What is a Backflip Takeover?

In the merger world, a backflip takeover occurs when an acquirer becomes a subsidiary of its target.

How Does a Backflip Takeover Work?

For example, let's assume that Company XYZ is acquiring Company ABC, which is smaller. Company XYZ has been through a rough patch: It had to recall one of its biggest products due to defects that caused deaths in six states, and its brand and image have suffered greatly as a result. Company ABC, however, is a competitor with an untarnished image, loyal customers, a target demographic that Company XYZ has been working for years to tap, and a small but formidable presence in four other countries that would take Company XYZ years to catch up to.

The Company XYZ board determines that in order to capitalize on Company ABC's stellar image and smooth sailing, it would be better to do business as Company ABC after the merger. Thus, Company XYZ structures a backflip takeover, whereby it acquires Company ABC and places the Company XYZ assets in a Company ABC subsidiary so as to merge the two businesses but preserve the Company ABC name.

Why Does a Backflip Takeover Matter?

Backflip takeovers are uncommon.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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