Reverse Triangular Merger: Its Overview and Examples

Key Takeaways:

• A Reverse Triangular Merger is a legal process where the acquiring company creates a subsidiary and merges it with the target company. This process can provide tax and legal advantages for the acquiring company.
• The legal structure of a Reverse Triangular Merger involves creating a subsidiary to acquire the target company, with the subsidiary being the surviving entity after the merger.
• The process of a Reverse Triangular Merger includes conducting due diligence, preparing legal documents, obtaining shareholder and regulatory approval, and closing the transaction. Advantages of this process include limited liability, tax benefits, and a simplified acquisition process. However, disadvantages include increased complexity and costs.
• Examples of Reverse Triangular Mergers include Company A acquiring Company B, and Company A merging into Company B's subsidiary. These examples showcase the tax benefits and legal advantages that a Reverse Triangular Merger can provide for businesses.
• The tax implications of a Reverse Triangular Merger depend on various factors, such as the size of the transaction and the jurisdictions involved. It is recommended to consult with tax professionals to fully understand the tax implications of this process.
• Before deciding if a Reverse Triangular Merger is suitable for your business, it is important to consider the advantages and disadvantages, consult with legal and financial advisors, and evaluate the specific circumstances of the merger.

Do you struggle with understanding Reverse Triangular Mergers? Take a look at this easy to understand guide and start unlocking their advantages for your business. You'll learn all about the intricate legal and financial workings of a Reverse Triangular Merger, plus some examples.

Overview of Reverse Triangular Merger

The reverse triangular merger structure is used in M&A transactions where the acquiring company sets up a subsidiary and the target company merges into the subsidiary rather than the acquiring company. This structure allows the acquiring company to utilize the target company's net operating losses and avoids the need for the target company's shareholder approval.

                            Overview of Reverse Triangular Merger                                         In a reverse triangular merger, the acquiring company creates a subsidiary that merges with the target company. This structure is used to utilize the target company's net operating losses and avoid the need for shareholder approval.                

Reverse triangular mergers are particularly useful when the target company has significant net operating losses that can be used to offset the acquiring company's future profits. This structure also allows the acquiring company to avoid the need for the target company's shareholder approval.

In 2008, HP used a reverse triangular merger structure to acquire EDS, a leading IT services company. HP set up a subsidiary called Everest Acquisition Corporation, which merged with EDS. The transaction was valued at $13.9 billion and made HP a leading player in the IT services industry.

Overall, reverse triangular mergers can provide significant benefits to acquiring companies, particularly in situations where the target company has valuable net operating losses that can be utilized.

Legal structure of Reverse Triangular Merger

Reverse Triangular Merger's Legal Framework

Reverse Triangular Merger (RTM) is a strategic business activity that involves a complex legal structure. The RTM legal framework revolves around three organizational entities: the acquiring corporation, the target corporation, and a subsidiary corporation. To acquire the target corporation, the acquiring corporation creates a subsidiary corporation that merges with the target corporation. This subsidiary corporation owns the target corporation, and the target corporation survives as a wholly-owned subsidiary of the acquiring corporation through the RTM structure.

Below is a table that illustrates the legal entities involved in an RTM structure:

Organizational EntityDescription                       The Acquiring Corporation       The company that initiates the RTM structure as a way of acquiring the target corporation.                  The Target Corporation       The company being acquired through the RTM structure.                 The Subsidiary Corporation       The newly created company that merges with the target corporation.          

An RTM structure allows the acquiring corporation to acquire the target corporation, without requiring its shareholders to sell their shares. Additionally, RTM structures have the added benefit of allowing the acquiring corporation to use the target corporation's assets and resources while limiting its liability.

Pro Tip:

RTM structures require a thorough legal review and consultation with legal experts to ensure proper compliance with applicable laws.

Process of Reverse Triangular Merger

Want to understand reverse triangular merger? Delve deeper! Consider two key areas: advantages and disadvantages. This will help you comprehend how the technique works, and the possible risks and rewards.

Advantages of Reverse Triangular Merger

Merger of two firms has always been a complex task for businesses. One option to carry out a merger is through a reverse triangular merger. This process offers benefits such as protection against liability, tax efficiency, and stock transfer ease. Reverse triangular mergers also provide an easier transition as the acquired firm merges directly into the acquiring firm's subsidiary rather than merging with the parent company.

Additionally, reverse triangular mergers help the firms save time in obtaining business permits and contracts. By reducing documentation formalities related to merger filing requirements and proxy solicitations, they enable quicker access to necessary permissions. Thus, this strategy ensures smooth transitions with minimal disruptions.

Pro Tip: Investors suggest that determining whether a reverse triangular merger is appropriate for your business is a careful decision that requires adept counsel. It's critical to approach robust negotiation tactics when deciding on terms and conditions for the proposed deal.

Reverse Triangular Merger - where the 'reverse' part sounds like a red flag, but at least it's not a square one.

Disadvantages of Reverse Triangular Merger

Reverse Triangular Merger Limitations that Restrict its Use

A Reverse Triangular Merger strategy is widely used in corporate acquisitions, but it may have some drawbacks. These drawbacks can limit the use of this merger type.

• Increased Complexity: A reverse triangular merger is more complicated than an ordinary merger, requiring the creation of a subsidiary company and the transfer of ownership of the target company to this newly created subsidiary.
• Tax Implications: Reverse triangular mergers can be challenging to execute due to tax implications, which must be considered by both parties involved in the merger.
• Shareholder Approval: Under specific circumstances, shareholder approval is required for reverse triangular mergers. Obtaining such approval can be arduous and time-consuming for companies.
• Certain Lawsuits and Obligations: Due to certain laws and regulations, a reverse triangular merger may lead to obligations for a company that they didn't anticipate. Furthermore, lawsuits concerning the legitimacy of key shareholders or their relationship with officers could threaten to derail a merger agreement.

Another issue with Reverse Triangular Mergers is that regulatory considerations create barriers that restrict their use.

Finally, some real-life reverse triangular merger examples that aren't as exciting as the phrase 'reverse triangular merger' sounds.

Reverse Triangular Merger Examples

To grasp reverse triangular merger, examples are essential. To give a clearer image, this section will provide two sub-sections:

1. Example 1 showcases Company A buying Company B.
2. Example 2 delves into Company A joining Company B's subsidiary.

Example 1: Company A acquiring Company B

A real-life instance of a reverse triangular merger would be when Company A purchases Company B. Here, Company B forms a subsidiary and merges with another or the same from Company A. This way, Company A indirectly acquires the assets, liabilities, and operational capabilities of Company B.

Example 1: Company A acquiring Company B

            td >< b > Annual Revenue Post Acquisition($)< / b >            td > $700 million< / td >        tr >Companies InvolvedAcquiring Company         Company A                   Merging / Subsidiary Target         Company B                    FinancialsPurchase Price for Equity ($)          $200 million                    Purchase Price for Assets ($)           $500 million                                Acquired Liabilities($)           $100 million                             Transaction Advisor(s) involved:            "Morgan Stanley"             "Bank of America Merrill Lynch"            

Furthermore, one advantage of reverse triangular mergers is that they are simple to process compared to other forms. This approach also enables the acquiring company to complete the transaction quickly and reduces the risk of third-party obstacles.

Interestingly, Apple Inc. utilized a reverse triangular merger in 2014 when it acquired Beats Electronics. The report indicated that Apple did it as an effective way of acquiring Beats without Beats experiencing a significant tax liability.

Looks like Company A's only option for survival was to be adopted by Company B's subsidiary like a stray kitten.

Example 2: Company A merging into Company B's subsidiary

In this scenario, Company A merges with one of the subsidiaries of Company B by conducting a reverse triangular merger. This means that Company A will create a new subsidiary and merge it with the targeted subsidiary of Company B. As a result, the ownership of this new subsidiary will be held by the shareholders of Company A, and therefore, control over the targeted subsidiary is gained.

This type of merger structure allows for several advantages such as limiting tax consequences, maintaining contracts and licenses, and avoiding regulatory issues. Additionally, this type of merger may also allow for faster approval from shareholders due to the limited effect on assets and liabilities.

It should be noted that this type of merger can become complicated when dealing with different jurisdictions or international parties. Thus, careful planning and execution are needed to ensure a successful transaction.

A prominent example of a reverse triangular merger occurred in 2017 when Broadcom merged with Brocade Communications Systems. Broadcom created a new wholly-owned subsidiary which then merged with the target company's subsidiary. This allowed Broadcom to gain access to key Brocade assets while minimizing tax exposure and regulatory hurdles.

Not even a Reverse Triangular Merger can escape the wrath of the IRS.

Tax implications of Reverse Triangular Merger

A Reverse Triangular Merger can have significant tax implications for the parties involved. Here is a breakdown of these implications in a professional and informative tone.

               Tax Implications       Explanation                       Capital Gains Tax       Shareholders of the acquired company may owe capital gains tax on the sale of their shares                 Step-Up in Asset Basis       The acquired company's assets get a step-up in basis which can lead to deductions for depreciation or amortization                 Tax Attribute Preservation       Acquiring company may be able to preserve the acquired company's tax attributes such as net operating losses or tax credits          

It is worth noting that each Reverse Triangular Merger will have its unique tax implications, and professional advice from a tax specialist should be sought.

Reverse Triangular Mergers have become increasingly popular in recent years due to the potential for tax savings and ease of execution. However, they are not without risks, and thorough due diligence is necessary to ensure the acquisition is financially viable and legally compliant.

Some Facts About Reverse Triangular Merger Overview and Examples:

• ✅ Reverse triangular merger is a type of corporate merger in which a subsidiary of the acquiring company merges with the target company, creating a new subsidiary. (Source: Investopedia)
• ✅ It is a popular method for acquiring a public company without going through a lengthy and expensive tender offer process. (Source: Harvard Law School Forum on Corporate Governance)
• ✅ In a reverse triangular merger, the target company's shareholders typically receive cash or stock in exchange for their shares. (Source: The Balance)
• ✅ The acquired company becomes a subsidiary of the acquiring company and the acquiring company assumes all the liabilities of the acquired company. (Source: Cornell Law School Legal Information Institute)
• ✅ Examples of reverse triangular mergers include Microsoft's acquisition of LinkedIn and Ford's acquisition of Volvo. (Source: The Motley Fool)

FAQs about Reverse Triangular Merger Overview And Examples

What is a reverse triangular merger?

A reverse triangular merger, also known as a reverse subsidiary merger, is a type of acquisition in which the purchasing company creates a subsidiary that merges with the target company. This allows the acquiring company to complete the transaction without having to obtain approval from the target company's shareholders.  

How is a reverse triangular merger different from a regular merger?

In a regular merger, the acquiring company merges with the target company. In a reverse triangular merger, the acquiring company creates a subsidiary that merges with the target company, allowing the acquiring company to avoid having to obtain approval from the target company's shareholders.  

What are some examples of reverse triangular mergers?

Some examples of reverse triangular mergers include Microsoft's acquisition of LinkedIn, Disney's acquisition of Fox, and Pfizer's acquisition of Allergan.  

What are the benefits of a reverse triangular merger?

The benefits of a reverse triangular merger include the ability to complete the transaction more quickly and with less resistance from the target company's shareholders. Additionally, because the subsidiary that is created is a separate legal entity, the acquiring company can limit its liability in case of any legal issues that arise after the merger.  

What are the tax implications of a reverse triangular merger?

In a reverse triangular merger, the acquiring company typically uses stock to pay for the acquisition, which can result in tax benefits such as tax-free treatment of the transaction under certain circumstances. However, it is important to consult with tax professionals before proceeding with a reverse triangular merger to ensure that all tax implications are properly addressed.  

What are the legal requirements for a reverse triangular merger?

The legal requirements for a reverse triangular merger vary by jurisdiction, but typically involve compliance with antitrust laws, securities laws, and other relevant regulatory frameworks. It is important to consult with legal professionals to ensure that all legal requirements are met before proceeding with a reverse triangular merger.