In the business world, the terms merger and consolidation are used quite often. Pretty surprisingly, they are also mistaken more often and interchanged with each other. It will not come out as a new thing to hear someone say their company merged with another one yet it was a consolidation and vice versa.
The main similarity between a merger and consolidation is that they both involve companies coming together as one. The companies usually come together to combine their assets, increase their market shares, as well as to grow profits.
Basically, mergers are different from consolidation, but they essentially follow the same process. In order to understand the difference between the two, a clear dissection of the two words needs to be made. Each term needs to be given its definition and characteristics. Examples of each would also play a big role in differentiating them.
What is A Merger?
A merger is defined as a contractual and statutory combination of two or more entities or things, mostly companies when they join into one. Also, it can be understood to be the process in which a company takes over another one including its assets and liabilities.
While the company taking over remains active, the other one essentially ceases to operate. A good example would be having three Companies, A, B, and C operating at the same time. Companies A and B merge into company C where C continues to exist, but A and B cease to exist. A merger is usually beneficial to small companies that join or get taken over by a larger one for better brand recognition or market traction.
What are the Major Reasons Why Companies Merge?
Companies can come together in a merger due to several reasons. Some of the inducing factors include:
- Economic necessity
- Economics of sale
- Operating economies
- Synergy
- Diversification
- Growth
- Better financial planning
- Utilization of tax shields
- Elimination of competition
- Increase in value
Major Benefits of A Merger
Companies enter into mergers with expectations of better days in business ahead. Among the major benefits of mergers are:
- Increased goodwill
- Tax benefits
- Entry into more markets.
- Combined forces to face competition.
- Increased financial resources.
- More growth and expansion.
- Increased market share.
What is the Meaning of Consolidation?
Consolidation, on the other hand, is defined as a contractual and statutory process or action where two or more entities come together to form a more solid or stronger entity. When a consolidation happens, the corporations joining hands become a completely new corporation, at this moment called the successor corporation.
For a consolidation, unlike a merger, the originals entities cease to exist altogether. The successor corporation acquires all assets and liabilities that the original entities owned before they came together.
What are the Major Reasons Behind Consolidations?
The top five reasons why companies decide to venture into consolidation are:
- Streamlining the management and improving decision making.
- Saving resources, money, and to reinvest funds.
- Launching new services in faster and easier ways.
- Improving security
- Streamlining provision of customer services.
Notable Benefits of Consolidation
When companies enter into a consolidation, they enjoy benefits such as:
- Established and uniformed operation procedures.
- Reduced costs through economies of scale.
- Elimination of redundancy.
- Lowered overhead expenditures.
Differences Between Mergers and Consolidation
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Meaning
A merger is a statutory and contractual combination of two or more entities or companies into one while consolidation is the contractual and statutory process where two or more entities, usually companies join hands to form a completely new, more solid, and stronger entity.
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Formation
For a merger to happen, two or more companies come together and combine forces where the company taking over is left as the existing entity. Consolidation, on the other hand, takes place when different ventures come together, combine forces, and join into one completely new venture. The old entities cease to exist altogether.
In short, A + B = C when it’s a consolidation and A + B = A if it’s a merger.
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Resultant Entity
In the case of a merger, the company absorbed will cease to exist and only the acquiring company continues to exist. In the case of a consolidation, all the companies involved stop existing, and a new large company is formed.
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Other Names
The other name for a consolidation is absorption while the other name for a merger is fusion. Even though amalgamation is sometimes used in place of merger, the two, merger and amalgamation also have some distinctions.
Merger Vs. Consolidation: Comparison Table
Summary of Merger Vs. Consolidation
Even though the two terms are common in the business world, it is apparent they are varied. The variances are deeply entrenched into the forms each take and the factors surrounding it. All in all, the two terms involve two or more business ventures or companies coming together as one for better business opportunities and market traction.