To OTC Journal Members:
 

What is a Reverse Merger?

Most investors are familiar with the traditional IPO (initial public offering) as a method for going public. Many people don't realize there are numerous other ways for private company to become publicly traded.

One widely used method is the "Reverse Merger", a simplified, fast track method by which a private company can become a Public Company.

This method for going public is more prevalent than most investors realize. One study estimates 53% of all companies going public in 1996 did so through the "Reverse Merger". The same study concluded about 30% of newly publicly listed companies got there through Reverse Mergers in 1999. Percentages dropped because Wall Street Investment Banking firms had a huge appetite for IPOs in the late 90s, and many marginal companies were able to find their way to the public market through traditional IPOs. We expect the Reverse Merger to make a come back in today's climate with very few IPOs being filed by Wall Street firms.

The reverse merger occurs when a public company which has no business and usually limited assets acquires a private company with a viable business. The Private company "Reverse Merges" into the already public company, which now becomes an entirely new operating entity and generally changes name to reflect the newly formed company's business.

The original public company, commonly known as a Shell company, has value because of its publicly traded status. The shell company is generally recapitalized and issues shares to acquire the private company, giving shareholders and management of the private company majority control of the newly formed entity.

Reverse Mergers are also commonly referred to as Reverse Takeovers, or RTO's.
 

Benefits of Going Public Through the RTO (Reverse Take Over)

• Initial costs are much lower and excessive investment banking fees are avoided.
• The time frame for becoming public is considerably shorter.
• There is no significant regulatory review or regulatory approval for the transaction.
• The company can now use its stock as currency to finance acquisitions and attract quality management.
• Capital is easier to raise as investors now have a clearly defined exit strategy through the public markets.

Negatives of Going Public Through the RTO

• There is no capital raised in conjunction with going public.
• There is limited sponsorship for the stock and the stock generally trades on a lower level exchange- i.e. the Pink Sheets or Bulletin Board.
• There is no high powered Wall Street Investment Banking relationship.

Things You Should Know About RTOs- Investors Beware

Many highly successful companies have gone public through the RTO. However, there some important risks and negatives investors should be aware of.

There is a much higher failure rate amongst RTO companies versus the traditional IPO. Much smaller and less successful companies are able to become public through the RTO, and many are underfunded. Often these stocks trade very inefficiently in the absence of any sponsorship or following.

There is a thriving cottage industry of merchant bankers and entrepreneurs who specialize in orchestrating reverse mergers. Unfortunately, there are no barriers to entry in this field. Therefore, scams are common place.

Scam artists have developed methods to accumulate large positions in the free trading shares of shell companies. An RTO is consummated with a marginal private company, and the scam artists puts together a massive publicity campaign designed to create activity in the stock. Unrealistic promises and absurd claims of corporate performance find their way to the public. The enhanced trading volume allows the scam artist to dump his shares on the unsuspecting public, most of whom eventually lose their money once the newly formed public company fails. This scam is commonly known as a "Pump and Dump".

The SEC has information on the warning signs of a Pump and Dump cyber scam on its web site. Click Here for that SEC section and please read it. Also, to fully understand the OTC Journal's role in the exposure process for RTO situations, you should read our Mission Statement found at our home page at www.otcjournal.com.

Alternatively there a hundreds of examples of highly successful companies which have yielded millions in profits for investors that have gone public through the RTO. Many of these companies deserve exposure to investors. Without Wall Street setting the bar, initial market valuations can be reasonable, providing excellent opportunities for individual investors to accumulate positions ahead of Wall Street institutional money.
 

Some High Profile and Successful RTOs

• Armand Hammer, world renown oil magnate and industrialist, is generally credited with having invented the RTO. In the mid 1950s, Hammer invested in a shell company into which he merged multi decade winner Occidental Petroleum.
• In 1970 Ted Turner completed a reverse merger with failing Rice Broadcasting, which went on to become Turner Broadcasting.
• In 1996, Muriel Siebert, renown as the first woman member of the New York Stock Exchange, took her brokerage firm public by reverse merging with J. Michaels, a defunct Brooklyn Furniture company.
• One of the Dot Com fallen Angels, Rare Medium (NASDAQ: RRRR), merged with a marginal refrigeration company. This was a $2 stock in 1998 which found its way over $90 in 2000.
• Aklaim Entertainment (NASDAQ: AKLM) merged into non operating Tele-Communications Inc in 1994.
• Cross Media Marketing (AMEX: XMM), our favorite pick for 2002, merged into non operating Brack Industries in 1998. Cross Media is on track to generate $150 million in revenues and over $15 million in profits in 2002.
• Although we can't confirm this from old records, ViaCom is rumored to have been an RTO, along with precious metals giant Placer Dome.

There are hundreds of other examples of highly successful RTOs and thousands of failures. Individual investors can profit from knowing about these situations before Wall Street gets involved and places its own inflated value on the company. Buyers of Cross Media stock in early November are enjoying the benefit of getting in ahead of Wall Street money managers. We brought it to your attention as a virtual unknown at $6.70 on November 2nd. It closed today at $11.93, up 78% in less than three months. On that date the stock was trading at 6x next year's earnings with a 50% growth rate. If Wall Street had done the IPO you would have never seen such a compelling value in the open market.

Taking the RTO To a New Level - Verus International Merchant Banking Firm

Wall Street Brokerage Firms have looked down their nose at RTOs for years. There are no massive investment banking fees generated in an RTO, and companies hitting the public market through this route are normally high risk.

However, there is a New York based Merchant Banking firm in a position to change this perception. Verus International, located in Midtown Manhattan, has the credentials and credibility to make Wall Street to stand up and take notice.

Their Advisory Board reads like a Who's Who of Wall Street power players. As disclosed on their web site (www.verusinternational.com), here is a list of people on the Verus International advisory board:

• Jack Rivkin- Executive Vice President in charge of investments at CitiGroup. Rivkin also serves as the Chairman of the Board of Verus International.
• Sir Richard Branson- High profile international businessman, investor, and financier. Founder of Virgin Airlines and Virgin Records.
• Strauss Zelnick- Formerly President and CEO of BMG Entertainment and 20th Century Fox.
• Jonathan Cohen- Well known and highly regarded Wall Street analyst. Was the subject of our last edition on Merril Lynch's track record during the internet craze.
• Robert Lessin- Current Chairman and former CEO of Witt SoundView Group.
• Peter Norris- International financier and investment banker. Currently with ING. Formally with Goldman Sachs.

In the near future a Verus International client company will open for trading on the American Stock Exchange after completing an RTO. We believe this stock will trade like a hot IPO, giving individual investors a chance to participate on a level playing field with institutions. Stand by for more information in the weekend edition.

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