Reverse Mergers: Motivations And Cost-benefit Analysis

During the period of 2007 to 2010, quite a number of real estate firms did not become a public company via a traditional initial public offering (IPO). Rather, they acquired public traded companies using the method of reverse merger (RM). The firms utilizing the reverse merger path have outnumbered the traditional IPO. In the over 100 of public firm in the real estate industry, only 50 companies get listed via IPO while more than half of them via RM. Reverse merger, also known as reverse takeovers, is an effective way of getting listed, and also a new path of raising capital from the capital market.This dissertation consists of Six Chapters.Chapter One is introduction, which is mainly about the background, the ideas and the research method of this dissertation.Chapter Two is about literature review, which reviewing the reverse merger literature from the studies within or out of China.Chapter Three gives the definition of Reverse Merger and other related concepts, such as Shell Company. And the illustrates the general deal structure in a reverse merger transaction.Chapter Four mainly make an depth analysis of the motivations behind the RM transaction of real estate companies. Firstly, illustrate the characteristics of the real estate industry in financing activities. Secondly, construct a simple three-period model in which a company has uncertainty about the availability of a project and need to issue equity to finance it. The model predicts that under suitable conditions, a separating equilibrium exists in which a high-type firm will prefer IPO and a low-type firm will prefer RM. The empirical evidence supports these predictions.Chapter Five introduce the Hua Yuan property case, in which Hua Yuan property acquired a public company call SST Xing Fu. From the financial point of view, Hua Yuan property is in short of capital and in desperate need of raising capital. And then analyze the reverse merger deal structure in this case. Then, calculate the cost and benefit which the original Hua Yuan property shareholders obtain from this reverse merger, according to the cost-benefit analysis model.Chapter Six summarizes the main ideas of this dissertation and comes into several conclusions.The main contribution is as follows,1. By constructing a three- period model, illustrate a separating equilibrium existed. And further more, this model explain that, a high-type firm will prefer IPO and a low-type firm will prefer RM.2. By establishing a cost- benefit model of reverse merger, calculate the cost and benefit of Hua Yuan property in this reverse merger deal. And the results shows that the return of the original shareholders is rather high.The deficiencies is as follows,1. There is no complete data about the cases of all reverse mergers. Thus, there may be some missing cases during the process of statistics.2. In the analysis of the case, due to its financial statement prior to the listing is not accessible, the financial analysis is limited.