Amalgamation – Definition, Types, Advantages, Disadvantages

The terms like amalgamation, merger, and acquisition are used when two or more companies decide to come together to form a new entity. However, it is common for people to get confused with the exact meaning of these terms.

The term merger is used when one or more companies come together where one company

acquire the assets of another company to create a new company, whereas, the term acquisition is used when one company buys the more than 50% shares of another company. In the process of acquisition, both companies survive and keep their identity. On the other hand, the term amalgamation is used when a new entity is created after combining one or more companies. In this process, all the companies involved leave their previous identity to form a new body.

Read this article ahead to learn all about amalgamation.

Definition of amalgamation

An amalgamation is a process of combining two or more companies to create a new company. The amalgamation is quite different from the merger, as all the companies involved in the process of amalgamation lose their previous identity to become a new entity. The newly formed entity holds the assets and liabilities of all combined companies.

What is amalgamation?

The dictionary meaning of amalgamation is combining two or more things to form a new thing. The definition of amalgamation remains the same in business terminology. In business terminology, the term “amalgamation” is used for the amalgam of two or more companies.

That means, in the process of amalgamation, two or more companies combine to form a new entity. The term amalgamation is different from the term merger. In amalgamation, the new entity created is given a new name and holds the assets and liabilities of all the companies combined to form the new entity.

The term amalgamation has become obsolete and not commonly used in developing countries like the United States of America. The terms like merger and consolidation have taken the place of amalgamation. But amalgamation is quite frequently used in developing countries like India for combining companies.

The amalgamation of two or more companies is possible only if the companies are engaged in the same line of business and have little bit similar production operations. Companies opting for amalgamation intend to expand services provided by them and diversify their business operations.

The size of newly formed entities is more significant as compared to the companies that take part in the amalgamation. The amalgamation takes place between the companies that are part of the same market segment. The company with a smaller size (known as transferor company) is absorbed by the company with a larger size (known as the transferee company). As a result of which the customer base of the company increases along with the increased assets of the newly formed entity.

It is very uncommon to see the amalgamation of two or more companies of the same size. Amalgamation usually happens among one large company and a small company or several smaller companies, where the smaller company becomes part of a larger company to form a new entity.

Types of amalgamation

1. The first type of amalgamation

The first type of amalgamation is a kind of amalgamation where all the companies involved in the amalgamation process combine their assets, liabilities, and shareholders’ interests. All the assets and liabilities of the transferor company became the assets and liabilities of the transferee company.

The shareholders of the transferee company become the transferor company holding a minimum of 90% face value of equity shares. In this type of amalgamation, no adjustments are made among the companies to book values.

2. The second type of amalgamation

The second type of amalgamation is a kind of purchase of one company to buy the other company. That means, the larger companies buy the smaller company and all its assets. In this type of amalgamation, the transferor company doesn’t hold any share in the equity of the newly formed company after the amalgamation.

If the purchase considerations are higher than the Net Asset Value (NAV), then the increased value is referred to as goodwill. On the other hand, if purchase considerations are lower than the Net Asset Value, then the decreased amount is referred to as Capital Reserves.

Reasons to perform amalgamation

Amalgamation takes place when two or more companies with similar types of business combine their business operations to cut costs or to achieve synergy. Sometimes companies opt for amalgamation when they want to enter a new market and want to create a new product. The following are the reasons for which companies choose for amalgamation.

1. To acquire new technologies.
2. To enter a new market.
3. To finance the new company less expensively.
4. To increase the customer base.
5. To expand the business in new geographical areas.
6. To eliminate competition in the market.
7. To achieve synergy by bargaining with suppliers and customers.
8. To introduce a new product in the market.

Advantages

The following are the advantages of opting for amalgamation.

1. The first and most important advantage of choosing for amalgamation is the elimination of competition in the market. When two or more competing companies come together, the competition automatically gets eliminated.
2. The operating cost of the business can be curtailed by opting amalgamation.
3. Research and development facilities can be improved.
4. The controlled price of goods in the market.
5. Diversification can be achieved.
6. Amalgamation is one of the best ways when a company wants to expand its business.
7. The goodwill of a company increases in the market when it associates with a more prominent company.
8. Managerial effectiveness can be achieved by opting for amalgamation.
9. Amalgamation results in an increased market share of the newly formed company.
10. Diversification can be achieved using amalgamation.
11. Amalgamation is the best solution for reviving the business of failing companies.
12. Amalgamation is an excellent way of creating a monopoly in the market.
13. The last but not least advantage of amalgamation is the tax advantage.

Disadvantages

1. Amalgamation sometimes eliminates the healthy competition in the market.
2. Amalgamation can also result in increased debt.
3. Companies taking part in amalgamation lose their identity, which affects the goodwill of the company and its products.
4. The monopoly achieved through amalgamation is not always healthy for the market.
5. The amalgamation of two or more companies results in the reduction of the number of employees. That means employees working in the companies become unemployed, which is not healthy for the economy.
6. The management of newly formed companies becomes very complicated.

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