What Is the Meaning of Consolidation & Merger?

Consolidation and merger, although often used synonymously in common speech, have very definite and distinct meanings in business law and accounting, and are rounded out by a third term, acquisition. Generally, a merger is the combining of two entities. A merger by consolidation implies the combining of two or more entities in a process that results in a new entity. Merger by acquisition involves the purchase of one or more entities by an entity with all parties retaining their individual identities.

History

"Consolidation" and "acquisition" as words first appeared in literature in the 15th century, while "merge" appeared first in 1635, according to Webster’s Collegiate Dictionary. Their use in business reflects the cycles of business mergers that accompanied later stages of the industrial revolution, most notably around the turn of the 20th century and in the 1920s, picking up again and intensifying from the 1950s forward, according to author Gregory P. Marchildon in "Mergers and Acquisitions."

Shifts in Popularity

Marchildon cites a preference for consolidation prior to the 1950s and a subsequent increasing reliance on acquisition. This follows a trend of increasing transparency in financial accounts, which made clearer the impact of a transaction on the financial statements of the parties to the transaction. Whereas, in a consolidation, assets and liabilities are valued at fair market value and transferred to the survivors' books, in an acquisition the entities involved maintain separate books, which are reconciled annually, states Pasewark Accounting.

Confusion of Terms

The word consolidation works in a number of contexts. Financial statements are called consolidated if they reflect a purchase or acquisition. In this case, the financial accounts (books) of constituent entities are maintained separately and only brought together as part of an annual reconciliation process. The terms consolidation and merger also can be used differently, where merger is the combining of two entities into a single entity, which may or may not be new. Consolidation is simply an ambiguous reference to an act of combining.

Accounting

One of the more significant differences, then, between an acquisition and a merger or consolidation is the accounting treatment of the transaction and the impact on the survivors, or principal party's books. An acquisition has little direct, immediate impact on the acquirer's books; it is reflected only in year-end consolidated financial statements. A merger or consolidation, on the other hand, has significant impact; assets and liabilities, as well as stockholder equity, among other line items are immediately restated to reflect market valuations at the time of the transaction.

Considerations

So, while there is a real difference between an acquisition, and either a consolidation or a merger, the two latter terms are used somewhat interchangeably as an umbrella term for an act of combining. The principal outcome of whether a transaction is treated as an acquisition or a merger/consolidation is a matter of legal survivorship. The primary determinant into whether a transaction is structured as an acquisition or a merger/consolidation is a matter of benefit from an accounting standpoint, looking primarily at tax and valuation implications.

References

• "Mergers and Acquisitions"; Gregory P. Marchildon; 1991
• Consolidation at Acquisition
• Merriam Webster's Collegiate Dictionary (10th Edition)