Unlock Explosive Business Growth: The Little-Known Power of Triangular Mergers You Can’t Afford to Ignore

Ever noticed how business deals sometimes look more like a game of three-dimensional chess than your run-of-the-mill handshake? That’s precisely the intrigue behind triangular mergers—a crafty M&A structure where one company doesn’t directly acquire another but cleverly uses a subsidiary to do the heavy lifting. It’s like playing hide-and-seek with liabilities and tax benefits, all while steering your business toward rapid growth. But why go triangular at all? What makes these forward and reverse triangular mergers a smart move in today’s cutthroat market? Stick with me, and I’ll unpack these two fascinating strategies that could very well change the way you think about company expansion and acquisition. Curious yet? You should be. LEARN MORE

A triangular merger is one of the types of M&A structures in which one company indirectly acquires another company. That said, the acquiring company creates a subsidiary company to complete the transaction with the target company. Triangular mergers are further categorized into two categories: a forward triangular merger and a reverse triangular merger.

What are these two types, and how are they beneficial for businesses? Let’s find out.

Merger vs. acquisition: how are they different

Before moving to triangular mergers, it is important to know that mergers and acquisitions are two different business transactions. An acquisition gives the acquiring company full or significant control over the other business. Mergers mean two different entities combining operations to merge and usually create a new business entity.

What is a forward triangular merger?

A forward triangular merger is a form of subsidiary merger in which a buyer purchases a target by means of a “subsidiary” or shell company. In a forward triangular merger, the target business “vanishes” into the shell business following the merger.

Advantages and limitations of forward triangular mergers

Triangular mergers are beneficial in multiple ways, but they have pitfalls of their own as well.

Perks of forward triangular mergers

Tax benefits. There are tax implications of mergers and acquisitions of this type. The underlying reason for the majority of forward triangular mergers is tax benefits. By purchasing the target firm with a mix of stock and cash, as opposed to solely cash, the acquiring company can deduct tax on the voting stock it issues to purchase the target firm and save substantially on taxation.
Lessened liabilities. Forward triangular mergers differ from direct mergers as they require the target company to become a subsidiary. This ensures that the acquirer is safe from the target’s liabilities, including pending legal liabilities. The parent company faces much lower risk compared to other merger and acquisition plans.
Easier to undertake. The ease of sale benefits the target company. Once the transaction is concluded, the target company remains a subsidiary. This makes it easier to sell than a fully merged entity in the future (if needed).

Pitfalls of forward triangular mergers

Discontinuity. The discontinuity resulting from the target company’s “vanishing” into the shell company once the deal is sealed could raise problems. Upon transition, existing contracts and licenses which were previously entered into by the target company will be legally null and void, such that the new company will have to re-enter into them. This contrasts significantly with a reverse triangular merger, wherein one of the significant benefits is continuity.
Additional expenses. A forward triangular merger usually entails additional expenses, since the acquiring entity will need to organize and manage a subsidiary. This is usually a complicated process, which is costly. This is not exclusive to forward triangular mergers, since reverse triangular mergers tend to have this form of added expense as well.
Liabilities. Though liabilities can be a strength of forward triangular mergers, they can also be a weakness since there may be existing legal or financial liabilities within the target firm. The acquirer should undertake a strong due diligence process to reveal as many liabilities as possible prior to completing the transaction.

What is a reverse triangular merger?

Similar to a forward triangle merger, a reverse triangular merger is also a subsidiary merger where the acquiring firm forms a shell company with the sole purpose of acquiring a target company.

However, it is different because the target company absorbs the shell company. This type of transaction underlies most SPAC deals.

In simple words, in a reverse triangular merger, the shell company “vanishes” in the target company once the merger has been made.

Advantages and disadvantages of reverse triangular mergers

Perks of reverse triangular mergers

Decreased liability. Decreased liabilities are also a part of reverse triangular mergers. The acquirer gains full control of the target firm’s assets without assuming its liabilities since the target retains its legal identity, which signifies that contracts, leases, and licenses are not required to be transferred.
Continuity. In contrast to forward triangular mergers, the target firm continues to exist as a distinctive entity after the reverse triangular merger is completed. That means none of the contractual agreements previously entered into by the target firm are forfeited in the deal.
Tax benefits. There are significant tax advantages. If properly handled, and over 80% of the acquirer’s stock is utilized to finance the merger, the reorganization can be a tax-free reorganization, imposing no tax liability on the acquiring firm.

Drawbacks of reverse triangular mergers

Integration problems. Since the target company continues to exist as its entity, natural differences exist between the target and acquiring companies. With a reverse triangular merger, fully combining the two firms can be fraught with integration issues, such as employee resistance and cultural clashes. With a forward triangular merger, the target firm is merged into, and integration tends to be less complicated.
Unhappy target company shareholders. Target shareholder discontent in a reverse triangular merger is prevalent. The target firm can remain a distinct entity on paper, but its previous shareholders generally have diminished control. This occasionally precipitates litigation for shareholders who consider that the merger did not work in their favor.
Legal complications and costs. The legal intricacies and costs involved in this type of merger’s specificity can be substantial. To be compliant with laws in places, businesses ought to possess the proper internal or external legal advisors and the needed resource allowance if they are going to undertake a reverse triangular merger.

Summing it up

Triangular mergers help excel business growth as they allow the acquiring company to buy another entity without taking on the liabilities directly. A subsidiary in this process streamlines legal and tax complexities, which preserves contracts and minimizes disruptions. This structure supports faster expansion and integration in competitive markets.

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