Merger Structure Rundown: Forward (Direct) Merger
As promised, I am spending the next few updates highlighting different merger structures. In case you did not know (and trust me it is not something you read on a daily basis), the three main merger structures are a Forward (Direct) merger, a Forward Triangular Merger and a Reverse Triangle Merger. I think the creator of these structures may have either moonlighted as a spiritual advisor or spent time in battle, but what do I know.
Below is a rundown of the Forward (Direct) Merger:
A forward merger involves the Selling company (the “Seller”) merging directly into the acquiring company (the “Purchaser”). The Seller ceases to exist post-closing and the two companies become a single entity under the Purchaser’s name and structure.
Benefits
It is very simple. It is tax friendly for the Purchaser because it is usually treated as an asset acquisition. Therefore, the Purchaser gets a step-up in basis on the Seller’s assets equal to the purchase price. In layman’s terms, it means that in addition to the larger depreciation deductions available, any future sale of the Seller’s assets would result in a smaller tax liability.
Drawbacks
Double taxation is still a risk. First, the transaction is taxed at the corporate level and then again at the shareholder level. The Purchaser is generally not shielded from the liabilities of the Seller.
The Purchaser usually has to get third-party consents for any contracts that the Seller had in place.
Here are some other useful M&A Articles:
- M&A 101 – The difference between mergers and acquisitions
- Making Mergers, Acquisitions and Other Business Combinations Work
- Acquisition Structure – General Framework
Here are some other items of interest:
- Economic Review: February 2023 – Silvercrest (silvercrestgroup.com) – Thanks to Sean O’Dowd for sharing
- Engine of Economic Growth: The Middle Market Entrepreneur! (genequityco.com)
Additional Merger Structure Rundowns
This blog post is part of a series on different types of merger structures. You can find the other structure rundowns at the links below:
- Merger Structure Rundown: Forward Triangular Merger
- Merger Structure Rundown: Reverse Triangular Strategy
- Merger Structure Rundown: 338 Elections
As always, please don’t hesitate to email myself (jsanders@mpl-law.com), Andy Miller (amiller@mpl-law.com), Christian Miller (cmiller@mpl-law.com), Erik Spurlin (espurlin@mpl-law.com), Brad Leber (bleber@mpl-law.com) or anyone in our office with questions or comments.
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