Backflip Takeover

What Is a Backflip Takeover?

A backflip takeover is a rare type of takeover that occurs when an acquirer becomes a subsidiary of the company it purchased. Upon completion of the deal, the two entities join forces and retain the name of the company that was bought.

Understanding a Backflip Takeover

Takeovers, the process of one company, the acquirer, making a bid of cash, stock, or a combination of both to assume control of another, the target firm, happen all the time.

When well-executed, these deals can function as a quick way for a business to grow and achieve its ambitions, whether that be boosting its customer base and market share, branching out into new areas, expanding economies of scale, eliminating competition, or obtaining new, potentially game-changing technologies protected by patents.

In some rarer cases, takeovers might also offer the added bonus of helping a company to revamp its image. A backflip takeover is named as such because it runs counter to the norm of a conventional acquisition.

In a run of the mill acquisition, the acquirer is the surviving entity, and the acquired target company becomes its subsidiary. Backflip takeovers buck this custom, transforming the company that was purchased into the main entity upon completion. The acquiring company becomes a subset of the acquired company, even though control of the combined entity is in the hands of the acquirer.

Benefits of a Backflip Takeover

Companies may consider a backflip takeover for a number of valid reasons. A common motive for such a structure is much stronger brand recognition of the target company than the acquirer in their major markets.

Often, the acquirer may be struggling with problems of its own. For instance, it may be a sizable and successful company that has had its image tarnished by one or more setbacks 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.

Real World Example

In 2005, SBC Communications purchased AT&T for $16 billion and retained the AT&T name, while the SBC name was absorbed into the overall company. SBC did this because AT&T was and is one of the most popular brand names in the world, and has one of the longest histories of a telephone company.

In fact, the merged entity even continued owning the original history of AT&T that dated back to the company's founding in 1885. Though SBC decided to use AT&T's name and history after the merger, internally, the company utilized SBC's corporate structure and stock price history.

SBC's chair and chief executive officer (CEO) kept the same roles in the merged company, while AT&T's CEO became president of SBC and was given a seat on the board.

SBC bought AT&T because the merger allowed SBC to grow significantly, accessing AT&T's large network and customer base, allowing other subsidiaries of SBC to expand beyond their regional areas of the business to become a truly national player.

AT&T accepted the merger because, at the time, it was struggling with Internet technology, the rise of the cellphone industry, which at the time it had little presence, and regulatory decisions that left it less competitive than it once was.

With this merger, SBC became the largest provider of data and phone services to corporate entities in America, and AT&T lived on through the merger in a business that it was otherwise struggling in.