In the world of takeovers, the expressions “merger” and “amalgamation” are often used to refer to an expansion of a company in order to maximize its market returns.
Merger and Amalgamation – Introduction
Inorganic growth has come up as a major part of the business world. In order to reach the market and reap some big fat returns, businesses are either purchasing smaller fish or taking hold of a new line of operation. The article aims to put forward the major difference between merger and amalgamation.
Amalgamation is the combination or consolidation of two or more businesses, known as amalgamating companies, typically in the same or related line of business, to form a completely new entity. According to Prof. L.H.Haney, a merger is “a form of business entity formed by the outright acquisition of constituents’ or organizations’ properties and the integration or amalgamation of such properties into a single business unit.”
Whereas a merger is the joining of two or more business organizations to create a single joint company with a fresh management structure and ownership, where both entities join hands and plan to combine as a single unit with a new name to achieve strategic advantage and operational synergies.
All the merging firms cease to exist as independent entities. The merged companies’ assets and liabilities are transferred to the new entity. The shareholders of the merging companies receive shares in the new entity.
A merger merges two businesses into one, either by closing the old businesses and forming a new one or by one company absorbing the other. To put it another way, two or more businesses are merged into one.
A merger is a financial transaction in a wide range of sectors, including healthcare, financial institutions, private investments, and manufacturing. Horizontal and vertical mergers are the two major forms of mergers.
Horizontal mergers – Horizontal Merger happen when two companies in the same industry merge to become a single entity. Depending on the market, this approach may result in antitrust issues. Because of antitrust rules, for example, GM and Ford will not be able to combine.
Vertical mergers – Vertical mergers occur when two companies with the same value chain or supply chain combine; this is known as a vertical merger. A hamburger restaurant, for example, could merge with a cow farm.
Example – Recent foreign mergers include
– P&G’s acquisition of Gillette,
– Ranbaxy’s acquisition of Betapharma,
– Lenovo’s acquisition of IBM’s PC division, and
– HP’s acquisition of Compaq.
An amalgamation is the merging of two or more entities into a larger single entity in corporate finance.
The combination of financial statements is referred to as amalgamation or restructuring of accounting. A group of companies, for example, may report their financials on a sequential basis, which includes the specific financial statements of many smaller firms.
Investment bankers, lawyers, accountants, and executives from each of the merging firms are usually involved in an amalgamation. To assess future transactions and advise the individual companies, the bankers must traditionally conduct comprehensive financial modelling and valuation.
Example – Asa result of a merger, Arcelor, the world’s largest steel company (which has since been acquired by Mittal Steel), was created. In 2002, Usinor, a French steel company, merged with Aceralia, a Spanish steel company, and Arbed, a Luxembourgish steel company, to create Arcelor.
Difference between Merger and Amalgamation – Comparison Table
|Two or more companies merge to create a new business or merge the other target companies into an established company. A merger is a method of combining many companies into a single entity. The Merger includes all of the Amalgamations.||It’s a form of a merger in which two or more businesses merge to create a new entity. Amalgamation does not apply to all mergers.|
|One absorbing company can survive in a merger |
after absorbing the target company, so a minimum
of two companies is required.
|An amalgamation of two companies results in a new company, so a minimum of three companies is necessary.|
|The absorbing corporation is significantly bigger than the absorbing company.||In an amalgamation, the size of the company that has been targeted is relatively comparable.|
|The absorbed/acquired company’s assets and liabilities are being consolidated.||Established organizations’ assets and liabilities are housed and moved into the newly created entity’s balance sheet.|
|The absorbing entity’s shareholders maintain ownership, while the absorbed entity’s shareholders acquire ownership over the absorbing company.||The original organizations’ shareholders automatically become shareholders of the new company.|
|Tata Steel is the result of the merger of two companies, |
Tata Steel and the UK-based Corus Group.
In the meantime, Corus Group lost its identity.
|The merger of two companies, Mittal Steel and Arcelor, has resulted in Arcelor Mittal’s creation. Mittal Steel and Arcelor Group both lost their identities as a result of the merger.|
The table above aims to compare the difference between mergers and amalgamation.
Merger vs Amalgamation – Explanation
A brief explanation of each of the aspects of the difference between merger and amalgamation.
• Creation –
There lies a very subtle difference between merger and amalgamation, as both processes lead to several firms’ consolidation. In a merger, amalgamation is a type of consolidation process. The outcome of amalgamation is the establishment of a completely new corporation. On the other hand, a merger is a consolidation phase in which the resulting business may be either new or existing.
• Entities Required –
A merger requires a minimum of two companies; however, the amalgamation process requires a minimum of three companies. One absorbing company can survive after absorbing the target company, so a minimum of two companies is needed. An amalgamation of two companies results in a new company, so a minimum of three companies is necessary.
• Size of the company –
The companies operating in the amalgamation process are of comparable scale. However, the companies involved in the merger process are different since an absorbing corporation is supposed to be larger than an absorbed company.
• Assets and Liabilities-
During the amalgamation process, the former companies’ assets and liabilities are passed to a new company. The assets and liabilities of the absorbed company, on the other hand, are integrated into the absorbing entity during the merger process.
• Impact on Shares –
During the merger process, shareholders of the absorbing company receive shares of the absorbing company. The owners of the current organizations in the amalgamation process, on the other hand, receive shares in the new company formed in the process.
• Impact on Shareholders –
In a merger, the absorbing entity’s shareholders retain their equity, while the absorbed entity’s shareholders acquire ownership in the absorbing company. In an amalgamation, all of the former entities’ shareholders become shareholders of the new company.
Both are merging two or more firms into a single organization or of an established company absorbing the target company. A resulting entity may be a new or existing entity as a result of the operation. An amalgamation is a form of the merger consolidation process.
Today’s businesses must devise acquisition plans and policies that address who to acquire and how to penetrate new global markets deftly. Mergers and acquisitions should be in line with the company’s long-term objectives. Before being purchased, distressed assets should be thoroughly examined.