Advantages of a Reverse Triangular Merger

During an M&A transaction, a possible purchasing tactic that can be used by an acquiring company is a reverse triangular merger. A reverse triangular merger is when the buyer forms a wholly-owned subsidiary which in turn works as a purchasing vehicle to acquire the target firm. To execute the deal, the target firm and wholly-owned subsidiary will merge giving the acquiring firm control of the target company. This newly merged company will function as a wholly-owned subsidiary of the acquiring firm so it will own all of its assets (tangible and intangible), liabilities, contracts, etc.

The advantages and disadvantages are the same as a direct merger; however, this type of acquisition is easier to execute since the only shareholder of the acquisition subsidiary is the purchasing firm which provides certain advantages, e.g., shareholder approval easy to obtain.

A reverse triangular merger allows the acquiring firm to gain control of the target company’s non-transferable assets and contracts which is not always possible with other acquisition techniques. Typically, acquirers have difficulty transferring contacts, particularly contracts with the government or governmental agencies when it is an asset transaction. This technique, i.e., utilizing a reverse triangular merger, while not perfect, does help. The downside is that the acquiring company does acquire all of the liabilities of the company as it is essentially a stock transaction.