What is Amalgamation? How is it different from Merger?

Incorporate finance, an amalgamation is the merger of two or more companies into a larger single company. In accounting, an amalgamation, also known as consolidation, is the combination of financial statements. 

 

For example, a group of companies may report their financials on a consolidated basis, which includes the individual statements of several smaller businesses. It's not the same thing as a merger. 

 

A new firm or company is formed with the help of both an organization and a company. It is defined as an agreement between two or more businesses to form a new large corporation. It is a strategy for business survival. Amalgamation is used to obtain tax breaks, economies of scale, capital gains, and the elimination of competition. 

 

The term "amalgamation" is frequently used in the business world. Amalgamation is the process by which two or more businesses combine to form a larger one. Companies in the banking industry frequently merge rather than acquire.

 

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What is Amalgamation?

 

The term amalgamation can be defined broadly as follows. "Amalgamation is the joining of two or more companies in order to form a new company." An amalgamation is the joining of two or more businesses to form a new entity. The distinction between amalgamation and merger is that neither company continues to exist as a legal entity. 

 

Instead, a completely new entity is formed to house both companies' combined assets and liabilities. Amalgamation occurs when two or more firms join forces to form a new firm in order to survive in a new business environment. Both firms will be eliminated from the business, but they will retain control of the new firm. It will benefit both companies. 

 

It will give both companies new hope. The management of both companies may have a mutual understanding. Amalgamation is an agreement between two or more companies to combine their business operations by forming a new company with a separate legal existence.

 

In contrast to a traditional merger, neither of the two companies involved survives as a separate entity. Amalgamation can help businesses increase their cash resources, eliminate competition, and save money on taxes. However, if too much competition is eliminated, the workforce is reduced, and the new entity's debt load is increased, it can result in a monopoly.

 

Types of Amalgamation

 

1. Amalgamation in the form of a Merger

 

This type of amalgamation involves not only the pooling of assets and liabilities but also the pooling of shareholders' interests and these companies' businesses. In other words, the assets and liabilities of the transferor company become the transferor companies.

 

In this case, the transferor business of the company is intended to continue after the merger. There are no plans to alter the book values. Other requirements must be met, such as the shareholders of the vendor company owning at least 90% of the face value of the equity shares becoming shareholders of the vendee company.

 

2. Amalgamation in the form of a Purchase

 

This method is considered when the conditions for amalgamation in the nature of the merger are not met. If the purchase consideration exceeds the net asset value, the excess is recorded as goodwill; otherwise, it is recorded as capital reserves.

 

This method involves the acquisition of one company by another, and the shareholders of the acquired company typically do not retain a proportionate share of the combined company's equity, and the acquired company's business is generally not intended to be continued.

 

Others believe that meeting certain criteria regarding the parties' relationship, such as the former independence of the amalgamating companies, the manner of their amalgamation, the absence of planned transactions that would undermine the effect of the amalgamation, and the continued participation of the transferor company's management in the management of the transferee company after the amalgamation, demonstrates the substance of an amalgamation in the nature of a merger.

 

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Amalgamation Vs Mergers

 

We have listed below difference between Amalgamation and mergers.

 

1. A merger is a process of combining two or more companies/entities to form either a new company or an existing company that absorbs the other target companies. It is, in essence, the process of combining multiple businesses into a single business entity.

 

Amalgamation is a merger process in which two or more businesses merge to form a completely new entity/company. Amalgamation is a suitable arrangement in which two or more companies operate in the same industry; as a result, Amalgamation aids in cost reduction through operational synergy.

 

2. Because companies typically do not want to join forces with their competitors, an outsider is frequently required to put together a merger.

 

In contrast, the surviving company is typically the one to take the lead in a merger and does not often require an outside promoter.

 

When two companies merge, the surviving company absorbs the merged company's culture and identity.

 

3. Amalgamation is the process of combining two or more businesses into a single entity that uses elements of each company's identity to create something new.

 

When two companies merge, the assets and liabilities of the target company are combined with the assets and liabilities of the surviving company. The shareholders of both companies are combined with the shareholders of the new company.

 

4. During a merger, shareholders of all participating companies receive new shares of the newly merged company.

 

In the preceding example, the Merger process could involve one of two options: A new entity, XYZ Corporation, will be formed to house the assets and liabilities of existing entities. As a result, the existing entities ABC Corp and PQR Corp are no longer in existence.

 

Because ABC Corporation is a more robust entity than PQR Corp, the absorbing company, i.e., ABC Corporation, is the resultant entity.

 

Following the Amalgamation process, ABC Corp and XYZ Corp will cease to exist, resulting in the formation of a new entity, JKL Corporation. 

 

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Method of Accounting for Amalgamation

 

1. Pooling of interest method

 

The assets, liabilities, and reserves of the transferor company are recorded at their current carrying amounts by the transferee company under the pooling of interests method. 

 

If the transferor and transferee companies have conflicting accounting policies at the time of the amalgamation, a uniform set of accounting policies is adopted following the amalgamation.

 

The effects of any changes in accounting policies on the financial statements are reported in accordance with Accounting Standard, Net Profit or Loss for the Period, Prior Period Items, and Changes in Accounting Policies.

 

2. The Purchase Method

 

Under the purchase method, the transferee company accounts for the amalgamation by incorporating the assets and liabilities at their current carrying amounts or allocating the consideration to individual identifiable assets and liabilities of the transferor company based on their fair values at the date of amalgamation.

 

The identifiable assets and liabilities may include assets and liabilities not recorded in the transferor company's financial statements. When assets and liabilities are restated based on their fair values, the determination of fair values may be influenced by the transferee company's intentions. 

 

For example, the transferee company may have a specialized use for an asset that other potential buyers do not have. The transferee company may intend to change the transferor company's activities, necessitating the creation of specific provisions for the expected costs, such as planned employee termination and plant relocation costs. 

 

 

Advantages of Amalgamation

 

1. Diversification

 

Diversification entails having a presence (establishment) in multiple business ventures that are unrelated to one another. 

 

It is strong enough to withstand the risks of diversification. It also has plenty of financial resources at its disposal to diversify.

 

2. Managerial effectiveness

 

Managerial effectiveness refers to a manager's ability to achieve the desired outcome in business operations.

 

A merged company improves its managerial effectiveness by changing an ineffective management team for a more effective and efficient management team. requiring managers to share their previous work experiences in the best interests of the company on an as-needed basis

 

3. Growth

 

In general, the business operations of a merged company grow faster than those of individual companies. Expansion is possible when a merged company can deal with competition more effectively. It can share previous experiences as needed. It can also make the most of joint expansion plans.

 

4. Operating Economics

 

Operating economics refers to the costs associated with running a business and its associated activities. These costs are necessary to carry out the day-to-day operations of the business. These generally include both fixed and variable costs.

 

When two or more businesses merge, their business operations expand. Such growth enables them to take advantage of and manage the economies of large-scale production and distribution.

 

5. To acquire Cash Resources

 

The amalgamated company purchases the cash resources of the other company, increasing the amalgamated company's cash resources.

 

6. Increasing Market Share

 

Amalgamation aids in increasing the combined company's market share.Market share can be increased by combining the sales of the amalgamated companies as well as increasing the amalgamated company's market presence (establishments).

 

7. Economies of large-scale operations

 

The merged company can gain an operating cost advantage by lowering production costs. This is made possible by the economies of large-scale operations.

 

8. Miscellaneous Advantages

 

The following are some of the numerous benefits of amalgamation:

 

• Amalgamation aids in the reduction of competition among companies operating in the same industry.
• It contributes to the increase in the market value of the merged company's shares.
• It raises the value of the merged company's brand.
• It results in synergy (joint collaboration) gains (additional profit) for the merged company.
• Amalgamation increases market trust. The majority of global market amalgamations have increased the amalgamating company's goodwill.

 

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Need for Amalgamation

 

There are several reasons why businesses enter into amalgamation Some of the reasons are listed below :

 

1. To avoid competition

 

The main reason for the merger of companies is to avoid competition among themselves. This will give the company an advantage over its competitors.

 

2. To cut costs

 

 The merged company can gain an operating cost advantage by lowering production costs. This is made possible by "large-scale economies."

 

3. To benefit financially

 

The merged company may benefit financially in the form of a tax break, increased creditworthiness, or a lower rate of borrowing.

 

4. To achieve growth

 

The merged company can pool its resources to facilitate internal growth and prevent the entry of a new competitor.

 

5. Diversification of activities

 

A company's risk can be reduced by diversifying its activities into two or more industries. At times, amalgamation may be used to hedge a weak operation with a stronger one.

 

 

Procedure for Amalgamation

 

An amalgamation is, in fact, a subset of a larger group of "business combinations." There are three main types of business combinations, which are discussed in greater detail below. When discussing mergers, acquisitions, and amalgamations, it is critical to understand the subtle differences.

 

Purchase (two survivors): Both companies survive after the purchasing company acquires more than half of the shares of the acquired company.

 

Merger (one survivor): The purchasing company acquires the assets of the selling company. The sale of the assets of the acquired company results in the survival of only the purchasing company.

 

Amalgamation (no survivors): This third option results in the formation of a new company in which none of the previous companies survive.

 

The procedure is as follows:

 

The terms of the amalgamation are finalized by the boards of directors of the merging companies.

 

1. A scheme of amalgamation is prepared and submitted to the respective High Court for approval.

 

2. The approval of the constituent companies' shareholders is obtained, followed by the 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 assets and liabilities are assumed by the transferee company.

 

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Conclusion

 

Both are the processes of combining two or more companies into a new entity or an existing entity absorbing the target entity. A resulting entity may be a new or existing entity as a result of the process. Amalgamation is a type of consolidation process that occurs as a result of a merger.

 

Two companies join forces to form a new entity during the amalgamation process. And mergers help companies achieve their goals, such as growth, increased shareholder value, increased economies of scale, synergy, access to larger markets/new geographies, entry into a new industry, and so on.