In our last issue, titled: “The Pre-Merger Run-up: Where you can cut yourself a piece of the profits”, we introduced readers to the reverse merger process. We briefly discussed the principle purpose to ‘shell’ stocks and where investors can capitalize on investment. In this issue we will break down the seemingly-intimidating and at-times-complicated reverse merger cycle into four (4) basic stages.  This will give every investor the opportunity and knowledge to recognize these explosive trends when they appear in the market.

Stage 1: Early Bird Special

A ‘shell’ stock with little to no market activity is aroused by a jump in volume. The volume primarily originates from (i) those with ‘inside’ knowledge and (ii) savvy investors speculating that a merger may be on the horizon.
During this stage, ‘accumulation’ of stock in the marketplace by one, or both of the aforementioned parties, is common. Unusual volume activity, in a given market, is a signal that favorable corporate activity may be taking place. The favorable event, relative to reverse-mergers, is that management may have found a suitor for the shell.

Stage 2: Let the games begin!

For any number of reasons, management believes it is important to inform shareholders that they are diligently working towards drawing a prospective merger candidate. “Merger Candidate” is used universally at this stage to entice potential investors. Generating market activity at a preliminary stage is often required to fulfill a binding agreement or public stock offering. This stage does not necessarily exist with every reverse merger. Often, stage two (2) of the reverse merger cycle, as defined by TimelessWealth.net, is coupled with stage three (3). This stage is identified when a corporate update is issued containing the term ‘merger’ or ‘merger candidate’ or (ii) when the context of a corporate press release is suggestive of merger activity.

Stage 3: Speculation Nation

This stage may encompass Stage Two (2) of the reverse merger cycle. In this stage a specific company is selected to merge into the publicly-traded shell. Information is typically detained over a period of several weeks as more detail regarding the targeted merger company is released. Speculation is predominant as it is often the driving force behind liquidity and price movement in the market. Speculation occurs because (i) limited or incomplete information is available on the targeted merger company, and (ii) limited information leaves significant leverage to the imagination, hopes and dreams of speculators. In simpler terms, speculation at this stage is rarely rational or logical. However, these circumstances go hand-in-hand with one of the most volatile markets, if not the most volatile market, a security will experience. The security peaks in price during or towards the end of this stage as the reverse merger is finalized. In turn, this stage equates to:

Room to Speculate = Room to Profit

Stage 4: Quality Query

Stage four (4) is best defined as a quality check. Volatility and price movement is dependant upon the management team that has acquired and now controls the shell company. This is the stage where employment of a critical mind is very important. Investors must ask themselves:

Based on a response to this inquiry, an investor can decide whether the market is positioned for growth or decline in price. The key here is value. Poor value in the marketplace is likely to lead to a loss on investment.

Speculation continues to play a role in the market, assuming management is active in communicating and marketing to investors. Depending on the value that management integrates, the market reacts accordingly. This stage immediately follows the peak in price in the market and is the most difficult to recognize because of its many characteristics and appearances. A decline in volume or loss of liquidity in the market is a familiar characteristic during stage four (4) of the reverse merger cycle.

To illustrate the reverse merger cycle, TimelessWealth.net has annotated a four-month chart representing the price movement of Skybridge Technology Group (OTC: SKGO). Prior to a reverse merger, Skybridge Technology Group was quoted on the Over-the-Counter (OTC) Market as a shell company controlled by Toronto-based Mina Mar Group. Notice how the framework to the reverse merger cycle is present in Skybridge Technology’s market. Remember that every reverse merger is unique but is generally limited to the four stages outlined in this educational piece.

Published 03.07.2010 19:20 PM EST