Merger vs Consolidation: Difference and Comparison

In the common nature of businesses, there are ups and downs. Business owners take different measures and policies to handle certain situations or increase profitability.

Two of the common measures are Mergers and Consolidation. In both cases, two or more businesses combine for a specific purpose.

Key Takeaways

1. The merger involves the combination of two or more companies to form a new entity, while consolidation involves integrating two or more companies to form a single entity.
2. Merger involves an equal partnership between the merging companies, while consolidation involves one company absorbing the others.
3. A merger is used to gain market share or diversify product offerings, while consolidation is used to streamline operations and reduce costs.

Merger vs Consolidation

A merger is a term used in business which means that two or more companies combine together. In this scenario, one company takes over the other company or companies along with their assets and becomes a single entity. In consolidation, two companies combine together to form a new company. They also combine their assets. 

The definition of a merger is that it is legally 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 is legally 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

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 used alternately with Amalgamation.	It is 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 general merger 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, and increase in operational costs, value, and competition are some of the reasons behind a merger. A merger’s benefits include tax advantages and increased goodwill, markets and market share, financial resources, growth, and expansion.

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 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 the unification has formed 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, and Lowered overhead expenditures are some of the benefits of a Consolidation.

Main Differences Between Merger and Consolidation

1. A merger is when two or more companies combine, where one company takes over or absorbs another company. In contrast, consolidation is when two or more companies combine, where both companies form a union.
2. In the process of merger, Assets, and Liabilities are also taken over, and in consolidation, Assets and Liabilities are combined.
3. After a merger, the company that takes over is the only one in existence, and after consolidation, only the new company is one in existence.
4. A merger is used interchangeably with amalgamation. Whereas consolidation is used interchangeably with integration.
5. Merger takes place when a company is in a financial crisis. Merger takes place when the companies wish to build a more powerful company.

References

1. https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.4250110404
2. https://www.sciencedirect.com/science/article/pii/S0378426698000843