Reverse Triangular Mergers

Definition

A Reverse Triangular Merger is a type of merger where a subsidiary of a purchasing company merges with a target company. As a result, the target company becomes a subsidiary of the purchasing company, while the subsidiary ceases to exist. This merger is often used to create tax efficiencies or to acquire control of a target company without needing approval from its shareholders.

Phonetic

The phonetic pronunciation of “Reverse Triangular Mergers” is: rih-vurs try-an-gyuh-lur mur-jerz

Key Takeaways

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Asset Transfer: In a reverse triangular merger, the target company’s assets and liabilities are automatically transferred to the acquiring company. This includes all contracts, permits, licenses etc. This automatic transfer reduces complications and possible objections that might occur in an asset purchase.
Shareholder Approval: Typically, a reverse triangular merger requires approval of the shareholders of the acquiring parent company and the target company. This is due to the fact that the target company technically survives the merger as a subsidiary of the acquiring company.
Tax Consequences: One of the main advantages of reverse triangular mergers is the potential for tax-free exchange of shares. If the merger meets certain requirements, the exchange of target company’s stock for stock in the acquiring parent company may qualify for tax-free treatment under U.S. tax law.

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Importance

The Reverse Triangular Merger is a significant business/finance term as it’s a commonly used mechanism in corporate acquisitions where the buyer creates a subsidiary (directly or indirectly wholly-owned) to acquire and merge with the target company. Upon completion of the merger, the target company survives as a subsidiary of the acquiring enterprise, while the shareholders of the target company receive consideration from the acquiring company. This mechanism plays a crucial role due to its various advantages over direct mergers, including permitting the preservation of contracts, licenses, and other essential arrangements. It also makes for a more streamlined secondary approval process. Thus, understanding the importance of reverse triangular mergers can lead to more strategic decisions during business acquisitions or ownership transfers.

Explanation

The primary purpose of a Reverse Triangular Merger (RTM) in the world of finance and business is to facilitate the acquisition of a company, ensuring the process is more efficient, reduces the potential for conflicts between shareholders, and simplifies the absorption of the target company. This method is often preferred when the acquiring company wants to take control of a target company that might have valuable contracts or beneficial arrangements that could be voided or impacted by a straightforward merger. RTMs allow the acquiring company to gain control of the target company and their coveted assets, while the target company continues to operate more or less as it did prior to the merger, at least from a legal and operational perspective.In an RTM, the acquiring company essentially creates a subsidiary, which is then merged with and into the target company. Post-merger, the target company, having absorbed the subsidiary, becomes a wholly-owned entity of the acquiring company, with the target company’s stockholders usually paid off in cash, shares in the purchasing company, or a combination of both. It is an appealing option as it typically allows for a transfer of assets to occur automatically and eliminates the need for separate asset transfer agreements – making the transition process relatively smooth and efficient. This strategy ensures the target firm’s existing agreements, permits, and contracts remain in place even after the merger, which could be disrupted in an ordinary acquisition process.

Examples

1. Merger of Citrix Systems and Netviewer AG: In 2011, Citrix Systems, a U.S. multinational software company, acquired Netviewer AG, a European SaaS vendor. In this reverse triangular merger, a subsidiary of Citrix Systems was merged with Netviewer, absorbing all its assets and liabilities. Afterward, this subsidiary ceased to exist while NetViewer remained, becoming a wholly-owned subsidiary of Citrix.2. Acquisition of Skype by Microsoft: In 2011, Microsoft acquired Skype through a reverse triangular merger. Microsoft created a new subsidiary, MS Rhode Island, which then merged with Skype, absorbed all its assets and liabilities and ceased to exist. Skype remained as a wholly-owned subsidiary of Microsoft.3. Merger of Google and DoubleClick: In 2007, Google, already a successful internet search and advertising company, acquired the online advertising company, DoubleClick. Google created a subsidiary which then merged with DoubleClick. This subsidiary dissolved while DoubleClick survived, maintaining its existing contracts and obligations, all under Google’s ownership.

Frequently Asked Questions(FAQ)

What is a Reverse Triangular Merger?

A Reverse Triangular Merger (RTM) is a type of merger structure where a subsidiary or created entity of the buying company merges with the target company. In this setup, the target company becomes a subsidiary of the acquiring company.

How does a Reverse Triangular Merger work?

In a RTM, the acquiring company forms a subsidiary which is then merged into the target company. The target company continues as a subsidiary of the acquiring company with the shareholders of the target company receiving acquire company’s stock as consideration.

Why would a company choose to do a Reverse Triangular Merger?

Often, an RTM is chosen due to its ability to transfer the target company’s assets while preserving the target’s organizational structure and existing contracts. This method avoids the complications associated with asset acquisition, such as approval requirements from third-parties.

What are the advantages of a Reverse Triangular Merger?

The key advantages of RTMs include: the ability to retain the target’s contracts or licenses which are non-transferable in nature, the transaction is mostly tax-free, and target company’s corporate existence continues, ensuring minimal disruption.

Are there any disadvantages to a Reverse Triangular Merger?

A potential drawback of a RTM could be the assumption of unknown or unwanted liabilities of the target company, as the entire entity is bought, including all its liabilities.

Is a Reverse Triangular Merger the same as a Forward Triangular Merger?

No, they are not the same. In a Forward Triangular Merger, the target company merges into the subsidiary of the acquiring company and ceases to exist, whereas in a Reverse Triangular Merger, the subsidiary of the acquiring company merges into the target company which continues to exist as a subsidiary of the acquiring company.

Is a Reverse Triangular Merger a taxable event?

Generally, RTMs are designed to be a tax-free exchange for the shareholders of the companies involved in the merger.

What happens to the shareholders of the target company in a Reverse Triangular Merger?

In a RTM, the shareholders of the target company typically receive shares from the acquiring company as a form of consideration, effectively swapping their original shares for shares in the acquiring company.

Related Finance Terms

Acquisition
Stockholders
Surviving Entity
Subsidiary
Corporate Restructuring

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