Tip of the Week: Market Downturn? Reverse Mergers Shine
By David Feldman at 5 February, 2010, 7:14 am
In the wake of the cataclysmic 2008-2009 market meltdown, we sometimes forget the history of reverse mergers and IPO alternatives. As a correction in the current market rally appears to be hitting, some players have increasing concern about completing APOs. Of course markets heading up are better than the alternative for most investors. However, for the most part over the years reverse mergers have not been very sensitive to current market conditions.
Why is this? The traditional IPO market appears very sensitive to the market, and the IPO window opens and closes very dramatically. Why doesn’t this happen for reverse mergers? Why are the number of transactions relatively stable through up and down markets? It’s very simple. Because trading immediately following most reverse mergers is limited, smart entrepreneurs, investors and deal makers realize that current market conditions are mostly irrelevant. What matters, say many, is the anticipated market performance 6, 12 or even 18 months following the going public event. That is when “real” trading will hopefully develop for a company that is meeting investor expectations. In addition, since the IPO market performs even more dismally when the market is down, some companies that were pursuing IPOs turn instead to a reverse merger to complete the process of obtaining a public trading stock. This increases deal volume when the market is down.
It is true that extraordinary events such as the September 11 terrorist attacks or the near financial collapse we faced in the last 18 months do indeed affect deal volume in the IPO alternative world. But in a “normal” down market, we do not typically see a reduction in the number of completed deals.
So hang in there guys! We’ll be fine….
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