What is Amalgamation?

The term “amalgamation” refers to the process of combining two or more entities to form a new entity, in which neither of the two combining entities survive as a legal entity and instead end up forming a completely new entity that houses the combined assets and liabilities of all the combining entities. However, it is to be noted that the term amalgamation and merger are used interchangeably in certain counties. For instance, countries like the United States popularly use merger or consolidation in lieu of amalgamation, while in India amalgamation is still in vogue.

Explanation

Typically, amalgamation occurs when two or more companies that are engaged in the same line of business decide to combine their business existence. Most of the entities decide to amalgamate in order to expand their range of services or to diversify their activities. This happens between a stronger transferee company and a weaker transferor company, in which the weaker company is absorbed into the stronger company resulting in the formation of an entirely different entity. As amalgamation involves merger of two or more, it results in the formation of a new entity that is larger in size with a much stronger and larger customer base.

Objectives of Amalgamation

Some of the main objectives are mentioned below:

At times, companies amalgamate in order to avail various benefits under corporate tax regime.
This also brings in the advantages of large economies of scale.
There are instances where companies enter into amalgamation with close competitor in order to eliminate competition in the market. However, in some cases it leads to creation of a monopoly in the market, which is not a desirable outcome.
It offers opportunities for future growth and development – both financial and capital.
Inherently, amalgamation provides synergy benefits, which means that the companies enjoy benefits due to the combining of operations.

Amalgamation Process

The process can be broken into the following five steps:

The board of directors of the combining entities finalize the detailed terms and conditions of the amalgamation agreement.
Preparation of the scheme of amalgamation, which is then submitted to the respective High Court for approval.
Obtain consent of the shareholders of the combining companies, which is submitted to SEBI for approval.
Form a new company and issue its shares to the shareholders of the transferor company.
Liquidate the weaker transferor company and transfer all the assets and liabilities to the stronger transferee company.

Examples of Amalgamation

Some of the major examples have been discussed below:

Arcelor S.A.: In the year 2002, French steel maker Usinor, Spanish steel maker Aceralia and Arbed of Luxembourg amalgamated to form the new company named Arcelor.
Maruti Suzuki India Limited: In the year 2002, India’s Maruti Udyog Limited amalgamated with Suzuki Motor Corporation based in Japan to form the new entity – Maruti Suzuki.
Tata AIG General Insurance Company Limited: In the year 2001, Tata Group and the American International Group, Inc. (AIG) amalgamated to form the new entity named Tata AIG General.

Types of Amalgamation

There are two major types and they are as follows:

Pooling of Interests Method: In this method of accounting, the assets and the liabilities of the transferor entity are transferred to the books of the transferee entity at their current carrying value.
Purchase Method: In this amalgamation method, the transferee entity records the assets and the liabilities of the transferor entity either at their current carrying value or on the basis of their fair value on the date of amalgamation.

Who are Involved Amalgamation?

The process of amalgamation typically involves the following:

Investment bankers to build various financial models to evaluate and determine the value of the potential transaction.
Lawyers to work in conjunction with the bankers and their corporate clients to select the best legal structure for the transaction.
Accountants to support the bankers in the evaluation of the transaction value.

Amalgamation vs Merger

Some of the major differences between amalgamation and merger are as follows:

In amalgamation companies combine to form an entirely new entity, while in a merger companies combine that results either in the formation of a new company or may be existence of one of the combining companies is retained.
The process in most cases consists of three companies, while a merger in most cases involves only two companies.
Companies of comparable sizes usually get involved in an amalgamation process, while size of companies involved in merger vary significantly as an one of the entity acts as the absorbing company that absorbs the relatively smaller company.
The asset and liabilities of the combining companies are transferred to the newly formed entity, while in case of a merger, the assets and liabilities of the relatively smaller entity are consolidated into the absorbing entity.

Advantages and Disadvantages

Below are the advantages and disadvantages:

Advantages

Some of the major advantages of amalgamation are as follows:

Popular Course in this category

Business Valuation Training (14 Courses)14 Online Courses | 70+ Hours | Verifiable Certificate of Completion | Lifetime Access
4.5 (5,209 ratings)

Course Price

View Course

It helps in elimination of competition between companies operating in the same industry.
Transfer of technical know-hows among companies enhance R&D capabilities.
The companies result in reduction of operating cost.
Lower competition results in stability of prices of the goods.

Disadvantages

Some of the major disadvantages of amalgamation are as follows:

Amalgamation among major players of the industry might result in monopoly market, which eliminates healthy competition.
Might result in the retrenchment of employees.
Deterioration of capital structure due to the additional debt of one of the entities.
Loss of goodwill and identity of the existing companies.

Conclusion

So, it can be seen that amalgamation is considered to be one of the tools that companies use to either manipulate market competition or expand their market offerings. Basically, it is a mutual advantage shared between the acquired companies and the acquirer.