Difference Between Merger and Amalgamation Explained Clearly

Key Takeaways

• Mergers and amalgamations are both corporate restructuring strategies, but they differ significantly in their structure, purpose, legal treatment, and outcome.
• A merger usually involves two companies combining into one — often with one company surviving — whereas amalgamation involves blending two or more companies into an entirely new entity.
• The main difference between merger and amalgamation lies in the legal identity of the resulting company, shareholder treatment, and the distribution of assets and liabilities.
• Mergers are often strategic, aiming at growth, competition reduction, or synergy. Amalgamations are more comprehensive consolidations used to restructure industries, save distressed firms, or create entirely new corporate entities.
• Both approaches can have substantial legal, financial, tax, and shareholder implications, making it essential for companies to seek expert legal guidance before proceeding.

What is the difference between a merger and an amalgamation? It's important to know the difference between these two concepts when consolidating a business. Companies often merge with each other to combine their assets so that they can expand to new markets and have better growth and survival prospects. Both mergers and amalgamations result in a bigger company that has more assets and a larger customer base. However, the road to that end result is different depending on which process you use.

What is a Merger?

Most companies are restructured through mergers and acquisitions. Although these terms are often used together or interchangeably, they are actually not the same thing. Mergers and acquisitions both expand the business externally. For example, when a business buys an existing business and instantly grows in size, increases its production levels, and has better chances for growth.

A merger occurs when two or more companies combine and create a new company. The companies in a merger typically are in the same industry or do similar things and want to either grow or diversify their offerings.

There are a number of advantages and reasons companies participate in mergers, including:

• Combining resources
• Removing trade barriers
• Taking away competition
• Creating a stronger company

Most often, one company is designated as the surviving company, which means its stock shares stay the same. The acquired company is called the target company. Shareholders of the target company receive cash, shares, or occasionally specific assets in exchange for their stock.

The process of creating a merger can be long and complicated. In many cases, it involves creating a shell partnership subsidiary that the surviving company uses to access its new assets. The surviving company can also buy the assets of the target company instead of purchasing its stock. The target company then settles its debts, pays shareholders, and slows down its operations.

If a large company merges with a smaller company and maintains its leadership and offices, most people say that that company has obtained the other company. When two fairly equal companies merge with each other, it is considered an alliance.

Legal Framework and Process of a Merger

A merger is governed by corporate laws and securities regulations that define how companies can combine. The process typically includes:

1. Board Approval: Each company’s board must approve the merger proposal, including valuation, terms, and share exchange ratios.
2. Due Diligence: Comprehensive due diligence ensures that all liabilities, assets, contracts, and potential legal issues are assessed before integration.
3. Shareholder and Regulatory Approval: Mergers often require shareholder votes and regulatory clearance, particularly in cases involving public companies or cross-border transactions.
4. Integration: After approval, the surviving company integrates the assets, liabilities, employees, and operations of the acquired company.

The resulting entity usually retains the identity and corporate structure of one of the merging parties, which continues operations under its existing name and governance structure.

What is Amalgamation?

An amalgamation occurs when one company takes over multiple companies. The combined corporations are then automatically liquidated. Amalgamations typically happen when larger companies take over smaller, less financially stable companies.

Characteristics and Implications of Amalgamation

Amalgamation is a more comprehensive corporate restructuring approach that involves the complete combination of two or more companies into a new legal entity. All the assets, liabilities, rights, and obligations of the amalgamating companies are transferred to the new company, and the original companies cease to exist.

Key features include:

• New Corporate Identity: Unlike in a merger, a new company is formed, and previous corporate entities dissolve.
• Equal Treatment of Shareholders: Shareholders of all amalgamating companies typically receive shares in the new entity, often based on a predetermined share exchange ratio.
• Strategic Rationale: Amalgamations are often pursued to consolidate industries, rescue distressed firms, or create a stronger market player through synergy and scale.
• Regulatory Complexity: The process requires detailed approvals, including from shareholders, creditors, and regulatory bodies, and often involves court-sanctioned schemes of arrangement.

Types of Mergers and Amalgamations

There are three types of mergers:

• Horizontal, which is done to eliminate a competing business from the market
• Vertical, where a company gives materials or services to the company it is acquiring, which concentrates operations and keeps the business moving seamlessly
• Conglomerate, which is done to diversify a business's reach and products

There are two types of amalgamations:

• Nature of purchase, which happens when one company acquires a business that is discontinued and the shareholders of that organization don't have shares in the new company
• Nature of merger, which combines the assets and liabilities of all companies and includes all shareholders in the new business.

Strategic Considerations for Choosing Between Merger and Amalgamation

Choosing between a merger and an amalgamation depends on a company’s strategic goals, financial situation, market conditions, and regulatory landscape.

• When to Choose a Merger:
  • Expansion into new markets or product lines.
  • Achieving economies of scale.
  • Reducing competition.
  • Gaining technology or intellectual property.
• When to Choose Amalgamation:
  • Rescuing distressed companies.
  • Industry-wide consolidation for efficiency.
  • Creating a new, larger corporate identity.
  • Tax optimization through restructuring.

Each approach has unique tax, governance, and compliance implications. Mergers might offer faster integration and less disruption, while amalgamations may unlock greater long-term synergy but require more complex planning.

Difference Between Mergers and Amalgamations

Because companies typically don't want to join with their rivals, it often takes an outsider to put together an amalgamation. However, the surviving company is typically the one to take the lead in a merger and often doesn't need an outside promoter.

When a merger happens, the culture and identity of the target company is lost and swallowed up in the surviving company. Amalgamation blends multiple companies together into a single entity that takes part of each company's identity to create something new.

When companies merge, the assets and liabilities of the target company are joined with the assets and liabilities of the surviving company. Shareholders from both companies are merged with shareholders in the new company. During an amalgamation, shareholders of all companies involved receive new shares of the newly fused company.

Key Legal, Financial, and Structural Differences

While mergers and amalgamations share the goal of corporate restructuring, they differ in several fundamental ways:

These distinctions are critical when evaluating the right approach to corporate restructuring, as they directly impact the governance, shareholder value, and legal obligations of the companies involved.

Examples of Mergers and Amalgamations

Mergers occur frequently. Some examples include when Gillette was acquired by P&G or when the PC division of IBM was acquired by Lenovo.

Amalgamations happen less frequently but have still created large, powerful companies. For example, the world's largest steel company, Arecelor, was created through an amalgamation.

Impact of Mergers and Amalgamations on Business Strategy

The choice between a merger and an amalgamation can significantly influence a company’s long-term trajectory. For example:

• Strategic Mergers: Microsoft’s acquisition of LinkedIn expanded its enterprise offerings and user base.
• Amalgamations for Market Leadership: The creation of ArcelorMittal combined multiple major steel producers into the world’s largest steel company, reshaping the global steel industry.

These examples illustrate that both strategies — while similar in objective — are suited to different business scenarios. Companies should align their restructuring approach with their strategic goals, industry dynamics, and long-term growth plans.

Frequently Asked Questions

1. What is the main difference between a merger and an amalgamation?
   A merger combines two companies, with one usually surviving. Amalgamation fuses two or more companies into a new legal entity.
2. Why would a company choose amalgamation over a merger?
   Amalgamation is often chosen for industry consolidation, rescuing financially weak companies, or creating a new market leader.
3. How does shareholder treatment differ in mergers and amalgamations?
   In a merger, target shareholders may receive shares, cash, or assets. In amalgamation, all shareholders get shares in the new entity.
4. Are mergers and amalgamations taxed differently?
   Yes. Tax treatment can vary by jurisdiction, and amalgamations may offer specific restructuring-related tax benefits.
5. Do both require regulatory approval?
   Yes. Both require shareholder and regulatory approvals, but amalgamations usually involve more complex legal and procedural requirements.

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