Through this acquisition process, the management of public company effectively cedes control to the private entity’s management by giving up majority ownership. The resulting entity typically changes its name to reflect the new business and then operates as a public company.

Why should your company go public?

Before a company decides to engage in a reverse merger to reach the public markets, it needs to ask itself why it wants to be a public company and if it is capable of being a public company.

There are several advantages and many disadvantages that a company should consider before deciding to go public. First, the advantages:

Advantages

• Financing—As a public company, you are no longer dependent on private placements or on debt instruments. The public markets are available for equity offerings.
• Currency—Your company’s common stock can be used to acquire assets or other operating businesses to boost growth potential or take advantage of potential synergistic relationships.
• Incentives—Common stock can be used to attract and retain quality management and employees.
• Reputation—Stock price and a public listing can be used to effectively establish a reputation to provide outside audiences with an objective view of your business.
• Valuation— Public companies are typically acquired at a premium compared to private companies of the same stature.
• Investor Liquidity—Publicly traded common stock attracts further investment interest from investors concerned about an exit.
• Public Disclosure—Investors are more likely to invest in public securities, where periodic reporting allows them to monitor their investment.

Disadvantages

The following list summarizes some of the disadvantages of being a public company, but is by no means a complete list.

• Public disclosure—Just as the requirement for public disclosure can be an advantage, it can also work against your company when things go bad. As a public company, your company is required to make certain disclosures about its business, financial state and ownership.
• Periodic reporting—The company incurs the periodic cost and time commitment of senior management to periodic reporting which must be completed to remain publicly trading on the exchanges.
• Stock sales restrictions—Certain stockowners may be restricted in their sales of stock.
• Potential loss of control—As a publicly traded entity, stock ownership dictates control. A hostile takeover could be initiated against your company if the majority of stock is not owned by affiliates.
• Investor relations expenses— Expenses in maintaining a public presence could easily be higher than 150,000 in the first year and are typically 1% of market capitalization in ensuing years.
• Potential liability—There are stricter regulations governing publicly traded company, which opens your company up to legal liability.
• Potential loss of management autonomy— Investor scrutiny or stock price could have an effect on management decisions.

In summary, maintaining a public presence requires a significant commitment of resources and capital to pay for this privilege, but has its rewards. Your company will have to be cognizant of the advantages and disadvantages and whether it has the capability to be public at this time. The additional expenses related to investor relations expenses, auditing expenses, internal operations and the added cost of top tier legal counsel to protect your best interests as well as other disadvantages, may be enough to consider alternate options for your company, depending on its needs.

Another alternative for your company to consider is the Initial Public Offering (IPO).

The IPO vs Reverse Merger

Typically, IPOs are for the rare companies that have the operating history, prestige and relationships with top tier banking firms.

The Disadvantages of the IPO Process:

• Access—For smaller companies, it’s difficult to get competent, first tier underwriter due to size of offering and the company’s lack of profitability
• Execution—Lower tier underwriters generally lack ability to do quality job and are unreliable
• Control—Company loses control over its own destiny, because the Underwriter controls the show
• Timing—Company is subject to underwriter’s queue and market conditions     
• Stock Price—Underwriters grind down initial price to make offerings attractive to investors, giving up potential capital.
• Timeline— Minimum of one year, including an average of 159 days in registration with the SEC.
• Expense—Because of the length of time and parties involved, IPOs are very expensive. $2-3 million for a $30 million offering.

Reverse Merger Advantages

• Access—Any company can go public through a reverse merger
• Control—Company pulls the trigger when it chooses
• Price—Effectively set by Company, where the upper limit is where Company can successfully sell securities, if required
• Timeline—30 to 120 days

The Disadvantages of Reverse Merger Process:

• There is no capital raised in conjunction with going public. In the IPO the company gets the proceeds. In a reverse merger, no new stock is issued and therefore no new paid-in capital is received until a new public offering is executed.
• There is limited sponsorship for the stock.
• There is no high-powered Wall Street Investment Banking relationship to underwrite your securities.
• The stock generally trades on a low exposure exchange.

Notable Reverse Mergers

In 1970, Ted Turner completed a reverse merger with Rice Broadcasting, which went on to become Turner Broadcasting.

In 1996, Muriel Siebert, the first woman member of the New York Stock Exchange, took her brokerage firm public by reverse merging with J. Michaels, a non-operating Brooklyn Furniture company.

Acclaim Entertainment (AKLM) merged into Tele-Communications Inc in 1994.

Additionally, Occidental Petroleum, Blockbuster Video, Waste Management, Inc all went public via a reverse merger.