What is Amalgamation?
In corporate finance, an amalgamation is the combination of two or more companies into a larger single company.
In accounting, an amalgamation, or consolidation, refers to the combination of financial statements. For example, a group of companies reports their financials on a consolidated basis, which includes the individual statements of several smaller businesses.
introduction of Amalgamations
Amalgamation typically happens between two or more companies engaged in the same line of business or those that share some similarity in operations. Companies may combine to diversify their activities or to expand their range of services.
Since two or more companies are merging together, an amalgamation results in the formation of a larger entity. The transferor company—the weaker company—is absorbed into the stronger transferee company, thus forming an entirely different company. This leads to a stronger and larger customer base, and also means the newly formed entity has more assets.
Amalgamations generally take place between larger and smaller entities, where the larger one takes over smaller firms.
Types of Amalgamation
Amalgamation in the nature of merger:
In this type of amalgamation, not only is the pooling of assets and liabilities is done but also of the shareholders’ interests and the businesses of these companies. In other words, all assets and liabilities of the transferor company become that of the transfer company. In this case, the business of the transfer or company is intended to be carried on after the amalgamation.
There are no adjustments intended to be made to the book values. The other conditions that need to be fulfilled include that the shareholders of the vendor company holding atleast 90% face value of equity shares become the shareholders’ of the vendee company.
Amalgamation in the nature of purchase:
This method is considered when the conditions for the amalgamation in the nature of merger are not satisfied. Through this method, one company is acquired by another, and thereby the shareholders’ of the company which is acquired normally do not continue to have proportionate share in the equity of the combined company or the business of the company which is acquired is generally not intended to be continued.
If the purchase consideration exceeds the net assets value then the excess amount is recorded as the goodwill, while if it is less than the net assets value it is recorded as the capital reserves.
What is the legal process of amalgamation?
An amalgamation is, in fact, a specific subset within a broader group of “business combinations.” There are three main types of business combinations, which are outlined below in more detail. It’s important to understand the subtle differences when talking about mergers, acquisitions, and amalgamations.
- Acquisition (two survivors): The purchasing company acquires more than 50% of the shares of the acquired company, and both companies survive.
- Merger (one survivor): The purchasing company buys the selling company’s assets. The sale of the acquired company’s assets leads to the survival of only the purchasing company.
- Amalgamation (no survivors): This third option creates a new company in which none of the pre-existing companies survive.
As you can see with the above examples, the difference comes down to the surviving companies. In an amalgamation, a new company is created, and none of the old companies survive.
The terms of amalgamation are finalized by the board of directors of each company. The plan is prepared and submitted for approval. For instance, the High Court and Securities and Exchange Board of India (SEBI) must approve the shareholders of the new company when a plan is submitted.
The new company officially becomes an entity and issues shares to shareholders of the transferor company. The transferor company is liquidated, and all assets and liabilities are taken over by the transferee company.
Advantages of Amalgamation
- Competition between the companies gets eliminated
- R&D facilities are increased
- Operating cost can be reduced
- Stability in the prices of the goods is maintained
Disadvantages of Amalgamation
- Amalgamation may lead to elimination of healthy competition
- Reduction of employees may take place
- There could be additional debt to pay
- Business combination could lead to monopoly in the market, which is not always positive
- The goodwill and identity of the old company is lost
Why perform an amalgamation?
Amalgamations are often done when competing companies engaged in a similar business would achieve some synergy or cost savings by combining their operations, which can be quantified in a financial model. By contrast, it can also occur when companies want to enter new markets or get into a new business and use mergers and acquisitions as a way to achieve synergy. Here is a list of reasons why companies perform consolidations:
- Access to new markets
- Access to new technologies
- Access to new clients / geographies
- Cheaper financing for a bigger company
- Cost savings (synergies) achieved through bargaining power with suppliers and clients
- Eliminating competition
Who is involved in amalgamations?
An amalgamation typically requires investment bankers, lawyers, accountants, and executives at each of the combining companies. The bankers will typically perform extensive financial modeling and valuation to evaluate the potential transaction and advise the individual corporations. In parallel to this process, the lawyers will work with the bankers and their corporate clients to determine which of the above legal structures is optimal: acquisition, merger, or amalgamation.
Amalgamation is one of the tools that can help companies avoid competition among them and add to the market offerings. It is for the mutual advantage of the acquirer and acquired companies. It serves as an apt method of corporate restructuring to bring about a change for the better and make business environment competitive.