David Feldman's book, Reverse Mergers: Taking a Company
Public Without an IPO, now in its third printing, was published in 2006
by Bloomberg Press (available on http://www.amazon.com).
View David Feldman's reverse merger blog at www.reversemergerblog.com.
Joseph Smith and David Feldman are coauthors of PIPES:
Revised and Updated Edition - A Guide to Private Investments in Public Equity
(Bloomberg Press, 2005) available on http://www.amazon.com.
In the News
David
Feldman referenced in a USA Today article
about the increasing popularity of reverse
mergers, June 26, 2007.
Formerly
Shady Reverse Mergers Gain Credibility:
More firms go public by merging with
shell companies that have no operations
by
Matt Krantz
Blackstone
Group and Fortress Investment Group
stole investors' attention with their
splashy initial public offerings. On
Monday, another alternative investment
company revealed it plans to go public
by using a method formerly thought of
as being for fly-by-night companies.
GLG Partners, a hedge fund that claims
$20 billion in assets under management,
said it will perform a reverse merger
with a publicly traded shell company
called Freedom Acquisition. The deal
would instantly turn GLG into a publicly
traded company worth more than $3 billion.
To complete the deal, GLG will change
Freedom's name to GLG Partners and its
stock symbol from FRH to GLG.
Reverse mergers are transactions in
which a private company combines with
a publicly traded shell company that
has no operations. That gives the private
company the respectability and currency
of being a public company without having
to meet the regulatory requirements
for an IPO. A common knock against reverse
mergers is that they have been abused
by fraudsters to get stock that they
can sell to naive investors.
The GLG deal, though, uses a 3-year-old
type of reverse merger called a special-purpose
acquisition company, nicknamed a SPAC
or blank-check company.
A SPAC is formed in two steps. First,
the shell company sells shares to the
public as an IPO. The shell, which usually
trades on the American Stock Exchange
or lightly regulated OTC Bulletin Board
market, has a management team that promises
to use the IPO proceeds to find a promising
(and usually private) company to merge
with. An existing business, GLG in this
case, then folds into the SPAC.
Some well-known business people, including
Apple co-founder Steve Wozniak, have
been involved with SPACs. This year,
33 SPACs have raised $4.1 billion, vs.
the $1.8 billion raised from 25 SPACs
in the same time frame last year, says
Dealogic. In 2004, at the dawn of SPACs,
there were just 13 that raised $484
million. Freedom was formed in December
after raising $528 million, making it
the largest SPAC ever formed.
SPACs offer investors safeguards
by letting them vote on the merger and
protecting their money in an escrow
account until a deal is signed, says
David Feldman, partner at Feldman Weinstein
& Smith, which advises companies
on reverse mergers.
SPACs have lent more credibility to
reverse mergers, which still have their
fair share of deals "that are a little
shady," says Meghan Leerskov, associate
editor of The Reverse Merger Report.
This year, there have been 90 traditional
reverse mergers between private companies
and public shells with no operations,
she says, vs. 212 last year.
While SPACs may be more legit than many
traditional reverse mergers, Jay Ritter,
professor of finance at the University
of Florida, cautions investors. He views
the rash of SPACs to be a reaction to
the popularity of private-equity funds
and a way to make individual investors
feel like they're getting a piece of
the buyout action. "I view this as a
fad," he says. "I'm certain the crash-and-burn
will happen at some point."
