Reverse Merger
Reverse Merger
AGENDA
OVERVIEW ON REVERSE MERGERS
KEY FACTORS FOR A SUCCESSFUL REVERSE
MERGER
structure of the public entity with its own company name, assets, officers, directors, management team and becomes public
The Process
Step One:
Finding a suitable shell and making sure it is clean A public shell could be either a public traded reporting company or a non-trading public reporting company (A Blank Check Company) A public shell usually has no operation or business activities and has no remaining employees and management team Shells that have no significant assets can be purchased for prices generally ranging from $200,000 to over $400,000 USD
The Process
Step Two:
Seeking experienced law firm Seeking reputable auditing firm The investors of private company buy an overwhelming majority of the shell shares for a nominal amount and/or the shell shareholders vote to authorize the issuance of a new large and highly diluted block of shares
The Process
Step Three:
The large block of shell company shares that is now controlled by the private company investors are swapped for the private company, thereby acquiring it. The shell company now owns the assets and ongoing business of the private company, including its name, officers, directors and management team.
The Process
The ongoing public reporting requirements, need for audited financial statements,
Public companies have long been accused of having a short term business focus.
Management often is consumed with the daily price of the companies and manage the business in response. a tremendous amount of management's time and energy.
The public reporting process and the need to maintain interest in the company takes
Increased liability. In 2002 there were 259 securities class action lawsuits and in 2003
there were 211. The average settlement in 2001 and 2002 was $16.6 and $24.3 million respectively.
Private placements difficult due to low public valuation Low liquidity stock ends up trading OTC or on the pink
sheets
Pre-Merger Planning
Private Company Preparation
Cleaning up corporate structure Setting up corporate governance Prepare financial statement Independent Board of Director Independent Auditing Committee Good management team which includes English speaking CFOs and CEOs Attractive business plan with ability to execute it
Post-Merger Planning
Develop and implement a strategy that creates liquidity for the shares,
raises capital, and provides long term value and market support for the firm that trade small/micro cap market
has grown by over 38% annually since 1995 Between 2000-2003, over $210 billion raised through the private market
Only $80 billion raised through IPOs over past three years
Private Placement Transactions
1,800 1,600 1,400 1,200
Transactions
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004 (YTD)
PIPE Market
In early 1990s, PIPEs were primarily opportunistic financings for
small and/or distressed, high-growth companies
Often times structured as death-spiral or toxic transactions
Mutual fund restrictions on minimum share price, trading volume and market
Crossover VCs and private equity firms view select public companies as startups that went public too soon
PIPE Trends
PIPE transaction volume has grown by over 29%
since 1995
114 PIPEs for proceeds of $1.4 billion in 1995 881 PIPEs for proceeds of $11.6 billion in 2003
1,400 1,251 1,200 1,037 25 30
Number of PIPEs
1,000 881 800 687 15 600 457 400 306 253 200 5 114 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 (YTD) 440 10 767 20
Proceeds ($B)
PIPE Trends
Average PIPE proceeds between $10-15 million
$25 $23 19.7 $20 $18 15.0 $15 14.2 13.4 12.1 $13 $10 $8 $5 $3 $1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 (YTD) 6.8 11.4 13.2 12.4 16.0
$MM
Recent Trends
Chinese issuers are tapping U.S. investors through the
144a private placement of stock, a limited offering that allows large institutions to purchase shares -- and that circumvents the Securities and Exchange Commission and Sarbanes-Oxley altogether.
launched IPOs of $250 million or more solely in Hong Kong and nine of them also have sold shares to qualified U.S. institutional investors through 144a private placements.
Pricing Trends
Recent market recovery has created a more favorable environment
for issuers
Common stock at a discount prevalent structure vs. convertible preferred Typical discount has narrowed from 20-25% to 20-15%
OVERVIEW
OUR MISSION:
Advising growing companies in China tapping into the financial and intellectual capital of the U.S.
OUR STRENGTH:
Human Resources Intellectual Resources Financial resources
Our Tools
Debt Underwriting IPO/Reverse Merger Project Finance M&A Merchant Banking PIPE/Private Placement
How Do We Proceed
Phase I:
Listen and identify your challenges Evaluate the merit of challenges Get your commitment
Phase II:
Research for solution Propose solution Implement solution Track the outcome of the solution
Recent Transactions
Raising $20 million USD senior debt for a government
coastline extension project in China Advising a fast growing auto parts company in Shanghai on a $10 million USD reverse merger deal Initiating a business relationship between a German brand auto parts supplier in the U.S. with one of the exclusive auto parts distributors in China Structuring a M&A transaction between a China based cardboard manufacturer and a U.S. partner Initiating a LBO transaction for a U.S. public traded company in Shanghai, China
Contact Information
Joseph Xiong Managing Director J & A Advisory Group Inc. Phone: (917) 941.8003 Fax: (212) 256.4944 E-Mail: [email protected]