverse mergers as an opportunity to access US capital markets.

"Deals continue to come to the US from Israel, Hungary, the UK, Korea, Germany and other countries... " A book that takes your knowledge of `reverse' forward.

http://BookPeek.blogspot.com

D.Murali

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