What is a Reverse Merger?

Using the simplest form of analogy, a reverse merger is like a guppy swallowing a whale.  After the guppy digests the whale, it still looks like a guppy on the outside, but is now a whale on the inside.  In corporate terms, this is accomplished through the purchase and/or exchange of equity securities.  The following diagrams illustrate the basic premise of a reverse merger transaction:

   
Figure C
 
The public shell company and private company agree to engage in a reverse merger transaction.  In this transaction, the shareholders of private company sell 100% of their stock in their private company to the public shell company.  In return, the public shell company issues the private company's original three shareholders (founders) an amount of stock equal to 90% of all of the stock in the public shell company.

The Four Key Steps to a Successful Reverse Merger

While there are numerous steps involved in successfully completing a "Reverse Merger" the process can be broken into four key steps.  Stag Financial Group has the experience and expertise to guide you and your company through this complex process as quickly and efficiently as possible (usually 60 - 90 days). To give you an idea of what to expect during the reverse merger process, Stag Financial will guide you through the four key steps to a successful reverse merger.

Step One - Review Client Goals and Capital Structure

Before even identifying a suitable public shell to conduct a reverse merger, Stag Financial's professionals will work with the client company's management to identify their short-term and long-term objectives and how they relate to the client's desire to "go public." This is probably the most important step of the reverse merger process.

During this step Stag Financial will review several aspects of the client's company and how they relate to the client's goals. In this step Stag Financial will help the client identify and resolve individual issues that may have an impact on how the reverse merger will be accepted in the financial marketplace. Stag Financial will also help develop a proper capital structure engineered to facilitate the client's goals, including future fund raising activities, acquisition prospects, stock options and warrants, employee stock ownership programs (ESOPs), stock management issues, and so forth.

Without a strategic plan the reverse merger will inevitably fail at some point in the future.

Step Two - Identify a Suitable Public Shell

Depending on the client's goals, strategies and budget, Stag Financial will help select an appropriate public shell vehicle. There are numerous types of public shells available. Some are trading, some are not trading. Some report to the Securities and Exchange Commission while others remain non-reporting. Some even have cash on hand and are looking for just the right private operating company to conduct a reverse merger.

It is important to note that Stag Financial acts as a principal in its reverse merger transactions. This insures the client is purchasing only the cleanest and most viable of public shell vehicles.

Step Three - Prepare and File All Required Documents

First and foremost, unless the client wishes to reverse merge into a non-reporting public shell such as a NQB Pink Sheet shell company, then the client will need to obtain a proper audit conducted by a licensed public accounting firm. Stag Financial is affiliated with several such firms and can assist with the preparation of a proper audit if the client has not recently undergone such an audit process.

Aside from the mandated public audit, conducting a reverse merger requires a number of legal documents, Board of Director resolutions, and state and federal corporate and securities filings. Stag Financial and its affiliated legal firms will help the client prepare and file all of the necessary paperwork to complete the reverse merger process.

Step Four - Become a Public Entity

Once all of the required legal documents have been executed, filed and seen through to completion, the client will successfully have taken over the public shell vehicle and transitioned itself into a publicly traded corporation.

Examples of Successful Reverse Mergers

In 1970, Ted Turner acquired control of Rice Broadcasting (WJRJ-TV) in Atlanta, Georgia. Eventually this company became Turner Broadcasting and was acquired by Time/Warner and later merged with America Online. Ted Turner is now one of the wealthiest men in the world.

In 1996, Muriel Siebert, the first woman to purchase a seat on the New York Stock Exchange (NYSE), reverse merged her discount brokerage house, Muriel Siebert & Co., into J. Michaels, Inc., a defunct, but publicly traded Brooklyn furniture company. The stock has since traded over $70 a share.

In 1999, Tony Robbins, best selling author of "Awakening the Giant Within", conducted a reverse merger with GHS, Inc. whose stock soared from $0.75 to over $12 a share.

Other well known companies that can trace their roots back to a successful reverse merger with a public shell include Blockbuster Entertainment, Inc., Occidental Petroleum Corporation, Waste Management, Inc., and RadioShack Corporation.

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