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The Reverse Merger: The Small Business Version Of The IPO

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  • Allen R. Goldstone
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      Article Title:

      The Reverse Merger: The Small Business Version Of The IPO

      Article Description:

      Why is our nation so focused on everything large when it comes to
      business? Multibillion dollar financings, acquisitions and
      meltdowns have us transfixed like rubber neckers on a highway. Is
      it possible that we need to revisit the thought that bigger
      isn't necessarily better?

      Additional Article Information:

      811 Words; formatted to 65 Characters per Line
      Distribution Date and Time: 2008-08-06 11:00:00

      Written By: Allen R. Goldstone
      Copyright: 2008
      Contact Email: mailto:Alleng123@...

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      The Reverse Merger: The Small Business Version Of The IPO
      Copyright (c) 2008 Allen R. Goldstone
      Creative Business Strategies. Inc

      Why is our nation so focused on everything large when it comes to
      business? Multibillion dollar financings, acquisitions and
      meltdowns have us transfixed like rubber neckers on a highway. Is
      it possible that we need to revisit the thought that bigger
      isn't necessarily better?

      The most recent poster child for large corporate blunders is Bear
      Stearns. How could people that were smart enough to create a
      company that as of November 30, 2006 had total assets of $350.4
      billion. (Institutional Investor) allow their shareholders and
      14,000 employees to lose almost everything?

      And yet, according to the US Dept of Commerce, 60-80% of all new
      jobs are created by companies with less than 500 employees.

      One group that knows this well met last week in Los Angeles. They
      are the entrepreneurs, investors and professionals that
      participate in the Reverse Merger industry. This group hailed
      from the US, China, India, Korea, Vietnam and more. The
      industries represented there were wide ranging including
      technology and health care companies from the US and
      infrastructure companies from emerging nations. Some were
      startups but most were established businesses in need of growth
      capital. What they all had in common was an interest in becoming
      publicly traded in the US.

      In the past, these companies may have looked forward to funding
      and liquidity for their shareholders by going public via a
      traditional Initial Public Offering (IPO). Today this dream has
      all but evaporated with the average current IPO in the US raising
      over $250 million.

      In addition, according to Ian Mount writing for Fortune Small
      Business, �A combination of Sarbanes-Oxley's steep compliance
      costs, Wall Street's neglect of small caps regardless of their
      performance, and heightened investor distrust has turned running
      a public company into a far less appealing proposition�.

      Even with these issues to overcome reasons still exist to be
      publicly traded in the US including:

      * Utilizing public stock to acquire other companies without
      using cash. * Attracting and retaining professional management
      through stock options and other stock based compensation. * The
      potential to raise capital through public equity markets at
      higher valuations than private companies.

      One alternative to the IPO for going public is known as a Reverse
      Merger. This is when a private company merges into a publicly
      traded company with little or no operations and is issued a
      majority of the shares. The management of the old public company
      resigns and the private company's Board of Directors replaces
      the old Board. One of the biggest advantages of going public this
      way is that it typically takes much less time ( 4-8 weeks) and
      the risk of an IPO being canceled is avoided.

      No industry is left out of this process. According to the
      Washington Post, a defense contractor, Argon ST, went public
      through a reverse merger and is in one of the hottest sectors of
      the defense industry. Other notable former reverse mergers
      include Turner Broadcasting and Acclaim Entertainment.

      A significant drawback of the reverse merger is that unless a
      private financing is completed simultaneously with the merger,
      the formerly private company is now public and has taken on the
      significant costs of being public without having raised any

      The comparison between the health of IPO's and Reverse Mergers
      for small and mid size companies speak for themselves.

      According to Tim Keating of Keating Investments there were only 9
      IPO's on average per year over the last 10 years that raised
      under $25 million.

      In 2007 alone there were 220 Reverse Mergers. 100 of these
      transactions included simultaneous private placements.

      In the first half of 2008 only 23 IPO�s were completed including
      deals of all sizes. (SPAC�s and REITs omitted)

      It is not only homegrown companies that are attracted to this
      method of becoming publicly traded in US markets. According to
      Robert Comment of Johns Hopkins Univ. The % of co�s going public
      in the US via Reverse Merger that are non US has gone from
      approximately 14% to 37% over the last 10 years.

      Companies receiving financing using this method create primary US
      jobs for printing companies, mailing services, transfer agents,
      lawyers and accountants and their staffs, employees of our stock
      exchanges and the government employees that regulate them.

      This does not include the employees of these now funded companies
      and their suppliers as they use the new capital to buy equipment,
      develop new products, open new markets and more.

      In the past this method was largely unregulated and often abused.
      Thanks to thoughtful regulations developed by the SEC and the
      NASD in conjunction with input from industry members, the quality
      of the companies accessing capital through Reverse Mergers has
      improved steadily. Revenues for these companies went from
      approximately $5 million in 1997 to $16 million in 2007 according
      to Mr. Comment.

      With the IPO market minimums continuing to grow, we are sure to
      see more Reverse Mergers filling the gap in the coming years.

      Allen R. Goldstone is President of Creative Business Strategies.
      Inc, a corporate development and turnaround consulting firm based
      in Boulder Colorado. Alleng123@...

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