November 13, 2009
David Feldman will be a panelist at the Financial Executive Institute seminar entitled, "Where’s the Money? Finding Public vs. Private Capital Today."
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.
David Feldman is a contributor to PIPES: Revised and Updated Edition - A Guide to Private Investments in Public Equity (Bloomberg Press, 2005) available on
http://www.amazon.com.
Dov Scherzer is the U.S. contributor to the British
treatise, Internet Law and Regulation (Sweet & Maxwell, 2d Ed. 1997;
3d Ed. 2002; 4th ed. 2007),
Available Here.
Dov Scherzer is the U.S. contributor to the British
treatise, Electronic Signatures Law and Regulation (Sweet & Maxwell,
1st Ed. 2004),
Available Here.
In the News
David
Feldman quoted in the August 2008 issue
of Ethanol Producer Magazine about reverse
mergers.
Are
Reverse Mergers Gaining Credibility
in the Industry?
From
a business standpoint, the idea sounds
like a match made in heaven: A small,
private ethanol company that’s
hungry for capital and eager to become
publicly traded targets a public company
devoid of assets and operation but desperate
to create some value for its shareholders.
In today’s current volatile ethanol
market, many privately owned ethanol
firms may be exploring more creative
and aggressive business strategies for
capital formation. As a means to grow
by acquisition, a reverse merger tactic
could serve as a viable alternative
to the typical initial public offering
(IPO) process. Reverse mergers are less
burdensome, less time-consuming and
in some cases equally lucrative if done
right.
Essentially, a reverse merger—sometimes
referred to as a shell merger—is
a transaction in which a privately held
company merges with a dormant publicly
listed company (the shell company),
which may have had a broken business
model, obsolete business plan, or underperforming
assets and liabilities. Although several
publicly traded ethanol companies have
found success after undertaking a reverse
merger strategy, such as Pacific Ethanol
Inc., a reverse merger tactic shouldn’t
be considered “the preferred option
if you’re looking for liquidity,”
according to Gregory Lynch, partner
with Michael Best & Friedrich LLP.
“I think there are other transactions
that may be more beneficial,”
says Lynch, who is also cochairman of
the firm’s business practice group
and renewable energy industry group.
“If you’re looking for pure
liquidity of sale, I think that would
be a viable option, but if you’re
looking for some type of roll-up transaction
or consolidation [and not] some short-term
liquidity, I think a reverse merger
would be a viable option.”
Precarious in nature, with an unsavory
past of being handled by illegitimate
players in similar emerging markets
in the 1980s, reverse mergers could
be gaining more credibility across all
industries, especially since the U.S.
Securities and Exchange Commission’s
ruling to improve disclosure and legitimacy
in such transactions. Plus, the IPO
market is relatively inactive right
now. According to David Feldman,
founder and managing partner of Feldman,
Weinstein & Smith LLP, more legitimate
players have used reverse merger tactics,
including some in the ethanol industry.
“The average market value of a
reverse merger last year was about $55
million, so these aren’t tiny
little start-ups,” he says. “In
the alternative energy space, it’s
been a very popular method of going
public. Whatever is hot on Wall Street
is hot in reverse mergers.”
Like all business strategies, there
are advantages and disadvantages to
reverse mergers that must be closely
examined during the due diligence period.
Some of the overarching benefits of
a reverse merger versus an IPO are that
it’s less expensive and less time-consuming.
Plus, less dilution is involved, meaning
earnings per share of common stock are
reduced. Additionally, there is no public
disclosure of financial statements in
a reverse merger, whereas a prospectus
is required for an IPO through the SEC. “The problem with an IPO
is that you have to get your prospectus
approved by the SEC, and that’s
just unpredictable, whereas in a reverse
merger, there is no involvement with
the regulatory authorities prior to
closing,” Feldman says. “It’s
all about how fast you can get the deal
done.”
However, IPOs generally raise more money.
The IPO process also makes it easier
to create market support for the once
private company seeking to increase
its value on Wall Street. “I think
one of the challenges is that there
are a lot of biofuel companies, especially
ethanol companies, that are subject
to the public reporting requirements
[through the SEC],” Lynch says.
“They don’t have the benefits
of liquid public trading in their stock,
and those types of companies are well-suited
for either a reverse merger or some
type of other similar liquidity event.”
He adds that having the backing of a
good sponsor and a good investment bank
for private investment in public equity
is crucial for “selling worth”
to Wall Street from the bulletin board
in an attempt to get on higher exchanges
such as NASDAQ. “That’s
going to be the key to a lot of the
success of the reverse merger for private
ethanol companies looking to go public,”
he says. “How quickly are you
able to create the liquidity for that
stock? That’s the biggest question.”
