A merger sub, is an acquisition vehicle used by an acquiring firm to purchase a target company in either a forward triangular merger or a reverse triangular merger. A merger sub is the common form of reference for a merger subsidiary in official documents, see example below.
The acquiring company forms the merger subsidiary as a separate company that is wholly owned by the acquiring company. Sometimes an existing subsidiary is used but most often a new merger sub is created specifically for the purpose of the merger or acquisition. These merger subs are often given names which make a subtle reference to the deal. For example, in the takeover of Tiffany & Co. (TIF) by LVMH, the parent is using a merger sub called “Breakfast Holdings Acquisition Corp.“, a nod to the classic 1961 movie “Breakfast at Tiffany’s“.
In the example below the acquiring company is referred to as the parent. The merger subsidiary then merges with the target firm in the merger. If the merger subsidiary continues to exist following the merger, it is known as a forward triangular merger. Alternatively, if the merger subsidiary it absorbed into the parent, and the target continues to exist, it is known as a reverse triangular merger. This may be necessary when licenses and authorization agreements need to be preserved. However, the effect of these structures on the merger arbitrage spread is limited at best, as they are post acquisition factors and not regarded as of primary interest to the trader.
Example Use of Merger Sub
In a January 10, 2020 8-K filing with the SEC by Demira (DERM) the term was used 165 times. Section 4.02 on page 30 of the merger agreement offers the following description of its purpose,
SECTION 4.02 Merger_Sub.
- (a) Merger_Sub was formed solely for the purpose of entering into the Transactions, and since the date of its incorporation, Merger_Sub has not carried on any business, conducted any operations or incurred any liabilities or obligations other than the execution of this Agreement, the performance of its obligations hereunder and matters ancillary thereto.
- (b) The authorized capital stock of Merger–Sub consists of 100 shares of common stock, par value $0.001 per share, all of which have been validly issued, are fully paid and nonassessable and are owned directly or indirectly by Parent free and clear of any Lien.
This is standard boiler plate language for a merger agreement and is similar across a variety of deals. In this instance the name of the merger sub is subsequently given as “Bald Eagle Acquisition Corporation“. The same filing also contains details of the merger sub following the merger.
Following consummation of the Offer, Merger Sub will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of Parent (the “Merger”).
The survival of the target company as a wholly owned subsidiary suggests this transaction would be classed as a forward triangular merger.
