Reverse Shell Mergers Explained » Foreign Companies

Venture Capitalists Going Global – Part 7

Ralph Amato — Tue, 23 Sep 2008 15:00:03 +0000

Some venture capitalists (“VC”) believe that their traditional industry model needs to be revised. That is why we are starting to see more and more companies being funded in the “BRIC” countries (Brazil, Russia, India and China). The days of sitting back and waiting for companies to come to you for funding is over. Now a VC has to get on a plane and travel half way around the world to uncover the best companies to invest in. Most of the foreign countries do not provide access to capital so VC usually are welcomed with open arms. Also the valuations of foreign based companies are half of US based companies. Therefore the VC gets a greater return for their overseas investments.

Bookmark to:

Reverse Mergers Attract Foreign Companies – Part 14

Ralph Amato — Fri, 27 Jun 2008 15:00:32 +0000

In contrast the differences in investing in a US based company versus a foreign company are significant. US based companies get higher valuations and in some ways have less risk. Companies have a greater awareness of SEC and SOX compliance and understand the importance of keeping their investors informed.

Foreign companies have greater risk associated with them but US based investors can usually find companies that are well established, exhibit steady increases in revenues and profits, and provide investment opportunities at substantial discounts to market. The biggest advantage is foreign companies have greater immediate growth potential. The downside, as we have described in length in this series, is if something goes wrong there is little recourse and the SEC is limited in its ability to protect US investors.

Bookmark to:

Reverse Mergers Attract Foreign Companies – Part 13

Ralph Amato — Thu, 26 Jun 2008 15:00:59 +0000

There are several other areas of concern that US investors must address when investing in foreign companies. This can include but not limited to release of funds from escrow in traunches based upon the company’s use of proceeds. Other conditions usually contain a provision for Officers and Directors shares to be held in escrow until certain milestones have been met and a “make good” clause that is based upon the company hitting their projected pretax profit for the next twelve months. These types of terms and conditions are unique to US investment in a foreign company listed on the OTCBB. However, when implemented properly, these safeguards tend to limit the downside risk and protect US investors.

Bookmark to:

Reverse Mergers Attract Foreign Companies – Part 12

Ralph Amato — Wed, 25 Jun 2008 15:00:15 +0000

Other terms and conditions for investment in a foreign company can include prepayment of the first year’s attorney, accountant and consultants fees along with $500,000 for investment awareness programs with a “use it or lose it” clause. Terms and conditions can also include a clause that prevents a change in the CFO position within the first twelve months of being public without written permission by the investors. Case in point – in 2007, sixty nine (69) Chinese companies went public with nine (9) of them changing their CFO’s in the first year. Now, that could mean the company’s wanted to bring in more qualified individuals for the CFO position or they felt they could drop the position altogether because they were now public. Either way, these types of issues are of great concern to US investors. For example; Chinese companies main goal is going public and they consider that achievement the end of the race when, in fact, it is actually the start of the race.

Bookmark to:

Reverse Mergers Attract Foreign Companies – Part 11

Ralph Amato — Tue, 24 Jun 2008 15:00:51 +0000

Because of the cultural differences and risk factors associated with foreign deals it is not uncommon for US based investors to dictate certain terms and conditions that are unique to these types of investment. One of the biggest areas of concern is investor awareness. For some reason certain countries, like China, do not understand why they should spend money to make retail and institutional investors aware of their company. I describe this observable fact as follows; It is like having a beautiful bride (the company) that you bring to the alter and marry (going public) and then you lock the bride in a closet where no one can see her (no investor awareness).

Bookmark to:

Reverse Mergers Attract Foreign Companies – Part 10

Ralph Amato — Mon, 23 Jun 2008 18:51:10 +0000

Foreign deals are valued differently than US deals. The goal for the foreign company is not to get listed on the OTCBB but to gain listing on an exchange like AMEX or NASDAQ. To do this they have to demonstrate earnings of $.30 to $.40 a share so they can eventually get their stock to trade at $3.00 to $4.00 per share. This is great for the investors because they end up investing in a company at a three or four price earnings (“PE”) ratio on a pre-money basis.

Now here is the cultural twist. Even though the foreign company understands the criteria for qualifying for an exchange listing they are completely against spending money for investor awareness programs which, if implemented correctly, improve the stock price. Foreign company management does not believe in spending money on things that are not tangible.

Bookmark to:

Reverse Mergers Attract Foreign Companies – Part 9

Ralph Amato — Fri, 20 Jun 2008 15:00:33 +0000

Investment in a foreign company is treated in a much different manner. This is due the inherent risk factors. Investors are keenly aware they have little recourse if a foreign company does not perform. Most of these emerging growth companies are located in BRIC (Brazil, Russia, India, China) countries. Those countries do not have an SEC to protect investors so the investors have to mitigate the risk by including very strong terms and conditions in their funding agreements. Those terms can include how and when the funds are distributed along with “make good” on certain performance standards.

Bookmark to:

Reverse Mergers Attract Foreign Companies – Part 8

Ralph Amato — Thu, 19 Jun 2008 15:00:57 +0000

There terms and conditions of financing a US based versus foreign company are as different as night and day. Most US based companies have a tendency to give their companies much higher valuations than they deserve. Investors are usually split into two camps. Either they want a company that has revenues, profits and large growth potential or they want to bet on some future technology where perception is greater than the reality.

If the company has revenues and profits the biggest determining factor for valuation are the future growth prospects of the company. If the company has a new technology or medical cure the valuations are subjective and investors base the valuation strictly on future earnings projections. Investors know such companies could result in either a billion dollar baby or a complete loss of their investment. However, they are willing to take substantial risk because the rewards can be enormous. One home run allows investors to spread their risk and bet on several new technologies.

Bookmark to:

Reverse Mergers Attract Foreign Companies – Part 7

Ralph Amato — Wed, 18 Jun 2008 15:00:21 +0000

The thought processes of going public through a reverse merger are quite different for foreign companies versus their US counterparts. Consideration of revenues and profits of foreign companies differ greatly from the investor’s point of view. Most foreign companies will not try to attempt a reverse merger or financing unless they have a minimum of $2MM to $5MM of net income. In contrast, with a US based company, it is not uncommon to have a technology or biotech company that is pre revenue and profit trying to perform a reverse merger. Financing a US based company that is considered developmental is doable whereas such a scenario would never fly with a foreign company. For the most part US investors seek foreign deals that have both revenues, profits and are priced below market.

Bookmark to:

Reverse Mergers Attract Foreign Companies – Part 6

Ralph Amato — Tue, 17 Jun 2008 15:00:29 +0000

There are many cultural differences between US investors and management of foreign companies. US investors have certain expectations when they make an investment in a company, regardless whether it is foreign or domestic. In most cases they expect a substantial ROI in less than 24 months. US investors want to see returns as soon as possible whereas foreign management has a slightly longer term investment view – usually 10 to 20 years into the future. Foreign managers are also risk adverse and they have a tendency to move in a slow and methodical fashion to build a company on a firm foundation versus seeking short term gains. For most US investors who are accustomed to immediate gratification waiting for long term results can be the equivalent of Chinese water torture.

Bookmark to: