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Understanding reverse mergers

On Behalf of | Feb 9, 2021 | Corporate Litigation

The reverse merger is one way of taking a private company public. Business people and investors in New York should understand what the process entails. Being able to discern when a reverse merger is happening can inform observers about the general health of and the possibilities for a company.

The why of a reverse merger

Reverse mergers, also known as reverse takeovers, are very appealing for businesses that wish to avoid the IPO process. An initial public offering is the most common way that a company goes from private to public. It’s a lengthy process that can take over a year. By contrast, a reverse merger can take as little as one month. Avoiding an IPO also saves a great deal of money.

Many prominent business people have used reverse takeovers to help their companies level up. For example, Ted Turner merged with Rice Broadcasting to create Turner Broadcasting. When it’s executed correctly, a reverse merger is a win for shareholders of the original public company and the owners of the private company.

There are some problems that can arise with reverse mergers, though. Often, the CEO of a private company has never led a public one before. That can mean a steep learning curve as they take over. Issues can arise over record-keeping, for example. Sometimes, the reverse takeover can actually lead to a loss of value in the stock.

Mergers and acquisitions are complex. It’s a good idea for anyone planning a reverse merger to speak with a lawyer. An experienced attorney who understands corporate governance can help the purchaser understand the process and may also be able to set expectations for what’s to come as a public company.