Forward Mergers vs. Reverse Triangular Mergers
Long before the advent of virtual data rooms, mergers and acquisitions were happening every day. It’s only been in the last few years that these forward mergers and reverse triangular mergers can take place with all the technological sophistication of a virtual data room, allowing for all the file sharing, document privacy, and security of a brick-and-mortar data room combined with the ease of traveless, inexpensive, and high-tech solutions.
What is a Forward Merger?
A forward merger, also known as a direct merger, are those in which the buyer directly merges with the target company. The target company no longer exists and the two companies act as a single entity under the buyer’s name and structure. The buyer assumes all of the target’s assets and liabilities, including contracts, licenses, etc.
The reasons for a forward merger would be because it would be easier to integrate the companies during and after the merger, and it maintains the acquiring company’s business continuity.
The downside of a forward merger is that the buyer takes on all of the target company’s liabilities. Forward mergers may also require a vote from the shareholders to approve the purchase, which can drag out the process.
What is a Forward Triangular Merger?
A forward merger, also known as a forward triangular merger, or an indirect merger, is what happens when the acquiring company absorbs the target company via a subsidiary entity, or a shell company. This shell company assumes all the targets assets and liabilities.
The benefit of this type of merger is that it protects the acquiring company from absorbing the target company’s liabilities. The reason that a company would want to do this is because these mergers–when financed by at least 50% stock–the target’s shareholders stock will be nontaxable. If these were financed by more than 50% cash, the bid would be taxable.
Forward triangular mergers are generally less common than reverse triangular mergers, which we’ll talk about below. The reason they are less favorable is because the target company’s licenses and contracts can be held by third parties’ consent.
For a forward triangular merger to be legal, the purpose of the business must be maintained by the acquiring company.
What is a Reverse Triangular Merger?
In a reverse triangular merger, a new company is founded by the acquiring company to create a subsidiary, and that subsidiary purchases the target company, and then the subsidiary is absorbed by the target company. This is an easier merger than a direct merger or a forward triangular merger, because the subsidiary has only one shareholder, the acquiring company, and the acquiring company may get control of the target’s assets and contracts–something that isn’t always the case in a forward triangular merger.
A reverse triangular merger may be taxable or nontaxable, depending on the structure of the acquisition. If at least 80% of the stock of the target company is acquired by the buyer, it may be considered nontaxable.
The reason you would want a reverse triangular merger is when the target company’s continued existence is needed for things such as franchising, leasing or contracts, or specific licenses that may be held and owned solely by the target.
In a reverse triangular merger, at least 50% of the payment is the stock of the purchasing company and that company gains all the assets and liabilities of the target company–differentiating it from a forward triangular merger.
Since the buyer must meet the continuity of business enterprise rule (a taxation principle applicable to corporate mergers and acquisitions in which, to qualify as a tax-deferred reorganization, the buyer must either continue the target company’s business, or use its business assets when conducting business) the acquirer must follow those guidelines.
How Does a Virtual Data Room Help in These Mergers and Acquisitions?
In the past, all of the actions taken before a merger and acquisition would require travel on both sides–the buyer and the target company–and there would be a physical, brick-and-mortar data room in which all of the financial documents relevant to the operation of the businesses were contained, and strict supervision and security was necessary and maintained to make sure that the right people had access to the right things at the right times. It was a time-consuming and expensive process that had many drawbacks.
Virtual data rooms allow for the right people to look at the right things at the right time–all from the comfort of their office, even if they’re on other sides of the world. The data is controlled, secure, and tracked and timestamped so that there is never a question as to who saw what and when. Everything can be done electronically and there is much less expense and hassle involved. It literally makes the data room as intuitive and accessible as your smartphone or tablet, from anywhere in the world.