Backflip Takeover

AAA

DEFINITION of 'Backflip Takeover'

An uncommon type of takeover in which the acquirer becomes a subsidiary of the acquired or targeted company, with business after the takeover conducted in the name of the acquired company. A backflip takeover gets its name from the fact that it runs counter to the norm of a conventional acquisition, where the acquirer is the surviving entity and the acquired company becomes a subsidiary of the acquirer.
While the acquired company's assets are subsumed into the acquiring company, control of the combined entity is generally in the hands of the acquirer.
 

INVESTOPEDIA EXPLAINS 'Backflip Takeover'

 
While companies may consider a backflip takeover for a number of valid reasons, a common motive for such a structure is much stronger brand recognition and goodwill for the target company than the acquirer in their major markets.
 
Often, the acquirer may be struggling with problems of its own. For instance, the acquirer may be a hitherto sizeable and successful company that has had its image tarnished by one or more negative issues such as a large product recall, well-publicized product deficiencies, accounting fraud and so on. These issues may significantly impede its future business prospects, leading it to consider other options for its long-term survival and success. One of these options is to acquire a rival company that has complementary businesses and sound prospects, but which needs significantly more financial and operational resources to expand than it could raise on its own.
 
For example, DullCo is a large company that has fallen on relatively hard times because the massive recall of one of its biggest-selling products has hurt its finances and caused large-scale customer defections. Management decides that its brand has suffered irreparable damage, and decides to use its financial resources – which are still substantial – to acquire smaller and fast-growing rival Hotshot Inc. DullCo’s management also decides that business after the completed takeover will be conducted under the Hotshot name, which will be the surviving entity, with DullCo becoming a Hotshot subsidiary.
 
Why would Hotshot’s management want to sell out to a larger, struggling competitor? Probably because Hotshot’s executive team believes it can use DullCo’s huge resources to expand faster than it could on its own. Hotshot’s management is also very likely to bargain for a substantial presence on the Board of Directors and management of the combined entity.

RELATED TERMS
  1. Acquisition

    A corporate action in which a company buys most, if not all, ...
  2. Clandestine Takeover

    An attempt to gain control over a company through secretive means. ...
  3. Breakup Fee

    A common fee used in takeover agreements if the seller backs ...
  4. Friendly Takeover

    A situation in which a target company's management and board ...
  5. Bust-Up Takeover

    A corporate buyout in which the acquirer sells off a piece of ...
  6. Acquisition Premium

    The difference between the estimated real value of a company ...
RELATED FAQS
  1. What happens to the stock prices of two companies involved in an acquisition?

    When a firm acquires another entity, there usually is a predictable short-term effect on the stock price of both companies. ... Read Full Answer >>
  2. Why do companies merge with or acquire other companies?

    Some of the reasons for mergers and acquisitions (M&A) include: 1. Synergy: The most used word in M&A is synergy, ... Read Full Answer >>
  3. How are corporate poison pills regulated in the United States?

    The Delaware Supreme Court was the first legal authority to declare poison pills a valid initiative. This defense is either ... Read Full Answer >>
  4. How can a company resist a hostile takeover?

    Several different defense strategies can be applied by existing corporate boards to ward off a hostile takeover. The most ... Read Full Answer >>
  5. How does a letter of intent work in the context of mergers and acquisitions?

    A letter of intent, or LOI, is used to set forth the terms of a proposed merger or acquisition. It is usually the first step ... Read Full Answer >>
  6. What happens to the shares of a company that has been the object of a hostile takeover?

    The shares of a company that is the object of a hostile takeover rise. When a group of investors believe management is not ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    Mergers And Acquisitions: Understanding Takeovers

    In the dramatic world of M&As, battleground terms meld with bizarre metaphors to form the language of the game.
  2. Fundamental Analysis

    Key Players In Mergers And Acquisitions

    Strategic acquisition is becoming a part of doing business. Discover the different types of investor groups involved.
  3. Forex Education

    Mergers & Acquisitions: An Avenue For Profitable Trades

    When major corporate transactions have a big impact on the currency markets, you can benefit.
  4. Options & Futures

    Reverse Mergers: The Pros And Cons

    Reverse mergers can provide excellent opportunities for companies and investors, but there are still some downsides and risks.
  5. Entrepreneurship

    Biggest Merger and Acquisition Disasters

    Find out which companies collapsed after merging.
  6. Active Trading Fundamentals

    Trade Takeover Stocks With Merger Arbitrage

    This high-risk strategy attempts to profit from price discrepancies that arise during acquisitions.
  7. Insurance

    The Wonderful World Of Mergers

    While acquisitions can be hostile, these varied mergers are always friendly.
  8. Options & Futures

    The Basics Of Mergers And Acquisitions

    Learn what corporate restructuring is, why companies do it and why it sometimes doesn't work.
  9. Economics

    What is a Management Buyout?

    A management buyout, or MBO, is a transaction where a company's management team purchases the assets and operations of the business they manage.
  10. Fundamental Analysis

    Explaining Enterprise Multiple

    The enterprise multiple is a ratio used to value a company as if it was going to be acquired.

You May Also Like

Hot Definitions
  1. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  2. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  3. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  4. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  5. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center