A reverse triangular merger occurs when an acquiring company forms a subsidiary entity, this subsidiary then acquires the target company, and eventually, the subsidiary is merged into the target company, leaving the target as the surviving entity. This complex merger structure allows the acquirer to gain control of the target while preserving certain advantageous aspects of the target company.
The Process of a Reverse Triangular Merger
A reverse triangular merger involves several critical steps:
- Formation of a Subsidiary: The acquiring company (AcquirerCo) establishes a subsidiary (SubCo).
- Purchase of Target: SubCo acquires the target company (TargetCo), often through the exchange of stock or cash.
- Merger and Absorption: SubCo is then merged into TargetCo, and as a result, TargetCo survives and becomes a wholly-owned subsidiary of AcquirerCo.
Key Advantages of a Reverse Triangular Merger
Asset Continuity
The target company’s assets remain intact and seamlessly transitioned, minimizing disruption of ongoing operations.
Legal and Contractual Benefits
Existing contracts, licenses, and permits of the target company typically remain in force without the need for re-approval, which can expedite the process.
Tax Considerations
- Tax Deferral: Allows for potential tax deferral benefits in a stock-for-stock transaction.
- Tax-Free Reorganization: The structure can qualify as a tax-free reorganization under the Internal Revenue Code Section 368(a)(2)(E), thus avoiding immediate tax liabilities.
Strategic Implications of Reverse Triangular Mergers
Simplified Integration
This merger type can streamline the integration process by reducing the need to transfer contracts and licenses anew.
Flexibility in Acquisitions
Flexibility is provided in structuring the purchase consideration, which can be beneficial in negotiations.
Market Perception
Maintaining the target company’s identity can be advantageous, especially if the target has a strong market presence or brand equity.
Examples of Reverse Triangular Mergers
- Google and Android Inc.: Google’s acquisition of Android involved forming a subsidiary that acquired and subsequently merged into Android, helping to preserve Android’s operational framework.
- Facebook and Instagram: Facebook’s acquisition of Instagram through this merger type facilitated a smooth transition and operational continuity for Instagram.
Related Terms
- Forward Triangular Merger: A merger where the target company merges into the acquirer’s subsidiary, and the subsidiary survives.
- Horizontal Merger: A merger between two companies operating in the same industry.
- Vertical Merger: A merger between companies in different stages of production in the same industry.
FAQs
Is a reverse triangular merger always beneficial?
Can a reverse triangular merger be considered a tax-free reorganization?
What happens to the employees of the target company?
Summary
A reverse triangular merger is a strategic and flexible approach for companies aiming to acquire another business while maintaining the target’s operational structure and legal benefits. This guide highlights the process, advantages, strategic impact, and provides real-world scenarios to elucidate its application in corporate strategies.
References
- Internal Revenue Code Section 368(a)(2)(E)
- Valuation Approaches in Mergers and Acquisitions - Harvard Business Review
- Strategic Mergers and Acquisitions - Financial Times Guide
