Shortcut To The U.S. Markets Through Reverse Mergers

A reverse merger takes place when a public company, commonly known as a shell, acquires a private operating company through a share exchange transaction. The public shell typically has no business operations, but is valuable because of its public trading status. Post-merger, the operating company’s owners take control of the newly formed public company. Reverse mergers have long been used in the U.S. as an alternative to achieve public trading status. Conventionally, foreign companies wishing to cross list their shares in the United States have followed the old-fashioned initial public offering (IPO) process. Their shares, typically in the form of American Depositary Receipts (ADRs), are registered with the SEC and are listed on a major stock exchange. In recent years, however, an increasing number of Chinese companies have gained U.S. market listing through reverse mergers. This article provides a detailed case study of an actual reverse merger. The case is appropriate for upper-level undergraduate or graduate finance courses such as corporate finance. Students should have the basic knowledge about the financial markets and corporate finance. Students can work individually or in teams on this project, which requires around 5-8 hours outside of class to complete. Classroom presentations and discussions should be arranged in a regular, 2-hour class.