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.
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.
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.
The advantages of forward triangular mergers include the following:
The disadvantages of forward triangular mergers are:
The advantages of reverse triangular mergers are:
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.