What is Reverse Triangular Mergers?
888 reads · Last updated: December 5, 2024
A reverse triangular merger is the formation of a new company that occurs when an acquiring company creates a subsidiary, the subsidiary purchases the target company, and the subsidiary is then absorbed by the target company.A reverse triangular merger is more easily accomplished than a direct merger because the subsidiary has only one shareholder—the acquiring company—and the acquiring company may obtain control of the target's nontransferable assets and contracts.A reverse triangular merger, like direct mergers and forward triangular mergers, may be either taxable or nontaxable, depending on how they are executed and other complex factors set forth in Section 368 of the Internal Revenue Code. If nontaxable, a reverse triangular merger is considered a reorganization for tax purposes.
Definition
A reverse triangular merger involves an acquiring company creating a subsidiary, which then purchases the target company, and subsequently, the subsidiary is absorbed by the target company to form a new entity. Compared to a direct merger, a reverse triangular merger is easier to execute because the subsidiary has only one shareholder—the acquiring company—and the acquiring company may gain control over non-transferable assets and contracts of the target company.
Origin
The concept of a reverse triangular merger originated from the complex needs of corporate acquisitions, especially when it is necessary to retain certain legal or contractual statuses of the target company. This merger method became widely adopted in the late 20th century as corporate acquisition activities increased.
Categories and Features
Reverse triangular mergers can be categorized as taxable or non-taxable, depending on how they are executed and the provisions of Section 368 of the Internal Revenue Code. Non-taxable reverse triangular mergers are treated as reorganizations for tax purposes and are generally preferred by companies to avoid immediate tax liabilities. Key features of reverse triangular mergers include indirect acquisition through a subsidiary, the absorption of the subsidiary by the target company, and potential control over the target company's non-transferable assets.
Case Studies
A typical example is Oracle's acquisition of PeopleSoft in 2005. Oracle created a subsidiary to acquire PeopleSoft and then had PeopleSoft absorb the subsidiary, successfully completing a reverse triangular merger. This structure helped Oracle retain PeopleSoft's contracts and customer relationships. Another example is Microsoft's acquisition of LinkedIn in 2016. Microsoft completed the acquisition through its subsidiary and used a reverse triangular merger to ensure the smooth execution of the deal.
Common Issues
Investors might encounter issues such as ensuring the merger's tax treatment qualifies as non-taxable and handling existing contracts and legal obligations of the target company. A common misconception is that all reverse triangular mergers are non-taxable, whereas this depends on the specific merger structure and legal provisions.
