Buzz Archive:
Reverse Mergers: After Market/Closing Share Price Performance

by Joseph W. Bartlett, Founder of VC Experts.com, 11/1/2007

For those investors and their advisers interested in alternatives to traditional public offerings on NASDAQ, one such alternative is the reverse merger into a public shell. Given a difficult IPO opportunity for mid-cap companies, financial engineers are exploring backdoor floatations ... reverse mergers into public shells and sales into blank check companies, a/k/a SPACs, for stock in the SPAC, often accompanied by cash.

But comprehensive data on the critical element vis-à-vis shells and SPACs are hard to come by ... the performance of the shares after the trade has closed. The core attractiveness of these vehicles is highly dependent on accurate numbers. Various data banks exist but we haven't yet found the final word ... living proof that most shell and SPAC trades wind up, as successful public companies, i.e. they are able to break out of the 'orphanage' with trading ranges in excess of, say, $10 per share.

A 1998 NYU study on 102 reverse mergers indicated that only 17 companies produced positive investor returns, with 12 outpacing our conservative benchmark. Only two companies in the survey paid dividends. If the paper returns were discounted for the applicable bid/ask spreads, 14 companies would have posted positive returns, with only 9 companies besting the benchmark. Stated conversely, 86% of after market investors would have lost money by investing in the aftermath of reverse mergers and over 91% would have failed to keep pace with the comparable small company market. Read more statistics, and whether this can still be utilized by PE and venture investors.