Reverse Mergers: The APO (Alternative Public Offerings) Part I

While the traditional IPO has been the normal way for a company to go public, it is questionable whether this practice is the best method for all companies to go public, and if more innovative ways of going public may be a better way to go. The three main vehicles for doing an alternative public offering include the following:

1. Reverse Mergers
2. Specialty Acquisition Corporations
3. Dutch auctions

I will also discuss PIPEs and mezzanine financing in this article and explain why reg-D type placements may be a better way to go when seeking further capital than a secondary offering, especially with the proliferation of hedge funds in the last decade, who can supply the capital and are willing and able to bear the risk for this type of deal.

I believe that major investment banks will eventually have to do more and more of these types of deals in the future. Businesses will look for the cheapest way to get financing, and eventually executives at many firms will realize that there are better alternatives to doing an IPO. This will eventually eat into the margins at the major investment banks, and force them to engage in more alternative type deals. Still, however, an IPO may be appropriate for larger corporations seeking to raise capital, and sometimes may be the only way as they are so large.

Introduction to Reverse Mergers

A reverse merger occurs when a shell company agrees to buy a privately held company, and renames itself after the privately held company. The shell company usually has no operating assets, and few if any employees. Reverse mergers can sometimes be much more effective than doing an IPO for a smaller, privately held company. It is less costly, requires less paper work with the SEC, and doesn't require road shows and all the crap that comes with dealing with investment bankers.

Famous reverse mergers include Berkshire Hathaway (BRK.A), and more recently American Apparel has said it wants to go public through a reverse merger. Smaller investment banks are picking up on this trend. Halter Financial Group is an investment bank that specializes in reverse mergers and provides a wealth of information to businesses that are exploring the best way to go public. The reverse merger may also be of interest to the investor. Due to lack of sponsorship by major investment banks, there may be a pocket of inefficiency in shell companies, especially after they liquidate former operating entities. Nonetheless, I still am in the process of testing this hypothesis.

Main Benefits of Reverse Mergers

1. Guaranteed outcome that the financing and going public transaction will be completed and are not subject to market risk, as with an IPO
2.Higher valuations than raising money privately
3.Becoming a public company and raise money in one transaction
4.Institutional financing validation, in time for the start of trading
5.Flexibility in amount of capital that is raised, with a long term process and strategy (including post closing) to minimize issuer dilution

Halter Reverse Merger Criteria

Halter gives the following criteria for reverse merger candidate companies:

We do not focus on specific industries, but rather on high growth, well managed and profitable companies.

We believe a company must meet certain financial requirements to be a viable reverse merger candidate. In our opinion, a company must be able to achieve a minimum $30 million market valuation, based upon historical financial performance relative to its publicly traded peer group. Depending on the industry and any unique factors, this typically would equate to approximately $1.5 million to $2 million in historical, after-tax profit based on a P/E of 15 to 20 times earnings.

In certain cases, HFG would consider candidates that fall below our profitability threshold, if there is justification and evidence that the company's public valuation would exceed the abovementioned market capitalization requirement.

Selection of companies to do a reverse merger with is vital to the success of this type of deal, as many of the operating companies inside the shell company fail. At the same time, a reverse merger is a quick, cost effective, and easy way to go public.

Comments

[Olivia T.]

halter financial is not an investment bank. theyre a PE/advisory firm. they work with investment banks, but are not a broker dealer

[ralph]

You would like to learn more about reverse shell mergers go to:
reverseshellmergers.co...

[mysteryman]

If a private company nets before taxes 50 million a year and has assets of 300 million, how would you value it for its common stock when doing an APO??? Also what would the estimated value of the stock be?