Surviving Reverse Merger

Reverse mergers is one of the most unique financial transactions in the investment industry. Companies large and small are often involved in this type of merger and it could have considerable effect in your portfolio if you are investing in a company who opted to be part of the reverse merger.

In gist, reverse merger is a type of merger wherein the publicly traded company becomes part of a smaller, privately owned company. This type of merger has happened before and the results of this merger were mixed.

There are companies that have posted success after the merger but there are also companies who considerably went down because of the merger.

That means the transaction could work well for you but could also cause the significant devaluation of your portfolio.

You need to be aware of this transaction and analyze intently if you have to go out or stay still and hope for the best.

Advantages

The winner in this type of transaction is clearly the privately owned company. Privately owned company who enters into reverse merger is aiming to be a public company as soon as possible.

The regular process of becoming an IPO could take years and would require millions of dollars more.

But when the private company mergers with a publicly listed company, the private company becomes a publicly listed company in 30 days or even less if the process of merger is speedier.

The private company is even poised to grow considerably fast because of the volatile movement in the industry.

There are also tax considerations that could happen during the merger. This type of merger usually happens when the public company is experiencing financial trouble.

Because of the purchase, the tax break enjoyed by the public company because of financial trouble such as bankruptcy could be transferred to the private company.

Disadvantages

There are situations wherein reverse merger could even pull the publicly traded company down.

The following could be the reasons why the reverse merger caused the company to fall.

• The CEO of the privately owned company may not have the right knowledge and experience of handling a public company.

• Although a little bit unfair, there are times wherein publicly traded companies hand over their problems to the privately owned companies. Although public companies could provide a lot of records before the takeover, there are also hidden records that may have been purposely kept to speed up the merger.

• Reverse stock split could happen and that is never a good indication that the company would eventually be successful. Through this transaction, the company shares are reduced significantly, which increases the price per share.

Get Out or Stay Put?

The first inclination of some investors when they hear a reverse merger is coming is to sell and get out. This is of course a valid reason because of the looming financial trouble as well as the reverse stock split.

But that could only be a temporary setback in your portfolio. Remember that a private company will not just go into merger without considering everything.

They have specific plans on how to excel in the industry and because of their relative experience; they would somehow improve in the industry and improve the price per share. But this will not happen over night.

If you are planning to stay put because you believe in the company’s ability to move forward, be prepared to stay there for a very long time because rehabilitation and the eventual improvement of your portfolio will happen in the long run.

It is a very risky transaction but people do take part of this transaction if they know they will eventually succeed.