Amalgamation - Meaning, Types, Methods, Advantages and Procedure
What is Amalgamation?
Amalgamation is defined as the combination of one or more companies into a new entity. It includes:
- Two or more companies join to form a new company
- Absorption or blending of one by the other
Thereby, amalgamation includes absorption.
However, one should remember that Amalgamation as its name suggests, is nothing but two companies becoming one. On the other hand, Absorption is the process in which the one powerful company takes control over the weaker company.
Generally, Amalgamation is done between two or more companies engaged in the same line of activity or has some synergy in their operations. Again the companies may also combine for diversification of activities or for expansion of services.
Transfer or Company means the company which is amalgamated into another company; while Transfer Company means the company into which the transfer or company is amalgamated.
|Existing companies A and B are wound up and a new company C is formed to take over the businesses of A and B|| Amalgamation|
|Existing company A takes over the business of another existing company B which is wound up.|| Absorption|
|A New Company X is formed to take over the business of an existing company Y which is wound up.|| External reconstruction|
How is Amalgamation different from a Merger?
Amalgamation is different from Merger because neither of the two companies under reference exists as a legal entity. Through the process of amalgamation a completely new entity is formed to have combined assets and liabilities of both the companies.
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.
Accounting of Amalgamation
- Pooling of Interests Method:
Through this accounting method, the assets, liabilities and reserves of the transfer or company are recorded by the transferee company at their existing carrying amounts.
- Purchase Method:
In this method, the transfer company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual assets and liabilities of the transfer or company on the basis of their fair values at the date of amalgamation.
- To acquire cash resources
- Eliminate competition
- Tax savings
- Economies of large scale operations
- Increase shareholders value
- To reduce the degree of risk by diversification
- Managerial effectiveness
- To achieve growth and gain financially
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.
Procedure for Amalgamation
- The terms of amalgamation are finalized by the board of directors of the amalgamating companies.
- A scheme of amalgamation is prepared and submitted for approval to the respective High Court.
- Approval of the shareholders’ of the constituent companies is obtained followed by approval of SEBI.
- A new company is formed and shares are issued to the shareholders’ of the transferor company.
- The transferor company is then liquidated and all the 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
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