If you are a regular reader of the business column or have any knowledge about the business world, you must have heard the terms acquisition or merger which are quite common in business when one company buys a maximum amount of shares of another company which usually causes the latter company to cease and function as an organisation with the former company. This process is known as absorption. However, sometimes forming a completely new company by combining the two existing companies to get more benefits may take place. This is known as amalgamation. To understand what this term actually means and how it works let us have a look at the process in a little more detail.
What is Amalgamation? How does it work?
An amalgamation happens when two or more companies combine to form a completely new entity. This process is a distinct form of a merger in which neither company that is involved survives as a legal entity and a completely new brand or legal entity is formed. This new entity houses the combined assets and liabilities of both the involved companies.
The fact that neither entity survives in an amalgamation is what sets it apart from a merge or an acquisition as in those cases at least one of the companies or organisations involved stays intact in the market. When an amalgamation takes place, all the employees and shareholders of the involved companies may still retain their positions but in the new organisation that has been formed.
During an amalgamation, the transferor company is absorbed by the stronger transferee company which then leads to the formation of a completely new company with more assets and a stronger customer base. The process of amalgamation helps to increase the cash resources, eliminate competition and save companies on taxes. But it can also have a negative effect where if too much competition is cut out, it can lead to a monopoly and the workforce might get scaled down which will increase the debt load of the new entity/organisation.
Amalgamation usually takes place between companies who are in the same line of business or the ones that share some similarities in their operations. Such companies often decide to go through the process of amalgamation and combine to form a totally new identity in order to diversify their activities and expand their reach in the market. The new entity formed after the amalgamation takes place is obviously larger than the involved companies because it is a combination of them with all their assets, resources as well as liabilities. As discussed above, the weaker company is absorbed into the stronger one; this is what helps to create a solid foundation and strong base for the new entity. This is why amalgamations generally take place between small and large companies where the larger one takes over the smaller one.
The terms of the amalgamation are finalised by the board of directors of the involved companies. After this the detailed plan is prepared and submitted to the High court and the Securities and Exchange Board of India (SEBI). These authorities need to approve the submitted plan and the shareholders of the new company for the process to go further.
Once the new company officially becomes an entity, it issues shares to shareholders of the weaker or transferor company. The weaker company is then liquidated and all assets, resources and liabilities of this company are taken over by the stronger or transferee company. The main objective of an amalgamation is to form a unique entity which rests on the business combination of the involved companies for a greater competitiveness.
Types of Amalgamation
The two main types of amalgamation are amalgamation in the nature of a merger and amalgamation in the nature of a purchase. To understand both these types in detail let us go through them one by one.
Amalgamation in the nature of a merger As the name suggests, this is the type of amalgamation which works as a merger. In this, the transferee or the stronger company absorbs the transferor or the weaker company and the two entities pool their shareholders’ interest, as well as the assets and liabilities. Businesses of both the companies continue to run under the newly formed entity and if the shareholders of the transferor meet the minimum requirements, then they can become shareholders in the new company as well.
Amalgamation in the nature of a purchase If the shareholders of the transferor company fail to meet the minimum requirements and conditions, then they cannot retain their position in the new entity and the amalgamation process takes place like a purchase which is made by the stronger transferee company wherein only the shareholders of the transferee company become shareholders in the new entity.
Although both these types seem fairly similar, it is important to differentiate them and know the difference because both the types need different methods of accounting.
Pros and Cons of Amalgamation
Like any other business or financial processes, even amalgamation has its own advantages and disadvantages. Before undergoing amalgamation, it is important for all the involved companies to have a thorough knowledge of the process and know its pros and cons.
Pros of Amalgamation
- Combining two companies to form a completely new entity with better resources and a stronger base will improve the competitiveness of the organisation in the market.
- This process also helps the companies to save on taxes.
- Amalgamation helps all the companies involved to diversify their operations and get a wider reach in the market which will also help to increase the customer base of the companies.
- Amalgamation can increase the economies of scale and has the potential to increase the shareholder value.
Cons of Amalgamation
- The process of amalgamation can sometimes concentrate too much power into a monopolistic firm which may ultimately lead to increase in the debt load of the new entity.
- When two companies combine together, there is a chance that a lot of employees that do not meet the new requirements and conditions are asked to leave their position which may lead to a few job losses.
