For those unfamiliar with the concept of reverse mergers, I thought I'd mention what I know in the hopes of providing some illumination on LifeOne's plans. A reverse merger is a backdoor for a privately held co. to becoming publicly held--the front door is a traditional IPO. They have both advantages and disadvantages, and, obviously, when a co. decides to become public via a reverse merger, its management has decided that the advantages make it worthwhile. All the potential advantages emanate from one reality which is that all things associated with the process of becoming public through an IPO are, for the most part, avoided: the paper work, reporting requirements, and attendant dialogue with the investment community as the company and its investment bankers work together to build enough interest in the investment community for the funding goal to be met. There is still some work to be done in a reverse merger--a proxy statement has to be created and voted upon--but amount of work is a whole order of magnitude less. Additionally, in an IPO, the co. is required to make a rigorous reporting of management's background, which can be uncomfortably revealing for some CEO's if they have skeletons in their past which they would prefer not having to air. It is in being able to make this omission that scurrilous management types opportunistically choose the reverse merger route to taking their company public. Another advantage is that of quickness. A reverse merger can be initiated and completed in just a month or two, the same time span as any private transaction. An IPO takes longer because of the number of filings and approvals required with the SEC. Additionally, the ownership structure of such a company isn't altered to the extent that it would be in an IPO because, almost always, in an IPO the co. issues newly created shares to the public, diluting pre-IPO ownership levels. The disadvantages are that the newly public company doesn't have the capital infusion an IPO provides. Some co's obviously choose a rev. merger because they want to become public so that their owners can cash out, so to speak, by having a public market for their shares but can't interest any investment bankers to take them on as clients. When investment bankers can't be found, the reason is almost always because the co's prospects are less than marginal. These sorts of co's invariably deflate to nothingness after the market discovers there really is nothing to them at all beyond hype. There are, however, sound businesses whose management has decided that their company has all the investment its needs and/or whose backers don't want their ownership diluted that choose to the rev. merger path. Internet related companies seem to be driving the growth in the number of rev. mergers that have occured in the last year or so. The reason for this I do not know. Two companies that have gone this route are iPARTY (IPTY) and Finenet Holdings (FNCM). FNCM is one of the leaders is internet based mortgage origination and appears to me to be a very substantial company. Yet it has labored the past couple of years to get its story out because its decision not to have a regular IPO left it without any champions in the investment community. Two months ago Finenet finally received its first sell side analyst coverage with a "buy" recommendation (M.H. Meyerson & Co.), which its management had so coveted as substantiation of its credibility as a business enterprise. One implication of the value, to some, in doing a reverse merger is that the publicly owned shell co. (usually the remnant of some ill-fated enterprise), which is the merger partner, has intrinsic value. Indeed elsewhere on SI, I have seen people speculate that the real value of a publicly owned shell co. is anywhere from $50 thousand to $150 thousand. This value, whatever it may be, reflects nothing more or less than the basic economic cost to a privately held company of purchasing a public market for its shares.
I am aware of a publicly traded shell company (Comptronix: CPTX), whose assets were stripped during a bankruptcy liquidation two and a half years ago, that is apparently being accumulated by a Cincinatti investment bank named Ramsay Hughes Inc., presumably for the purpose of a rev. merger. Insider filings over the winter (available on Yahoo) show that R.H. has been accumulating it, as the rise in its share price suggests. |
