The Advantages of Reverse Triangular Mergers

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A reverse triangular merger format offers advantages, such as a faster deal execution.
A reverse triangular merger format offers advantages, such as a faster deal execution. (Image: Jupiterimages/Brand X Pictures/Getty Images)

A merger occurs when one company acquires another. A reverse triangular merger is a specific way to set up a corporate merger. In this form, the acquiring company sets up a subsidiary to acquire a target company. The subsidiary then does the acquisition of the target company. The target company continues in business and the subsidiary will not exist after the merger goes through. This type of merger has its advantages.

Quicker Execution

In a merger transaction, the acquirer will have to get the vote of approval of the shareholders of the acquired company. A reverse triangular merger involves the approval of a fewer number of shareholders than a typical merger does, which makes for a faster merger execution. Since the target company continues in existence, the reverse triangular merger involves the assent of a fewer number of third parties than a regular merger does. This too helps move the transaction forward faster.

Continuation of Contracts

Certain situations exist in which the target company has been in business for a while and built up a number of good business prospects and contracts. The reverse triangular merger format helps the acquiring company hold on to these contracts. In case the target company does not continue in business after acquisition, the acquiring company may not be able to enforce its contracts.

Protection from Liabilities

By not directly acquiring the target company, the acquiring company also maintains a distance from the liabilities of the target company. Since the target company becomes a subsidiary of the acquiring company, the acquirer does not have a direct exposure to the subsidary’s liabilities. This affords better protection to the assets of the acquiring company.

Easier to Sell

Sometimes, after a merger goes through, the acquiring company realizes that it made a mistake. In this sort of situation, it is easier to sell off the acquired company if it is a subsidiary of the acquirer. It is more difficult to go through the process if the acquired company fully integrated into the acquiring company.

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