What is Amalgamation?
Amalgamation is when two or more companies combine to form a new legal entity. Unlike a merger or acquisition, where at least one company survives, amalgamation creates an entirely new organisation, housing the original entities' combined assets, liabilities, and operations.
This process typically occurs to:
- Increase competitiveness.
- Expand market reach.
- Diversify operations.
- Pool resources for improved efficiency.
How Does Amalgamation Work?
- Proposal and Approval:
- Initiated by the boards of directors of the involved companies.
- A detailed plan is created and submitted to regulatory authorities, such as the High Court and the Securities and Exchange Board of India (SEBI), for approval.
- Formation of a New Entity:
- Once approved, the weaker company (transferor) is absorbed into the stronger company (transferee).
- A new entity is formed with all combined assets, liabilities, and operations.
- Share Issuance:
- Shareholders of the transferor company shall receive shares in the new entity, subject to specific conditions.
- Liquidation:
- The transferor company is liquidated, and the new organisation absorbs its resources.
Types of Amalgamation
- Amalgamation like a Merger:
- Both companies pool their resources, shareholders’ interests, assets, and liabilities.
- Shareholders of both companies continue to have stakes in the newly formed entity.
- Both companies operate under the new structure.
- Amalgamation like a Purchase:
- Shareholders of the transferor company do not meet the criteria for retaining stakes in the new entity.
- The transferee effectively purchases the transferor company, and only the transferee’s shareholders own the new entity.
Pros of Amalgamation
- Improved Competitiveness: Resources and strengths sum up into better positioning in the market.
- Tax Advantages: It saves one from taxes through tax shields arising from the losses of one company.
- Diversification in the Market: Expand operations geographically and customer base.
- Economies of Scale: The larger the scale of operations, the lower the cost and higher the shareholder value.
Cons of Amalgamation
- Monopolistic Behavior: Over-merging may lead to reduced competition and monopolistic practices.
- Debt Burden: The new entity would take on heavy liabilities from the transferor company.
- Loss of Employment: Unqualified employees for the new company were dismissed.
- Integration Problems: Integrating the two companies' cultures, operations, and management may not be easy.
Conclusion
Amalgamation is a strategic process that can benefit businesses through pooling resources, expanding the market, and enhancing competitiveness. However, potential problems like monopolistic concerns, increased liabilities, and integration difficulties exist. Companies need to carefully weigh the pros and cons before amalgamation so that the process benefits all stakeholders.
