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Merging with another company is a great business accomplishment and a momentous event, which means that it's highly important for you to do it the correct way. There are countless types of mergers--horizontal, vertical, conglomerate, and concentric, just to name a few--so you need to be familiar with the appropriate terms and concepts well in advance.

This article will discuss three different types of mergers: forward, forward triangular and reverse triangular. By learning the key differences and advantages of each one, you'll be able to decide for yourself which option is right for your organization.

Forward Merger

Forward mergers, also known as direct mergers, are those in which the target company merges directly into the buyer. The target company ceases to exist, and the two companies continue to operate as a single entity under the buyer's name and structure. In addition, the buyer assumes all of the target company's assets and liabilities.

Pros and Cons of Forward Mergers

Forward mergers are sometimes the most preferable choice because they are a direct action between two companies. This makes it easier to integrate the two companies during and after the merger, and preserve the buyer's business continuity.

However, because the buyer directly assumes the target company's liabilities, it does not have any legal protection against these concerns. Forward mergers may also require the buyer's shareholders to approve the transaction, making it more time-consuming and complex.

Forward Triangular Merger

As the name suggests, triangular mergers are those that involve three companies: the buyer, the target company and a third organization that is a subsidiary or shell company. In a forward triangular merger, the target company is merged into the buyer's subsidiary, which also assumes the target company's assets and liabilities.

Pros and Cons of Forward Triangular Mergers

Using a subsidiary to perform the merger gives the buyer more protection against problems with the target company's liabilities. In addition, performing a forward triangular merger gives the buyer much more flexibility in terms of purchasing the target company's stock than a reverse triangular merger. Half of the total consideration that the buyer uses to pay the target company's shareholders can be in cash or other non-stock options.

However, because the target company ceases to exist, performing a forward triangular merger can be problematic in terms of business continuity. The target company's contracts, licenses and authorizations may all have to be reassessed.

Reverse Triangular Merger

A reverse triangular merger is identical to a forward triangular merger except in terms of the surviving company. In a reverse triangular merger, the buyer's subsidiary is merged into the target company, which continues operations as a subsidiary of the buyer. Therefore, whether a triangular merger is performed in forward or reverse, the end result is the same: the target company becomes a subsidiary of the buyer.

Pros and Cons of Reverse Triangular Mergers

Like the forward triangular merger, reverse triangular mergers can be advantageous by isolating the target company's liabilities to a subsidiary of the buyer. In addition, because the target company survives the merger, it can easily continue operations without having to sign new contracts or obtain new licenses and authorizations.

However, in order to perform a reverse triangular merger tax-free, the buyer must use company stock to acquire at least 80 percent of the target company's stock. This makes the transaction less flexible in terms of payment options.

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