It’s unfortunate that the structure and incentives in Corporate America cause too many C-suite managers to focus on short-term results. Focus on immediate quarter-over-quarter returns to shareholders is actually one of the reasons so many CFOs’ tenures are so short. It’s also a troubling trend in the reverse takeover market that is often either the direct cause or a contributing factor in the failure of a many a RTO or direct public offering. While many deals were doomed from the outset, a good number of high quality deals could have easily been salvaged had the deal-maker been focused on a more sustainable long-term investing approach.
With this sustainable approach in mind, let’s discuss a few ways reverse merger deals can be better coddled long-term.
Market Liquidity & Investor Relations
Many a reverse merger or self-filing simply dies on the vine. Even many IPO’s lack sufficient market support to create a viable trading market. In RTOs it’s magnitudes worse without the right post-transaction promotion team in place.
Unfortunately, the vast majority of investor relations firms in the microcap stock realm are on the shady side. Honesty in the promotion of stocks is difficult at best, due in part–again–to incentive misalignment. The temptation to embellish historical success or potential growth is too great, even for some reputable firms.
This represents a catch-22 and proverbial double-edged sword for the would-be public company. If you’re “dead on the vine” without promotion and most promotion is shady, how do you legitimately raise capital for a fledgling enterprise? In short, do your homework. Promotion may be a necessary evil, but it shouldn’t be evil.
Accountability & Reporting
Regular reporting and transparency to the public through the SEC is only a small piece of the “sustainable” model for most public companies. Even more important than what is provided to investors and shareholders is perhaps the internal data used for relevant company information. Don’t get me wrong, reporting transparent and GAAP/PCAOB compliant data to the SEC is an absolute must, but without good internal reporting the business managers will lack the important information they need to help the business expand beyond it’s current position as a micro-stock.
Focus on the numbers will help managers to see which direction the business needs to head. With the right accounting and reporting systems in place both investors and managers not only receive an accurate current view of the company, but it makes future planning more plausible.
Growth & Expansion
Rather than simply focusing on the deal for the deal’s sake, business fundamentals and sustained long-term business growth should be at the very core of any “go public” strategy. Unfortunately, the industry short-term-focused dope-pushers fail miserably in this regard. All too often reverse merger and APO deals are used by the financial engineers to simply get in and get out with no eye on the future sustainability of the entities–and in many cases– the people they’re screwing. True long-term sustainable growth also means a shift away from flash-in-the-pan companies.
A focus on future growth means that the deal-makers and not just the founding entrepreneurs have a commitment to seeing the success of the business continue for five, ten or twenty years into the future. Follow-on and secondary financing is a big part of this type of support, which is where the first point mentioned above comes into play.
Maintaining a focus on long-term sustainability is as much about attitude and alignment of business goals with both the market maker and the company shareholders as it is about some of the ancillary items we’ve been discussing. This type of alignment is absolutely necessary to ensure reverse takeovers aren’t still considered the red-headed stepchild of the capital markets.