Reverse mergers, often seen as a shortcut for private companies to go public, carry hidden risks that can lead to financial suicide for the unwary. This method, while cheaper and faster than traditional IPOs, often results in long-term costs that can cripple a company financially.
A reverse merger occurs when a private company merges with a public shell company, allowing the private company to bypass the traditional and more rigorous IPO process. This method is initially less expensive, with costs ranging from a few thousand to several hundred thousand dollars, compared to over $1.5 million for a standard IPO in the United States.
While the upfront costs are lower, the long-term financial burden can be substantial. For instance, maintaining a favorable stock price in the market can be costly. A hypothetical example involves an OTCBB company with a float of 500,000 shares needing about $400,000 annually to maintain a $3/share price. If insiders begin selling their shares at market price, they could potentially earn millions, while the company incurs significant costs in investor relations and stock maintenance, often not covered by its income.
The allure for CFOs is the ability to offer potential investors liquidity and leverage, such as discounting the price of private placement shares. However, these benefits come with the responsibility of maintaining stock liquidity in the market, a costly endeavor that can lead to financial distress.
According to a study by Charles Lee and David Ng, companies that undergo reverse mergers have worse post-merger operating performance and higher likelihood of financial distress compared to those that go public through traditional IPOs (Journal of Financial Economics, 2009). Furthermore, the survival rate of companies after a reverse merger is significantly lower, with many failing within the first few years due to financial instability.
CFOs should consider alternatives such as:
Reverse mergers might seem like an attractive option for private companies looking to go public, but they come with significant risks that can lead to what is metaphorically described as corporate suicide. It is crucial for CFOs to weigh these risks against potential benefits and consider more sustainable paths to going public.
For further reading on the implications of reverse mergers, visit the Securities and Exchange Commission or explore financial analysis on Investopedia.
CFOs are advised to conduct thorough research and consider all possible implications before deciding on a reverse merger as a strategy to take their company public. A well-informed decision is the best defense against potential financial disaster.
Five Myths About Inflation
A classic definition of inflation is any increase in the money supply. Understanding inflation is vital to anyone seeking investment profits or attempting to build a successful company. As with most basic issues of the global economy, inflation is surrounded by myths and misinformation.
Recession Planning
The clouds of a 2006 Recession are starting to form on America's horizon.Politicians know that Recessions or Depressions are bad for their reelectionchanges. Bad economic times tend to create unemployment among the nice folksholding office at the time of economic stress. You can expect the Governmentto do everything possible to delay a Recession until after the November 2006election. However, the American economy is currently caught in an upwardmoving inflation and a Recession would still the fires of a runawaycurrency. The Real Estate Bubble may be about to burst. And, America'sfinancial institutions appear to be in increasing trouble over failedderivative bets.
African Aid
Africa, like everywhere else in the world, has its fair share of honest, intelligent; hardworking people who want to see their families have a better standard of living. Unfortunately, most of these people are living below the poverty line. The reasons that Africa, with all of its natural resources, is an economic basket case are complex. They start with the 16th Century Africans' failure to adopt an effective immigration policy. The result was the European immigrants divided up the continent without regard to historic tribal boundaries. The modern result has been tribal wars waged with modern weapons from the Sudan to Rwanda.
