Inorganic growth is a business strategy that companies use for growth. The two common tools that companies use for inorganic growth are Amalgamation and Mergers. You will often see people using the amalgamation and merger of the terms interchangeably. Both terms are commonly in use when it comes to takeovers in the business world. However, there are several differences between the two in terms of business and accounting. To properly understand the two terms and their usage, it is important to know the difference between Amalgamation vs Merger.
Before we move to the differences, it is crucial to understand what amalgamation and merger mean.
The amalgamation of companies means combining two or more companies and creating a new entity from them. Amalgamation is a common strategy by companies for varying purposes, such as:
- Gaining an edge over the competition.
- Enhance the efficiency of the companies by combining them into one.
- Expansion of business.
- Gaining Synergy.
- Economies of large-scale production.
The amalgamation of two or more companies obviously impacts the asset and liabilities of the companies involved in the process. Along with the asset and liabilities, the shareholders also go through transition.
Once the board members of the companies enter into an agreement, the plan is then sent for approval to the market regulators and court as well. These approvals from different authorities take their due time and, once done, result in a new entity. The new entity would then issue shares to the shareholders of the transferor company. After that, all the assets and liabilities are taken care of.
A merger means the absorption of one company by another company, which is comparatively bigger in size. Like amalgamation, mergers have various purposes, such as expanding the customer base, reaching out to new markets, and reducing headwinds such as competition and new product launches.
All the assets and the liabilities of the company that is merged belong to the company in which it is merged. Similarly, the shareholders of the old company get ownership and the shares of the new entity.
The merger has two forms – Merger through Absorption and Merger through Consolidation. Separately, there are several types of mergers – Horizontal mergers, Vertical mergers, Co-generic mergers, Reverse mergers, and Conglomerate mergers.
Amalgamation vs Merger – Differences
Following are the key difference between Amalgamation vs Merger:
Two companies merge when they have a similar line of operations and usually want to expand in the new markets or acquire new customers. Amalgamation usually takes place when a bigger company acquires a smaller company or a company acquires multiple companies.
There are mainly four types of mergers – Horizontal, Vertical, Co-generic, and Reverse. Amalgamation could either be by nature of purchase or in the nature of merger.
Creation of New Entity
Under the merger, one company takes over another company. Hence, the acquiring company may retain its identity. In amalgamation, the bigger and acquiring company remains and retains its identity. The smaller company, however, loses its existence.
Who Takes the Initiative?
In the case of a merger, the initiative is generally from the acquirer, who wants the merger to happen. On the other hand, amalgamation gets the equal consent of both entities.
Number of Companies Involved
The merger involves a minimum of two companies, where one is an existing company, and the other is the target company. Amalgamation involves a minimum of three companies, where one is the amalgamated company and the others are amalgamating companies.
Size of Companies
In a merger, the absorbing company is usually bigger in size and operations. Under amalgamation, the target companies are typical of similar size.
What Happens with Shareholders?
After a merger, shareholders of the absorbed company get the shares in the absorbing company. However, the number of shares they get may or may not be proportionate to their earlier shareholding pattern. In amalgamation, all shareholders in the existing companies get shares in the new company as well.
Under the merger, the companies can decide on who will own the controlling stake. In amalgamation, the controlling stake is always with the acquirer. The other companies own a minority stake.
In comparison to amalgamation, a merger involves more legal formalities and paperwork.
Transfer of Assets and Liabilities
In a merger, the existing company not only keeps its asset and liabilities but also takes up the assets and liabilities of the other company. Under Amalgamation, the assets and liabilities of the amalgamating companies get transferred to the newly created entity.
In a merger, the assets and liabilities of the merged company are consolidated. Under amalgamation, the assets and liabilities get transferred to the balance sheet of the new company.
In the business world, mergers happen more frequently in comparison to amalgamations. Some of the biggest mergers of 2019 are Occidental Petroleum and Anadarko Petroleum; AbbVie and Allergan; and Bristol-Myers Squibb and Celgene. Even though amalgamations are less frequent, the new company resulting from amalgamation is usually large and powerful. For example, the world’s biggest steel company, Arcelor, was the result of amalgamation.
For corporate restructuring, both amalgamations and mergers are useful tools. In fact, it won’t be wrong to say that amalgamation is a form of merger. Or, all amalgamations could be mergers, but it does not necessarily mean that all mergers are amalgamations. The company can go for either of the two depending on the nature of their business, company structure, objective, and macro business environment.
Quiz on Amalgamation