Privately owned small and midsize manufacturers who want the benefits of going public may want to consider a reverse merger.

Although the process is not as widely known as an initial public offering, the reverse merger process has been in existence for decades. For example, Arman Hammer invested in a public shell company in the 1950s and developed what is known today as Occidental Petroleum Corp., a multinational company.

Timothy P. Halter, president of Halter Financial Group Inc. in Dallas, believes the reverse merger process is ideal for small and midsize companies looking to grow through acquisitions. Besides this, however, other benefits of going public include offering stock options for employees, shareholder liquidity, collateralizing loans, or reducing debt in exchange of stock.

Here's how the reverse merger works:

Halter says there are hundreds, if not thousands of 'public shell' corporations. A public shell is a corporation that went public at some point in the past, and for whatever reason, has little or no assets nor liabilities. Nevertheless, these corporate shells have shareholders and are still considered to be legal, public entities.

During a reverse merger process, shareholders of the public shell agree to buy the private company. Generally, millions of new shares are issued to purchase the private company. In exchange for the new shares, the private company agrees to buy the shares of the shell corporation. At the end of the transaction, the seller of the private company is the majority owner of the public company.

'Being a public company gives them stock as currency to make acquisitions,' Halter tells IW Growing Companies. 'It's ideal for companies that are established and are growing and that would have some appeal in the public market place.' Halter, whose company has directed about 40 reverse mergers, says a typical private company should have a market value of at least $20 million, as well as have good cash flow and a strong balance sheet.

One drawback, however, is that the reverse merger process does not attract the attention of investors that an IPO does, says Robb Russell, a Boston-based investment banker.

'There is no way for the stock to gain momentum, to get the story out about your company,' Russell says. 'No one is promoting the company to get the stock to move.'

But Halter points out that when the IPO hype ends, companies need to rely on financial performance in order to attract and keep investors.

Halter says the reverse merger process is substantially less expensive than an IPO, carries less risk, and creates a tax advantage.

On November 5, Halter is sponsoring a one-day seminar to explain the details of the reverse merger process. The seminar will be held at the University Club in Dallas. For more information, call 972-233-0300 or visit Halter Financial Group's Web site at www.halterfinancial.com.

Internet search engines also can help find additional information about reverse mergers and contacts with other companies.

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