Mergers

Mergers are the most common form of restructuring undertaken by successful startups. A merger is by nature a statutory process, and hence its structure is prescribed by the corporate laws of the merging companies' state of incorporation.

Classic Mergers

In the classic merger, the target is incorporated into the acquirer, which is also deemed as a merging company, in a transaction which takes place at the corporate level. The consent of both companies' shareholders is usually required. The main disadvantages of classic mergers are the need for the acquirer's shareholders' approval for the transaction (which is troublesome when a large company is taking in a small company) and the legal risk involved in the acquirer's assuming all of the target's liabilities with all of the uncertainties that this entails. See Figure 15-1.

Figure 15-1. Classic Merger

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Triangular Mergers

Under triangular mergers, a parent company uses a (typically specially formed) subsidiary as the acquirer. In this type of merger, only the consent of the target's shareholders is usually required. Using the triangular merger technique overcomes the two main disadvantages of classic mergers: obtaining the consent of the acquirer's shareholders and the legal uncertainty. The level of certainty rises because a "legal corporate veil" is extended between the acquirer (with its deep pockets) and the target's liabilities. See Figure 15-2.

Figure 15-2. Triangular Merger

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A version of the triangular merger is the "Reverse Triangular Merger" in which the target absorbs a subsidiary of the parent company. This type of merger enables the target's identity to be preserved following the merger, which is sometimes important for legal considerations (for instance, when the target has non-assignable intellectual property rights) or for marketing purposes (when the target has a known brand).

The most common mergers are triangular mergers since, as mentioned above, these transactions often significantly facilitate the process of the acquirer's approval of the transaction and create a "wall" between the acquirer and the target's liabilities. However, it is usually difficult to obtain the capital gain tax authorities' approval to defer the captial gain tax imposed on the transaction, unless the deal is made in voting stock, in which case the triangular merger may be recognized as a tax-free transaction.

From the taxation point of view, the target's tax basis in the assets remains intact even if the assets are revaluated for accounting purposes. In other cases, if the transaction is not treated as tax-exempt, the companies tend to revaluate the assets for tax purposes (and enjoy higher depreciation rates in the following periods). In such a case, the seller pays tax on the increase in the value of the assets until the transaction.



From Concept to Wall Street(c) A Complete Guide to Entrepreneurship and Venture Capital
From Concept to Wall Street: A Complete Guide to Entrepreneurship and Venture Capital
ISBN: 0130348031
EAN: 2147483647
Year: 2005
Pages: 131

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