Sunday, February 05, 2006

Serial fourtune 500 company founder and Entrepeneur discusses reverse mergers

Founder and former CEO of Iomega David L. Bailey is the walking, talking definition of a serial entrepreneur. Since leaving Iomega in ’83, the now 62-year-old launched two additional companies, both acquired by major companies, and is in the throes of launching his fourth.


Bailey, recently inducted into UITA’s Hall of Fame, talks about how his search for funding eventually led him to go public using a controversial reverse merger.

Wasatch Digital iQ: Let’s start with a brief description of a reverse merger.

David Bailey: A reverse merger is when a company seeking to go public merges into the shell of an inactive public company. The new company replaces the old, and typically the officers and board of the old company resign and are replaced by those of the new company. The inactive public company could have been a legitimate company doing business that went bankrupt or had problems, or it might have been set up strictly as a shell looking to house a business, and in that case, is called a blank check shell.

DiQ: When and why did your company decide to do a reverse merger?

DB: We’ve been trying to raise money for some time and had a commitment from a group in New York in August of last year. Two weeks later, 9/ll occurred. The World Trade Centers were right out their windows. They stood and watched the planes fly into the buildings; their girlfriends and wives were in them. It created turmoil within the group. The economy turned bad, there was the dot com fiasco during which VCs wished they hadn’t put so much money into the industry and lost millions. They became more interested in trying to save their present companies than looking for new companies to invest in. So the investment climate was paralyzed. And frankly, I was tired of going to venture capitalists and groveling for money.

People began to approach us saying, “If you were public, we could raise money for you.” But the company was not financially positioned to do a traditional IPO, nor was anyone doing them in high tech at the time. The only option available to us was a reverse merger that cost significantly less than a traditional IPO. So that was the attraction.

DiQ: Did you have any misgivings about doing a reverse merger given their questionable reputation?

DB: My reaction was initially very negative to the whole concept because of the baggage reverse mergers have and the negative attitude that exists towards them. “I don’t think I can do that,” I said. “I’ve never done it before and it’s always been the wrong way to go.” The people we were talking to said, “Take a look at it, see what we have to offer.” So I looked at it very extensively, decided it was very viable, and was really quite attracted to the idea.

DiQ: What were some of the advantages?

DB: It’s less expensive and easier than a traditional IPO, therefore it’s kind of like morphine. Properly used in a controlled environment, it can be very beneficial, but it can also be abused and very harmful. That’s how it is with a public shell. Some have abused them and try to make money without bringing a legitimate business into the shell. They scam the public by raising money for an illegitimate business and that’s where they get such a bad name. We investigated that extensively.

DiQ: Why are so many reverse mergers unsuccessful?

DB: We discovered it was because the business moving into the shell wasn’t legitimate. If it was, then it was equally as successful as a regular IPO.

DiQ: What kind of due diligence is performed when doing a reverse merger?

DB: We started talking to lots of people. Accounting firms that had dealt with shells; we got input from them, probably four different firms. At least four different law firms, some that had and hadn’t worked with shells. We talked to people who invest in shells, people who did shells as a business, and when we selected what we thought was the right shell, we went back and asked their opinions again. So we did a lot of background work. I think it’s something you have to be careful with, to make sure you’re dealing with the right people and organizing it in the right way so as to be successful.

DiQ: Which exchange are you on?

DB: Over the counter and we’ll be registered in Europe probably next week.

DiQ: So how has it worked for your company?

DB: It was only completed l0 days ago, but so far it’s worked and we’re very optimistic about it.

DiQ: Have there been any problems?

DB: Not really so far. Again, it’s a matter of making sure you do all the homework, but it’s all gone smoothly. We’re using two investment banking firms, one out of the UK and the other out of New York City, and our law firm is a very reputable one out of Texas working in conjunction with the local law firm of Mackey, Price and Thompson. We used the local accounting firm of Tanner & Company. We’re trying to avoid problems with all our precautions.

Our major concern is making sure we can manage the price of our stock and what we’ve done to try to do that is select a shell with shareholders that were committed to our future with a very small number of outstanding shares held by unknown investors. The majority of shares are being restricted and can’t be sold in the early stages. We think we have it well managed but you never know.

DiQ: I’ve heard it said that naïve people, overexcited about going public, do reverse mergers. But that doesn’t seem to fit your profile.

DB: Typically I would agree with that, people get excited thinking they’re going to make a lot of money on the deal. But I am naïve on this, given that I’ve never done it before, that’s why I’ve been super cautious. We’re in constant communication with the SEC to make sure that we have met all their requirements.

DiQ: Others have called it the poor boy’s way to go public. Can you comment on that?

DB: It certainly is a way to go public for less expense, if that’s what is meant, so yes, that’s one way to describe it.

DiQ: Are reverse mergers good for the shell company’s shareholders?

DB: Hopefully, yes. You try to set it up so it’s win/win for everybody.

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