When encountering challenges in expanding a business, terms like merger, acquisition, and amalgamation often surface. However, these terms, despite being related, carry distinct meanings and implications. To grasp their functions effectively, it’s crucial to thoroughly understand each concept before delving into their differences. This includes gaining a solid foundation in the individual concepts of mergers, amalgamation, and acquisitions. In this blog, we shall see the difference between merger acquisition and amalgamation in detail.
What is a Merger?
Before seeing the difference between merger acquisition and amalgamation, let us first understand about merger. A merger, as per its legal definition, involves the amalgamation of two companies into a singular entity, featuring a fresh ownership and management arrangement. This strategic move allows companies to broaden their geographical and operational scope, gain larger market shares, and diversify their array of services.
Benefits of Adopting a Merger Strategy
The advantages of adopting merger are as follows:
1. Elimination of Operating Inefficiency
One of the key advantages of implementing a merger strategy is the significant reduction in operating inefficiencies. This benefit arises from the consolidation of two or more companies, leading to enhanced operating economies. Under the guidance of proficient management, the potential for duplications in accounting, marketing, or procurement is greatly minimised, resulting in streamlined operations.
2. Synergy
Synergy is a critical outcome of a merger, representing the increased combined value of the merged entities compared to the sum of their individual values. When a company with limited resources and management expertise merges with another company possessing abundant resources, it creates a more formidable and efficient organisation than either entity could achieve independently. This synergy can lead to enhanced competitiveness and profitability.
3. Enlarged Diversification
Mergers facilitate diversification by allowing companies to expand their scope and enter new markets or business domains. This strategic move reduces the risk associated with a single organisation attempting to venture into uncharted territory. By leveraging the complementary strengths of both merging companies, they can effectively address challenges and capitalise on opportunities in diverse areas, ultimately leading to improved resilience.
4. Optimum Financial Planning
Merging companies gain the advantage of optimising their financial resources. With access to a larger pool of combined finances, the merged entity can develop innovative financial plans and strategies for efficient resource utilisation. This optimisation enhances the overall financial health of the company, potentially increasing its competitiveness and long-term sustainability.
Understanding Acquisition in Corporate Transactions
Before seeing the difference between merger acquisition and amalgamation, let us now understand the concept of acquisition. An acquisition stands as a substantial corporate manoeuvre where one company obtains a portion or the entirety of another company’s shares or assets. The primary goal behind an acquisition is to leverage the strengths and assets of the target company, seeking to realise synergies that ultimately benefit the acquiring firm.
Key Benefits of Acquisition
The advantages of adopting acquisition are as follows:
1. Access to Capital
Acquisitions provide access to the capital held by a larger, well-established company. Small business owners often face the challenge of funding their own growth. Through an acquisition, entrepreneurs can secure a substantial amount of capital, thereby obtaining the necessary funds without depleting their personal resources.
2. Enlarged Pool of Talent
Acquisitions offer the advantage of tapping into a larger pool of skilled and competent resources. This influx of talent can significantly enhance a company’s capabilities, leading to increased revenues and overall growth.
3. Enhanced Market Power
To attain a dominant position in the market, staying ahead of competitors is crucial. Acquisitions expedite the process of expanding a company’s market share, simultaneously impeding the progress of competitors. In a fiercely competitive market, adopting an acquisition strategy not only fuels a company’s growth but also diminishes the competitive strength of rivals.
4. Reduced Entry Barriers
Acquiring shares in a progressive company provides immediate access to diverse product lines and new markets, often associated with a well-established brand and an existing customer base. For small companies, acquisitions simplify market entry, eliminating the need for substantial investments in new product development, extensive market research, and the time-consuming task of building a sizable client base. Acquisition acts as a shortcut past the formidable entry barriers that smaller businesses would typically face.
Understanding Amalgamation in Corporate Transactions
Lastly, let us see what amalgamation means as we see the difference between merger acquisition and amalgamation. Amalgamation, a distinct form of merger, involves the integration of operations from two or more companies to establish an entirely novel entity. Typically preferred by companies within the same industry, the principal aim of amalgamation is to curtail operational expenses and attain synergies by forming this fresh corporate entity.
Advantages of Amalgamation
The advantages of adopting amalgamation are as follows:
1. Operating Economics
Amalgamation leads to improved operating economics, encompassing the day-to-day expenses associated with business operations. When two or more companies amalgamate, their combined business operations expand, allowing them to optimise the economies of scale associated with a larger entity’s production and distribution activities. Additionally, amalgamation helps in reducing various internal expenses such as managerial costs and operating costs.
2. Financial Benefits
Amalgamated companies can reap various financial benefits, including tax advantages, especially when a loss-making company amalgamates with a profit-making counterpart. This financial synergy can result in tax savings and improved overall financial performance.
3. Accelerated Growth
Studies indicate that amalgamated companies tend to experience faster growth compared to individual entities. This rapid growth is attributed to their enhanced ability to withstand competition, the opportunity to jointly pursue expansion plans, and the sharing of past experiences and knowledge when faced with challenges.
4. Access to Effective Management
Effective management is crucial for achieving success in the business world. Amalgamated companies have the advantage of improving their managerial effectiveness by replacing inefficient staff with a competent team of managers. They possess the flexibility to recruit skilled professionals with extensive experience in the relevant industry, enhancing their overall operational efficiency and strategic decision-making capabilities.
Difference between Merger Acquisition and Amalgamation
The major difference between merger acquisition and amalgamation are as follows:
| Point of Difference | Mergers | Acquisitions | Amalgamations |
| Required No. of Entities | Minimum 2 companies are required as only 1 company will remain after absorbing the target company. | Minimum two companies are required wherein 1 company takes over the shares as well as assets of another company. | Minimum three companies are required as amalgamation of 2 results in a new entity. |
| Size of the Company | Both the companies that are involved are equal in terms of size. | Small to medium sized firms are acquired by larger companies. | Here sizes of the target companies are comparable. |
| Impact on their Shares | Shares of the absorbing company are given to the shareholders of the absorbed company. | The buyer co. purchases more than 50% of the shares of the target company. | Shares of the new company are given to shareholders of existing firms. |
| Resulting Entity | 1 of the existing company absorbs the target company for retaining its identity. | The acquired company then ceases to exist and it becomes a part of the acquiring co. | Existing companies lose their identity and result in forming an entirely new company. |
| Driver for the Consolidation | Mergers are generally driven by the absorbing company only. | Acquisition is mostly driven by the buyer company and with or without even the consent of the acquired company. | Amalgamation is initiated generally by both the companies with an equal interest. |
| Accounting and tax Treatment | Assets as well as liabilities of the absorbed company are consolidated. | 1 firm acquires completely the assets and liabilities of the target company or firm. | Assets as well as liabilities of the existing firms are transferred to balance sheet of the newly formed company or the firm. |
Final Thoughts
In the corporate system, the difference between merger acquisition and amalgamation is essential to understand. A merger forms a new entity, enhancing market reach and diversifying services, with advantages such as increased efficiencies and financial optimisation. Acquisitions involve a company buying another’s shares or assets, providing access to capital, talent, market influence, and streamlined market entry. Amalgamation, a specialised merger, creates a new entity focused on cost reduction and synergy, offering benefits like improved operating economics, financial advantages, rapid growth, and effective management.
These strategies cater to diverse business objectives and sizes, necessitating a thorough understanding of their distinctions for informed decision-making in the ever-evolving business world.
