Reverse merger

Reverse Merger

An act where a private company purchases a publicly traded company and shifts its management into the latter. It also normally involves renaming the publicly traded company. This allows private companies to become publicly traded while avoiding the regulatory and financial requirements associated with an IPO. In order for a reverse merger to happen smoothly, the publicly traded company is usually a shell corporation, that is, one with only an organizational structure and little or no activity. The two businesses can then merge the private company's product(s) with the public company's structure. It also makes initial trading less dependent on market conditions, a key risk in IPOs. However, it is important to note that a reverse merger only provides the private company with more liquidity if there is a real market interest in it.

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Reverse merger.

In a reverse merger, a privately held company purchases a publicly held company and, as part of the new entity, becomes public without an initial public offering (IPO).

It's described as reverse because in the more typical merger pattern a public company purchases a private company to expand its business.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.