Triangles Aren’t Just An Offensive Strategy – Mergers

Written by James Sanders

I know we have talked about this before, but triangles aren’t just used in offensive strategies (see Phil Jackson).  They are also the basis for two successful merger strategies.  Perhaps if Phil Jackson was not a coach, he would have been a successful M&A advisor.  In today’s update, we look at the forward triangular merger.    

A forward triangular merger involves the purchasing company (the “Purchaser”) acquiring the selling company (the “Seller”) through a subsidiary company (the “Subsidiary”) that is wholly owned by the Purchaser.  Post-acquisition the Seller disappears and the Subsidiary is all that remains.

Benefits

1. Tax – The Purchaser can use a combination of cash and stock (up to 50%) to acquire the Seller through the Subsidiary.  This can provide tax benefits for the Purchaser.
2. Liability – Because the Seller is acquired through a subsidiary, there is a liability shield in place to provide protection for the Purchaser from pre-acquisition issues of the Seller. 

Drawbacks

1. Third Party Consents – The Purchaser usually has to get third-party consents for any contracts that the Seller had in place. 

Next week, we will look at the reverse triangular merger.