In the common nature of businesses, there are ups and downs. To handle certain situations or increase profitability, business owners take different measures and policies. Two of the common measures are Mergers and Consolidation. In both cases, two or more businesses combine for a specific purpose.
Merger vs Consolidation
The main difference between Merger and Consolidation is that when a merger takes place, it usually means a company is taking over another company or making the other company a part of its organization. In the case of a consolidation, the two companies combine but maintain a separate entity.
The definition of a merger is that its legal binding between two or more entities or companies. Where two companies merge and transform into a single company. The Merger also means the act of a company taking over one or more companies, along with its assets and liabilities.
The definition of consolidation is that it’s a legal binding between two or more entities or companies. Where two companies consolidate but remain as two separate companies, in this case, the companies come together to form a stronger association of one or more companies or entities.
Comparison Table Between Merger and Consolidation
| Parameters of Comparison | Merger | Consolidation |
| Meaning | Two companies combine where one company takes over or absorbs another company. | Two companies combine where both the companies form a union. |
| Items | Assets and Liabilities are also taken over. | Assets and liabilities are combined. |
| Status | The entity that takes over is the only remaining entity. | Both the companies form a new company. |
| Alternative | It is often used alternately with Amalgamation. | It is often used alternately with Integration. |
| Situation | It takes place mostly in a situation of a financial crisis. | It takes place when the companies wish to establish a stronger firm. |
What is Merger?
A merger, in general, is a legal combination or binding of two or more companies. It is also called Fusion or Amalgamation. When a merger takes place, a company takes over the other or multiple companies. In this process, several items, including the assets and liabilities of these companies, are taken over.
The company that takes over remains the same entity. However, the companies that have been taken over are no longer in existence. The company that has been taken over then needs to function under the rules and regulations of the other company.
For a better understanding of the concept, let’s take an example. Let’s assume that company X and Y are going to merge, and X is taking over company Y. So X will take over all items, including assets and liabilities. And X is the only company in existence. Usually, larger organizations take over small companies. This mostly takes place when smaller organizations are in need of resources or are unable to face the competition in the market.
Financial need, Diversification, growth, decrease in resources, increase in operational costs, value, and competition are some of the reasons behind a merger. Tax advantages and increased goodwill, markets and market share, financial resources, growth, and expansion are a few benefits of a merger.
What is Consolidation?
A consolidation, in general, is also a legal combination or binding of two or more companies. It is also called Integration. When a consolidation takes place, a company unites with the other or multiple companies. In this process, several items, including the assets and liabilities of these companies, are combined.
The two companies form a completely new organization. The original companies are no longer in existence. The new company that has been formed by the unification then needs to function under the rules and regulations of the new company.
For a better understanding of the concept, let’s take an example. Let’s assume that companies X and Y are going to consolidate. It means they are going to be integrated or unified. So X and Y will combine all items, including assets and liabilities, for this new organization. And now X+Y is the only company in existence.
Streamlining the management and improving decision making, Saving resources, money, and reinvesting funds are some of the major reasons why companies decide to consolidate. Launching new services in faster and easier ways. Improving security Streamlining provision of customer services. Established and uniformed operation procedures, Reduced costs through economies of scale, Elimination of redundancy, Lowered overhead expenditures are some of the benefits of a Consolidation.
Main Differences Between Merger and Consolidation
- A merger is when two or more companies combine where one company takes over or absorbs another company. Whereas consolidation is when two or more companies combine where both the companies form a union.
- In the process of merger, Assets and Liabilities are also taken over, and in consolidation, Assets and Liabilities are combined.
- After a merger, the company that takes over is the only one in existence, and after consolidation, only the new company is the one in existence.
- A merger is used interchangeably with amalgamation. Whereas consolidation is used interchangeably with integration.
- Merger usually takes place when a company is in a financial crisis. Merger usually takes place when the companies wish to build a more powerful company.
Conclusion
In everyday usage, both the terms are often used, but sometimes in an inappropriate way. They are mistaken for each other due to their formations. The one similarity between both mergers and consolidations is that both of them involve combining individual companies. Also, mergers and consolidations come with their individual dangers and opportunities. In one of them, a company takes over the other, and in another one or two, companies unify to form an entirely new company. Both Merger and Consolidation are techniques adopted for the betterment of financial resources, markets, profits, and goodwill of the companies.
References
- https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.4250110404
- https://www.sciencedirect.com/science/article/pii/S0378426698000843