Mergers and acquisitions are a proven way for the corporate sector to raise the current market price, boost geopolitical influence, and reduce market competition.
After a slow 2022, the M&A market in the United States showed slight signs of gaining momentum in 2023. The total value of M&A deals completed in Q2 (2023) was $339 billion.
Various types of mergers and acquisitions (M&A) help companies achieve different organizational goals. One of those types is a reverse triangular merger. Here is a detailed guide on reverse triangular mergers, their pros and cons, and how technologies like online data room software can help streamline M&A.
What is a reverse triangular merger?
Before defining reverse triangular mergers, it is important to understand what is mergers and acquisitions.
Corporate mergers and acquisitions are transactions in which one company buys another company, or two companies merge to run combined operations and make a new business entity.
In a reverse triangular merger, the acquiring company either forms a new subsidiary company or uses its already operational subsidiary company to acquire the target company. The subsidiary company later absorbs the target company after the completion of the transaction and forms a new business entity.
Reverse triangular mergers are comparatively simpler than direct mergers because the acquiring company is the only shareholder in the subsidiary company.
How do reverse triangular mergers work?
Reverse triangular mergers are simpler and faster as compared to direct mergers. The process starts with getting approval from the board of directors (BOD) of three companies involved in the transaction.
After that, it is mandatory to get the approval of the target company’s shareholders. The target company must buy back shares from dissenting shareholders. A plan of merger and an agreement is drafted and approved, after which the target company dissolves and merges into the subsidiary company.
Benefits of reverse triangular mergers
Reverse triangular mergers are beneficial in the following ways.
Business continuity of the target company
In reverse triangular mergers, unlike forward triangular mergers, the target company can easily continue its operations without losing licenses and contractual agreements.
Faster deal process
Reverse triangular mergers are easy to execute as there are few shareholders involved in them. That’s because a reverse triangular merger needs the consent of the target company’s shareholders and approval from the boards of directors of all three companies.
Protection from liabilities
Reverse triangular mergers also allow the acquirer to maintain a comfortable distance from the ongoing liabilities of the target company. The target company operates a subsidiary company, which eventually protects the assets of the acquiring (parent company).
- Note:Although a reverse triangular merger reduces the responsibilities of the parent company, it might still have to face those liabilities in the future. That is a major pitfall of reverse triangular mergers.
It is easier for the parent company to sell a subsidiary formed after a reverse triangular merger because selling a fully integrated unit (formed after the direct merger) is a lengthy and complex process.
Role of virtual data rooms in M&A
The role of technology has been fundamental in the modern-day M&A market. Online tools like data room software have simplified complex M&A transactions.
What is a data room?
A virtual data room is a cloud-based document storage software with advanced features for:
- Two-way communication
- Meeting management
- Deal management
These digital data rooms are hosted by certified vendors, which makes them highly reliable for complex data sharing, private communication, and similar purposes. A few trusted data room vendors include iDeals, Merrill, ShareVault, Caplinked, and SecureDocs.
Benefits of an M&A data room software
An M&A data room facilitates mergers and acquisitions in various ways, such as the following.
Secure storage of sensitive documents
The first biggest challenge in mergers and acquisitions is how to safely share data with the acquiring company or potential investors. The amount of data is huge and highly sensitive. That is why traditional channels like email or free cloud-storage platforms are not trustable.
Virtual data rooms provide a central document repository where sellers can store, manage, share, and protect large volumes of information and deal with multiple buyers simultaneously.
Safer and faster communication
Another perk of using an M&A data room is that it makes two-way communication easier and safer. That said, users can share documents and communicate on a single platform. Any high-end VDR possesses meeting management tools, Q&A tools, and chat messengers.
Using a secure information-sharing channel is not just an option nowadays. Companies must comply with data-sharing and management laws set by regional and international bodies. Online data rooms are certified by FINRA, FISMA, or GDPR allowing dealmakers to comply with the laws.
Reverse triangular mergers help companies acquire another company faster and with limited responsibilities, and it is easier to sell subsidiaries formed after reverse triangular mergers. One of the ways to make the reverse triangular merger deal smoother is to use virtual data rooms.
Data rooms simplify the M&A process by streamlining data sharing and communication, thus, accelerating the deal closure process.