A reverse triangular merger is a strategic process used during mergers and acquisitions (M&A). This approach happens when an acquiring company forms a subsidiary, which then purchases the target company, leading to the subsidiary being absorbed by this target entity. Essentially, the target company becomes a subsidiary of the acquirer after the merger. This type of merger can efficiently bring several benefits that might not be as easily achieved through direct mergers.
Key Takeaways
- A reverse triangular merger integrates a company by creating a subsidiary that acquires another enterprise.
- The merged subsidiary dissolves, making the acquired firm the new subsidiary of the acquirer.
- This method boasts benefits such as tax advantages, continuation of contracts, and straightforward execution.
- The merger can be taxable or nontaxable, based on IRS Section 368 considerations.
- At least 50% of the payment during this merger is in the form of acquiring company stock.
The Mechanics of Reverse Triangular Mergers
In a reverse triangular merger, the acquiring company structures the transaction using the following steps:
- Formation of a subsidiary.
- The subsidiary purchases the target company.
- Subsequent merger of the subsidiary into the target company and dissolution of the subsidiary.
- Rebranding the target firm as a subsidiary of the parent/acquiring company.
Upon completing these steps, the target company operates as a subsidiary of the acquiring corporation, facilitating a seamless continuation of operations.
Advantages of a Reverse Triangular Merger
Even though a reverse triangular merger might sound intricate, several advantages make it a preferred choice for many companies:
- Continuity: It allows the continuation of existing business contracts and operations without interruptions post-merger.
- Simplicity: With only one shareholder in the subsidiary, getting approval from shareholders is simpler and faster.
- Business Separation: The immediate subsidiary status helps in maintaining a degree of separation between the acquiring company’s assets and those of the target, offering easier divestiture possibilities.
- Tax Advantages: Utilizing the stock purchase method, the acquirer is eligible for the target’s tax benefits such as operating losses and credits.
This approach is beneficial when the seller’s ongoing existence is crucial for reasons beyond taxes, such as maintaining franchising rights, leases, or valuable licenses exclusively held by the seller.
Requirements for a Reverse Triangular Merger
For executing a reverse triangular merger, certain regulations must be met:
- Bona Fide Needs Rule: The acquiring company must ensure fulfillment only if a legitimate requirement for such a transaction exists within the appropriate fiscal year.
- Continuity of Business Enterprise Rule: The acquiring firm must continue the erstwhile target company’s business or significantly utilize its business assets.
- Continuity of Interest Rule: Shareholders of the acquired entity should retain an equity interest in the acquirer for the merger to be nontaxable. Necessary approvals must come from the boards of directors of both companies.
Tax Treatments in Reverse Triangular Mergers
These mergers can either be taxed or remain tax-exempt, heavily depending on compliance with Section 368 of the IRS. A qualifying reverse triangular merger covers 80% of the stock purchases with voting stock from the acquirer, limiting non-stock considerations to 20%.
Tax Benefits in a Reverse Triangular Merger
Acquiring the target firm’s tax attributes, including tax credits and operating losses, offers significant tax incentives for the buyer company.
Notable Example: Amazon and Whole Foods
Amazon.com’s acquisition of Whole Foods through a reverse triangular merger remains a striking instance. Instead of procuring Whole Foods outright, Amazon formed a subsidiary to purchase Whole Foods, eventually leaving Whole Foods to survive as the acquirer’s subsidiary.
Differentiating Reverse Triangular Merger from a Reverse Merger
Unlike reverse triangular mergers, a reverse merger involves a private firm acquiring a public company to harness public trading advantages without the expensive IPO process.
Final Thoughts
A reverse triangular merger is an influential strategy within the M&A domain. By strategically forming subsidiaries to acquire other enterprises, corporations can benefit significantly from tax incentives, operational continuity, and streamlined shareholder approvals. This method offers flexibility and convenience, making it a commendable approach for companies aiming for expansion through acquisitions.
Related Terms: Mergers and Acquisitions, Subsidiary, Tax Reorganization, Reverse Merger, Initial Public Offering.
References
- Thomson Reuters Practical Law. “Reverse Triangular Merger”.
- Woodruff Sawyer. “Reverse Triangular Merger”.
- Devensoft. “Maximizing Your ROI with a Reverse Triangular Merger: Expert Insights”.
- Internal Revenue Service. “Section 368.—Definitions Relating to Corporate Reorganizations”.
- Bloomberg Law. “M&A, Flowchart - Amazon - Whole Foods Reverse Triangular Merger”.
