Reverse Mergers Thrive in Recessionary Climate

08/17/2009 05:12 am ET | Updated May 25, 2011
  • Joseph Meuse Founder and President of Belmont Partners, an international financial consulting firm.

Are there opportunities for going public in the current recessionary climate? While the number of traditional IPO's have slowed to a crawl, reverse mergers are continuing their ascent in popularity with 222 reverse merger deals in 2007 valued at US $8.36 billion, a 14 percent increase over the previous year according to The Reverse Merger Report. While the market tsunami of 2008 resulted in less deals in the last quarter of 2008, there has been a dramatic up-tick in activity this year.

A "reverse merger" is a method by which a private company becomes a public entity through the acquisition by a private company of a shell public company. Reverse mergers are also referred to as a "reverse takeover" (RTO) and "back door listing." While Initial Public Offerings (IPOs) have declined, reverse merger activity has increased dramatically over the past few years with major investment banks including Goldman Sachs and UBS quietly adding reverse mergers to their deal flow. Reverse mergers have been steadily overtaking the tepid traditional IPO market as IPOs are more vulnerable to market conditions and require greater cash outlays and a longer timeline to complete.

Amid the unpredictable landscape of the credit crunch, economic contraction, and market correction, tremendous shell opportunities have emerged. As the founder and president of an international financial consulting firm specializing in providing shell public companies for reverse mergers, I see companies who never before would have considered a reverse merger execute these deals.

While shell transactions of all types are an excellent platform for going public, my advice in today's environment is -- if you can afford it, skip buying a non-traded shell or one that requires uplisting to a higher trading exchange, and go directly to the Bulletin Board. The price spread between Bulletin Board shells and Pink Sheets shells has decreased significantly, making Bulletin Board shells a great buy. Average price parameters for a typical Bulletin Board shell in today's market are in the range of $300K-400K, nearly half of what they were recently selling for. Most notably, Pink Sheets shells were recently averaging as high as $250K, demonstrating the outstanding value now present for a Bulletin Board shell.

My recommendation to those in the market for a shell public company is to buy quality. The price impediment has diminished in this buyers market, making it affordable to upgrade from a grade B shell to a grade A shell. Additionally, favorable new payment terms are available permitting payment over a period of up to 3-to-4 months. Capitalize on post-merger investor relations and public relations to attract investment and create significant trading interest and liquidity.

Market corrections can be viewed as a glass half-full or a glass half-empty, but it is my view that there has never been a greater buying opportunity for shell public vehicles at a reduced price. I see enormous growth and opportunity for a reverse merger industry still in its infancy, with major institutional investors, hedge funds and venture capitalists coming aboard this fast moving train to invest in reverse mergers. If you have a great company with a great story to tell, strong fundamentals, and an excellent management team, a reverse merger presents your best opportunity for an exit strategy with maximum upside potential.