When the stock went to a very small bid, I would accumulate the stock on the chance that the company would later be used in a reverse merger. This bring us to the next reason reverse merger companies have bad aftermarkets they have been told by their attorneys, their financial consultants, and the people who sold them the shell that once they are public, the company will have unlimited access to money. No new buying price declines. Sharks prey on the weak and the unwary. Second, substantial blocks of stock may be in the hands of market makers. In sum, doing a reverse merger without a complete plan for the aftermarket is a trap for the unwary. To get this money, reverse merger companies, in fact all companies, need to keep their stock price up. The liquidity they actually supplied to the market was minimal. First, the shell promoters will almost certainly be selling their stock.
The main reason to do a reverse merger, or do a deal with a public shell, is to raise money. As the attorneys, the financial consultants, and the reverse merger company all make their money when the shell deal closes, they somehow neglect to explain what happens after the close. When the reverse merger was announced, I would be eager to sell my
China CPVC Pipe Factory position. A reverse merger company that is sold a bill of goods about a reverse merger being the total solution is likely to find its stock price headed down. The final reason reverse merger companies do not do well in the after market is the most evil. Wall Street, as everyone should be aware, is not a place where mercy reigns supreme. There were also other market makers who specialized in low priced stocks. In actual fact, all the company gets is an exit strategy that may be used to entice investors. When the stock went up, they would also sell and possible cease making a market. As the price was extremely low, it cost me little to accumulate a large number of shares.
Thus, many reverse merger companies that thought they were buying a shell with market makers were in fact getting no real market. Not knowing how to fight off short sellers can be deadly. When the shorts raid the stock, they know that pushing the price down can destroy the company. Customers, employees and investors will exit and avoid a company with a low stock price. As a former market maker myself, I can tell you that I would wind up with positions in companies that crashed. It is a place inhabited by sharks. The investor still has to be found and sold. After selling the position, I would cease making a market in the stock. You must have an investor relations and fund raising plan that includes recruiting investors and market makers and fighting off attacks by short sellers. Unfortunately, whether or not the company does a PIPE deal, the stock performance of the new public company after a reverse merger with a public shell is often dismal. The usual reverse merger stock chart looks like a profile of a waterfall as the stock starts trading on high expectations, only to sink to near zero bid after a time. Growth requires constant new money, even profitable growth.
The only reason for a market maker to trade a stock is because he believes he will see a volume of trading that will allow him to profit from the spread. Unlike our firm, they had limited funds to take positions in stocks. So the company that anticipated having me as a market maker lost on both counts I was a seller and I left the market. A low stock price not only stops the company from getting the money it needs or getting the money it needs at a good price, it tells everyone that the company is weak and likely to die. Usually, the idea is to get a high stock price and then sell stock privately based on the price of the public stock - a private investment in public equity or PIPE deal. Even making an agreement to lock up their stock may not help much if they have given stock to others or kept stock in other accounts that are not part of the lock up agreement. This stock will be a substantial part of the company. About Author John Lux :. There are several possible reasons for this bad performance. That is not their problem; it is yours. He knows that unless the company engages in aggressive investor relations, there will be no volume in a small company's stock and the price will go down. They may fall victim to short sellers. Short sellers know that small companies need to have a continuous stream of money to grow.