Reverse Mergers & The Closing IPO Window

Initial public offerings are funny things. In most cases an IPO is all about macro timing. Sure a company may have the brand recognition to get an initial pop on the stock (unless of course your Facebook), but unless the market remains strong and bullish, the zest for going public for many a private company begins to fade as the economy pulls back on the reigns a bit. As the bears start to emerge, the luster of going public can quickly fade–leaving more room for alternative and cheaper methods for going public.

I really like how Organovo CEO Keith Murphy puts it:

A lot of biotech companies have now gone [the reverse merger] route, which is what made us know it could be a success. You can step up to the next level…When we did it, we were making our decision in the middle of 2011, when there was no IPO window at all. When the window closes, you’ll see more people do [reverse mergers].

Murphy goes on to say the whole process involves lower risk and less expense for growing companies. He correctly adds that stock promotion is certainly more difficult in the alternative public offering scenario, but that doesn’t mean it can’t be done successfully.

Organovo is a great reverse merger success example as the company has–in pivoting it’s core business for ancillary services–been able to graduate from trading over the counter to trading on NASDAQ.

Alibaba’s timing couldn’t have been better. In my mind, they likely hit the peak before the trough in the IPO world. Many companies, due to timing issues in preparing their S-1 and the laborious timing involved in SEC & FINRA commenting, are never able to hit the IPO window with the right timing. It can also be a bummer for companies still in a good growth curve heading into a bullish market. Reverse mergers can offer a good alternative when there is pull-back.

Certainly not every new business or start-up is a good candidate to go public, but opportunities exist for getting companies off the ground when the market is “not so hot,” allowing them to be even better prepared for stock promotion when things do pick up. It’s more of a long term bet on the longevity and staying power of the business.

It doesn’t mean that those in the reverse merger arena are looking forward to the pull back in IPOs. Quite to the contrary, when the market is up, the rising tide floats all boats. The options just become a bit more limited for would-be public firms that may have missed the timing of getting their stock shares up and trading. While we may see an increase in demand for reverse mergers coming from up-market, it also generally means things tend to dry-up a bit in the lower market. It will be interesting to see how this coming downward cycle eventually plays out. The last was certainly the worst we’ve ever seen and just about everything dried up. My hope is that we’ll not have a repeat this time around.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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