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Guide to Forward and Reverse Triangular Mergers

Forward and reverse triangular mergers provide an interesting twist on mergers.

Both have come under the spotlight recently, due in no small part to the explosive growth of SPACs, most of which use the reverse triangular merger form of transaction.

In this article, we at DealRoom look at how forward and reverse triangular mergers are conducted, their benefits and drawbacks to acquirers, and investigate some of the reasons why this form of transaction has risen to prominence over the past few years.

What is a Forward Triangular Merger?

A forward triangular merger is when a company acquires a target company through a subsidiary or shell company. This form of transaction is sometimes called an indirect merger, as the parent company of the subsidiary or shell company is indirectly acquiring the target company.

In a forward triangular merger, the target company ‘disappears’ into the shell company after the merger has been conducted.

forward merger

What is a Reverse Triangular Merger?

A reverse triangular merger is when a company creates a shell company with the specific intention of using it to acquire a target company. When the shell company acquires the target company, it is absorbed into the parent company. This is the form of transaction underpinning most SPAC deals.

In a reverse triangular merger, the shell company ‘disappears’ into the target company after the merger has been conducted.

reverse triangular merger

Advantages and disadvantages of forward triangular mergers

The advantages of forward triangular mergers include the following:

  • Tax benefits: Tax benefits are the underlying motive for most forward triangular mergers. By acquiring the target company with a combination of cash and stock, rather than cash only, the acquiring firm can offset tax against the voting stock it uses for the acquisition, saving considerably on taxation.
  • Reduced liabilities: Unlike direct mergers, forward triangular mergers involve the target company becoming a subsidiary, meaning that the acquirer is protected against the target;s liabilities, including, for example, pending legal liabilities. 
  • Certainty of execution: Because the only shareholder of the subsidiary is the acquiring firm, permission for the transaction does not need to be sought from the acquirer’s shareholders, reducing a common source for friction for companies involved in direct mergers.
  • Ease of sale: Because the target company remains a subsidiary after the transaction has closed, it remains technically easier to sell further down the line as compared to selling a portion of a fully merged entity. 

The disadvantages of forward triangular mergers are:

  • Lack of continuity: The ‘disappearance’ of the target company into the shell company after the transaction has been concluded may create issues in terms of continuity; contracts and licences previously agreed by the target company will become legally void, meaning the contracts and licences have to be rewritten.

Advantages and disadvantages of reverse triangular mergers

The advantages of reverse triangular mergers are:

  • Continuity: Unlike with forward triangular mergers, the fact that the target company remains a going entity after the reverse triangular merger has concluded means that none of contractual arrangements previously agreed by the target company are lost in the transaction.
  • Reduced liabilities: Just as with forward triangular mergers, the acquirer takes full control of the assets belonging to the target company without having to take on the target’s liabilities. 
  • Tax benefits: If managed correctly, and more than 80% of the acquirer’s stock is used to fund the merger, the reorganization may qualify as a tax-free reorganization, resulting in zero tax liability for the acquiring company. 


Forward triangular mergers and reverse triangular mergers are similar operations whose difference essentially comes down to the status of the target company after the merger transaction has closed.

The reverse triangular merger is far more popular on the basis that it provides continuity - the target company, its contractual agreements, and ultimately, its brand value, are all maintained after the transaction has closed. 

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