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What do you get when you pair a publicly traded but bankrupt company with a private, solvent one that can’t go public thanks to market conditions? A perfect match. With the current dearth of capital, such matches are an increasingly common way for companies to gain access to public markets. The complicated maneuver behind these arranged marriages is called a reverse merger. Once viewed as limited to shady operators who wanted to avoid the financial disclosures required by initial public offerings, reverse mergers have become more widely accepted, says Paul Goodman, a corporate partner at New York’s Ellenoff Grossman Schole & Cyruli. Reverse mergers are a faster, cheaper, and easier way than IPOs to take a business public. Depending on the companies involved, says Goodman, the deal can often be done in a matter of weeks. Without lengthy disclosure paperwork to file, the deals are relatively inexpensive. And, says Goodman, “you don’t need shareholder approval or any third-party approval.” Goodman has handled several reverse mergers, including one between Internet services company Rare Medium and ICC Technologies, which was trading at $2.38. The combined company’s stock rebounded to almost $90 (but was, like much of the Internet industry, much lower at press time, at 69 cents). New York-based Rare Medium is now set to merge with Reston, Va.-based wireless company Motient Corporation. Goodman says that the demand for reverse mergers has been steadily increasing. “They’re tricky deals to do, but they’re fun, creative, and unique.” Reverse mergers typically involve Nasdaq small-cap companies that have ceased operations. All that remains is a shell: a public entity with no business. Champions of reverse mergers, like avid matchmakers, are quick to point out high-profile success stories, such as Blockbuster Inc.’s reverse merger with Xtra-vision PLC. Armand Hammer invested in a public shell in the 1950s to create Occidental Petroleum Corporation, and Turner Broadcasting Systems, Inc., was built upon a 1970 reverse merger between Rice Broadcasting and a billboard company that Ted Turner inherited. In 1998 Waste Management, Inc., went public by merging with USA Waste Services, Inc. The renewed interest in reverse mergers has spawned a number of companies that specialize in these deals. Philadelphia-based private investment banker FS Capital Markets Group Inc. offers clean public companies ready for merger on its Web site, absoluteIPO.com. The Adar Group, a Mashpee, Mass.-based company, promises on its site to take companies public in 17 weeks, for about $80,000. Other sites include ReverseMerger.com, IPO-Merge.com, and (no kidding) Mergers-R-Us.com. With dot-coms dropping like flies, the ground would seem to be thick with potential shells for the taking. But Daniel Jacobsen, vice chairman of discount brokerage firm Muriel Seibert & Co., cautions that many of them are saddled with hidden liabilities. Seibert, which itself went public through a reverse merger in 1996, paired up with a defunct but publicly traded furniture company. Jacobsen, a lawyer and CPA, acted as matchmaker. The key factor, he says, was that neither company had hidden liabilities: “I knew they were clean as a whistle.” And they lived happily ever after.

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