Sacramento-based DMGI (Nasdaq: DMGI) has entered into a reverse merger with The Orchard. Local investors in DMGI are waiting to understand how this effects them. After going public February 1 2006, the stock price quickly dwindled, earning DMGI the dubious honor of the 2nd worst IPO of 2006.

As of the date of this transaction, the stock was off more than 50% from its IPO price of $9.75. The Motley Fool's take - "Digital Music (Nasdaq: DMGI) faltered as an IPO last year. It was hoping to cash in on the popularity of digital distribution, but it simply lacked the content library to make a material difference." After the anouncement, the stock was up 12% to close at $4.48. And now the Motley Fool seems much more bullish: 'The makeover it's now getting should give the combined company a clean slate in the minds of burned investors. Clearly, there are many opportunities waiting to be milked in digital distribution. Now with The Orchard on its side, DMGI has some good chances to finally produce a worthy harvest.' Groan at the cheap orchard/harvest connection!

Here is a rundown on the deal from Digital Mediawire

The Orchard, a digital distributor and marketer of independent music, announced on Wednesday that it has agreed to a reverse merger agreement with fellow digital music and video distributor Digital Music Group, Inc.

Under the terms, DMGI will issue 9.1 million shares of common stock and 4.5 million shares of convertible preferred stock to The Orchard, whose shareholders will own about 60% of the merged entity.

The combined business will retain DMGI's Nasdaq listing and change its name to The Orchard, whose president and CEO Greg Scholl will lead the combined company.

Following completion of the deal, The Orchard will control over one million recordings and thousands of hours of film and video programming.

Last year, DMGI reported revenue of $10.2 million and $2.4 million in profit, while The Orchard had revenue of $14.9 million and $4.2 million in profit.

Another potential Sacramento-headquartered company not destined to grow to maturity in our region. Has anyone any ideas as to how we can get them past a certain size - the size where they get snapped up by companies headquartered elsewhere - so they can grow and mature here?

Gillian Parrillo
The Sacramento Executive