# Reverse Triangular Merger: Overview and Advantages

> **Definition**
>
> A reverse triangular merger is an indirect merger where the acquiring company creates a subsidiary which acquires the target firm.

## What Is a Reverse Triangular Merger?

A reverse triangular merger is a [mergers and acquisitions (M&A)](https://www.investopedia.com/terms/m/mergersandacquisitions.asp) strategy that occurs when an acquiring company creates a [subsidiary](https://www.investopedia.com/terms/s/subsidiary.asp) and that subsidiary purchases and merges with a target company. A reverse triangular merger is easier to accomplish than a direct merger because the subsidiary has only one shareholder—the acquiring company—and the acquiring company may obtain control of the target's nontransferable assets and contracts.

### Key Takeaways

*   A reverse triangular merger involves a company forming a subsidiary that purchases another company.
*   The subsidiary purchases the target company and is then dissolved, leaving the newly acquired company as the subsidiary.
*   Acquiring companies can offer numerous benefits, including potential tax savings, continuity, and easier execution.
*   A reverse triangular merger may be taxable or nontaxable depending on factors listed in Section 368 of the Internal Revenue Code.
*   At least 50% of the payment in a reverse triangular merger is the stock of the acquirer, and the acquirer gains all assets and liabilities of the seller. 

## Understanding Reverse Triangular Mergers

In a reverse triangular merger, the [acquirer](https://www.investopedia.com/terms/a/acquirer.asp) creates a subsidiary that merges into the selling entity. That subsidiary is then [liquidated](https://www.investopedia.com/terms/l/liquidation.asp), leaving the selling entity as the surviving entity and a subsidiary of the acquirer. The buyer’s stock is then issued to the seller’s shareholders.

The process is more or less as follows:

1.  The acquiring company forms a subsidiary
2.  The subsidiary acquires the [target company](https://www.investopedia.com/terms/t/targetfirm.asp)
3.  The created subsidiary merges with the target company and is then dissolved
4.  The acquired company becomes the new subsidiary

Once this process is complete, the acquired target company resumes its normal operations, acting as a subsidiary of the purchasing company.

In a reverse triangular [merger](https://www.investopedia.com/terms/m/merger.asp), at least 50% of the payment is the stock of the acquirer, and the acquirer gains all assets and liabilities of the seller.

> **Important**
>
> A reverse triangular merger is attractive when the seller’s continued existence is needed for reasons other than tax benefits, such as rights relating to franchising, leasing or contracts, or specific licenses that may be held and owned solely by the seller.

## Advantages and Disadvantages of a Reverse Triangular Merger

Reverse triangular mergers sound more complicated than regular mergers. However, they are often preferred for their simplicity. Here are some of the main reasons why companies go down this path:

*   **Continuity:** A reverse triangular merger can make it easier for a company to acquire another company’s business contracts and ensure they continue to run without disruption following the completion of the merger.
*   **Easier to push through:** For a merger to go through, shareholders need to give their approval. With reverse triangular mergers, there are fewer [shareholders](https://www.investopedia.com/terms/s/shareholder.asp) involved in the decision. That's because the only shareholder of the subsidiary is the acquiring firm. In other words, the acquirer doesn't necessarily need to get permission from its shareholders to push through the deal.
*   **Keep business separate:** Having the acquired company come in automatically as a subsidiary can help create some distance between the target and [parent company’s](https://www.investopedia.com/terms/p/parentcompany.asp) assets and potentially make it easier to sell later on.
*   **Tax advantages:** The transaction is treated as a stock purchase rather than an asset purchase. This means the acquirer can capitalize on the target company’s tax attributes, such as net operating losses or [tax credits](https://www.investopedia.com/terms/t/taxcredit.asp).  
    

### Disadvantages

*   **Transaction costs:** Reverse triangular mergers have higher [transaction costs](https://www.investopedia.com/terms/t/transactioncosts.asp). That's because they are complex—notably because the acquirer has to bear the cost of creating a subsidiary. There may also be additional accounting or advisory costs that the firm may need to pay to execute the deal.
*   **Integration challenges:** Integrating two companies can often be challenging because they need to combine two different corporate cultures, technologies, and processes. There may be communication breakdowns, operational inefficiencies, and employee conflict. It can also be time-consuming and costly to streamline systems and processes.
*   **Regulatory hurdles:** The acquiring company must do its due diligence to ensure there are no potential [liabilities](https://www.investopedia.com/terms/l/liability.asp) in the transaction and it must comply with the regulations set forth by federal regulators.

*   Continuity
    
*   Easier to push through
    
*   Keep business separate
    
*   Tax advantages
    

Cons

*   Transaction costs
    
*   Integration challenges
    
*   Regulatory hurdles
    

## Reverse Triangular Merger Requirements

Because the acquirer must meet the [bona fide](https://www.investopedia.com/terms/b/bona-fide-error.asp) needs rule, a fiscal year appropriation may be obligated to be met only if a legitimate need arises in the fiscal year for which the appropriation was made.

Since the acquirer must meet the [continuity of business enterprise rule](https://www.investopedia.com/terms/c/continuity-of-business-enterprise-doctrine.asp), the entity must continue the target company’s business or use a substantial portion of the target’s business assets in a company.

The acquirer must also meet the continuity of interest rule, meaning the merger may be made on a tax-free basis if the shareholders of the acquired company hold an equity stake in the acquiring company. In addition, the acquirer must be approved by the boards of directors of both entities.

> **Fast Fact**
>
> A reverse triangular merger is an indirect merger, which involves the merger of two companies using a subsidiary established by the acquirer.

## Reverse Triangular Merger Tax Treatment

A reverse triangular merger, like direct mergers and [forward triangular mergers](https://www.investopedia.com/terms/f/ftm.asp), may be either taxable or nontaxable, depending on how they are executed and other complex factors in Section 368 of the [Internal Revenue Code (IRC)](https://www.investopedia.com/terms/i/internal-revenue-code.asp). If nontaxable, a reverse triangular merger is considered a reorganization for tax purposes.

A reverse triangular merger may qualify as a tax-free reorganization when 80% of the seller’s stock is acquired with the voting stock of the buyer; the non-stock consideration may not exceed 20% of the total.

## What Are the Tax Benefits of a Reverse Triangular Merger?

With reverse triangular mergers, the subsidiary acquires the tax attributes of the target company. This means the acquirer can benefit from the target company’s tax position, such as credits or net operating losses.

## What Is an Example of a Reverse Triangular Merger?

Amazon’s purchase of Whole Foods constituted a reverse triangular merger. Rather than acquire Whole Foods directly, the e-commerce giant used an indirect subsidiary, with Whole Foods then surviving this subsidiary.

## What Is a Reverse Merger?

A reverse triangular merger isn’t the same as a [reverse merger](https://www.investopedia.com/terms/r/reversetakeover.asp). A reverse merger occurs when a private company acquires control of a public company. This effectively enables the private company to become a publicly traded one without having to go through the expensive ordeal of an [initial public offering (IPO)](https://www.investopedia.com/terms/i/ipo.asp).

## What's a Forward Triangular Merger?

A forward triangular merger is an indirect type of merger. It is the opposite of a reverse triangular merger. In a forward triangular merger, the acquirer merges with the subsidiary of the target company. Once the merger is complete, the target ceases to exist. As such, all of the assets and liabilities of the target are assumed by the acquiring company.

## The Bottom Line

A reverse triangular merger involves a company forming a subsidiary or [shell company](https://www.investopedia.com/terms/s/shellcorporation.asp) to purchase another company. Once the transaction is complete, the subsidiary merges with the acquired company and is then dissolved, leaving just the newly acquired company as the subsidiary. Other than potential tax benefits, reverse triangular mergers are also easier to get past shareholders and can offer greater continuity.  

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Section 368.—Definitions Relating to Corporate Reorganizations](https://www.irs.gov/pub/irs-drop/rr-15-10.pdf)."
>     
> 2.  Bloomberg Law. "[M&A, Flowchart - Amazon - Whole Foods Reverse Triangular Merger](https://www.bloomberglaw.com/external/document/XAP24B0O000000/m-a-flowchart-amazon-whole-foods-reverse-triangular-merger)."