Amalgamation vs Absorption – Difference and Comparison

What is Amalgamation?

Amalgamation is the process where two separate entities or corporations merge to form a single organization. In the process of merging the entities, the newly formed organization or company assumes all the assets and liabilities from the dissolved entities.

Depending on the type of amalgamation the merger leaves the partners with different responsibilities in the new entities.

There are two types of amalgamation namely; merger amalgamation and purchase amalgamation. Merger amalgamation essentially involves two corporations of the same size coming together to form one big corporation.

In merger amalgamation the two entities coming together work as equals and develop strategies of growth and expansion together. This means that the partners bear the profits and losses in equal measure.

Purchase amalgamation is when a strong and a weak corporation or a big and small corporation merge to form a single entity.  Purchase amalgamation is therefore the process where the stronger entity acquires the weaker one and in the process takes control of its assets, liabilities and structures.

The responsibility and mandate of running the newly formed company after the merger in this case is fully vested on the purchasing entity or the bigger company. All the profits and losses in this case lie with the purchasing partner.

What is Absorption?

Absorption is the process through which a company takes over the operations of another company. Here the bigger company takes over the smaller company either voluntarily or in a hostile manner. In this process no new entity is formed. Only the smaller company that has been absorbed is liquidated.

All the assets and liabilities of the liquidated entity become part of the bigger entity.  Absorption can be as a result of the smaller company struggling to survive in the market or simply as a result of the larger entity desiring to expand.

The main objective of absorption is therefore saving the smaller entity from total failure especially due to competition.

Absorption might also be as a result of the smaller entity being in debt and with too much liability hence the takeover by the larger entity which assumes the liabilities and finally takes control of the operations.

After absorption the larger entity might decide to change the personnel of the absorbed through reduction by firing or downsizing.

Difference Between Amalgamation and Absorption

  1. The main difference between amalgamation and absorption is that in amalgamation a new single entity is formed.
  2. In absorption the existing entities remain but the operations of the weaker entity are assumed by the larger or stronger one. 
  3. Amalgamation which involves three entities, that is the two liquidating and the newly formed company while absorption only involves two companies one that is absorbing the other.
  4. In amalgamation dominance doesn’t exist because the companies merging are of the same size while in absorption the acquiring company can dominate over the one being acquired.
  5. Amalgamation is always voluntary while absorption might be hostile if not voluntary.

Comparison Table Between Amalgamation and Absorption

Parameters of ComparisonAmalgamationAbsorption
DefinitionTwo companies of the same size merge to form a single entity which they both run equally.A large company acquires a smaller company and assumes all the operations of the acquired entity.
New entityA new company is formed and operated by the liquidated partners.No new entity is formed but one company takes over the operations of the other.
DominanceCompanies are equal partners and none of the liquidated companies dominates the operations of the new entity that is formed.The larger company dominates over.
ACTIn amalgamation the act is voluntary for both entitiesIn absorption the takeover act may be voluntary or hostile.
LiquidationIn amalgamation both companies are liquidated and operate as a new entity.Only the acquired company is liquidated.