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How A Reverse IPO Affects Market Shares


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A REVERSE IPO SOUNDS COMPLICATED — IN FACT, IT IS THE EXACT OPPOSITE

reverse ipo

A reverse IPO may be an unfamiliar process to many.  If you have ever watched television or a movie about the corporate world, you may have heard the phrase “merger” or “hostile takeover” used frequently to demonstrate the buying power of public investment.  Yet the process of purchasing up a company’s shares in a takeover is a lengthy and expensive procedure.  Many times, it is more profitable for a private company to purchase a public company instead of going public; this called a reverse initial public offering, or IPO.  An IPO exists when a company initially goes public, giving investors the choice to purchase shares at a lower base price in the hopes of success and increased market share.  A reverse IPO will use the same name, structure, and facilities of the prior corporation (called a shell company) while installing new management and employees.

WHY GO THROUGH WITH A REVERSE IPO?

The advantage of going public with a corporation involves the ability to command a higher price for your securities.  Yet the amount of paperwork and red tape required for this to occur makes it a fearsome challenge for many companies.  In addition to hiring legions of attorneys and accountants, the government must investigate records, and the initial stock price may become diluted.  With a reverse IPO, the shell company already exists as a public entity and does not need to be altered or reconstituted.  Conventional IPOs have a deal of risk, as investors may not know the full financial history needed to make a purchasing decision, while the information available through shell companies makes it much more amenable to investment.  Furthermore, market conditions that could affect share prices cannot be helped in a conventional IPO, but a reverse IPO may time the merger and offering to coincide with favorable economic weather.

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