Amalgamation

Reviewed by Bhavana | Updated on Sep 28, 2020

Meaning of the Term "Amalgamation"

It is a consolidation of two or more companies into a single entity. Amalgamation is different from a merger; this is because either of the companies involved does not survive as a legal entity. Instead, a whole new company is created to hold both companies' combined assets and liabilities. In the accounting context, amalgamation can also be known as consolidation.

When Does an Amalgamation Happen?

Amalgamation usually happens between two or more firms involved in the same business line or those that share some organisational overlap. Companies can combine to diversify their activities or broaden their service portfolio.

When two or more companies join together, an amalgamation leads to the creation of a larger organisation. The transferor company, i.e. the weaker company, is absorbed into the stronger transferee company, creating a completely different corporation. That results in a much stronger and broader pool of clients, which also ensures that the newly created company has more money.

In general, amalgamations take place between larger and smaller firms, where the larger one takes over smaller businesses.

Advantages and Disadvantages of Amalgamation

Amalgamation is a means of gaining cash capital, reducing competition, saving on taxes, or affecting large-scale operating economies. Therefore, amalgamation can increase shareholder value, minimise risk by diversification, enhance management performance, and help drive market growth and financial benefit.

On the other hand, when too much competition is squeezed out, the amalgamation will result in a monopoly that can be alarming for customers and the marketplace. This could also contribute to a decrease in the staff of the new organisation, as some positions are duplicated, thus rendering some workers redundant.