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.

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.

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.

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.

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.

If you need help with the difference between a merger and amalgamation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.