What is Amalgamation?

What is Amalgamation?

The concepts "acquisition" and "merger," which are quite frequent in business whenever one firm acquires a maximum number of shares of another firm, typically result in the latter corporation ceasing to exist and functioning as an organization with the former company, must be familiar to readers of the business column or anyone with any understanding of the corporate world. Absorption is the term for this action. However, combining the two existing businesses may occasionally be necessary to gain more benefits to creating a brand-new entity. This process is called amalgamation. 

1. What is Amalgamation? How does it operate?

When 2 or more companies combine to form a new business, this is known as a merger. This procedure is a unique kind of merger where neither of the parties' businesses survives as a separate legal entity, and a fresh branding or legal entity is created. The merged assets and liabilities of the 2 firms concerned are housed in this new company.

An amalgamation differs from a merger or an acquisition in that neither entity survives; in those situations, at least one of the businesses or organizations concerned maintains its position in the marketplace. Each of the shareholders and workers of the participating companies may continue to hold their jobs after a merger but inside the newly established organization.

In an amalgamation, the weaker transferee company absorbs the stronger transferor company, creating a brand-new business with more resources and a larger clientele. As a result, the merger benefits from increased monetary capabilities, less competition, and tax savings. However, it can also have a detrimental impact in that if much more competition is eliminated, it might result in a monopoly, the workforce may be reduced, and the debt load of the new entity or organization may rise.

Amalgamation typically occurs among businesses operating in the same industry or with some operational commonalities. To broaden their operations and increase their market share, these businesses frequently choose to amalgamate and join forces to create an entirely new identity. Since the companies concerned are combined with all of their resources, assets, and obligations, the new entity created after the merger is completed greater than the original one. As mentioned above, the stronger corporation absorbs the weaker one; this aids in building a strong base and foundation for the new entity. Due to this, mergers between large and small businesses frequently occur, with the larger one acquiring, the smaller one.

The terms of the amalgamation are determined by the boards of directors of the relevant corporations. A comprehensive strategy is created and filed with the High Court and the Securities and Exchange Board of India (SEBI). The shareholders of the new firm and the presented plan must receive their approval before the procedure may move forward.

Shareholders of the weaker or transferor organization receive shares from the new company once it has acquired legal status as a separate legal entity. The weaker firm is subsequently liquidated, and the stronger or transferee company acquires its resources, obligations, and assets. The primary goal of an amalgamation is to create a singular organization built on the participating companies' business fusion for increased competitiveness.

2. Types of Amalgamation

2.1 Amalgamation like merger:

In this kind of amalgamation, the interests of the shareholders and the operations of these organizations are combined with the assets and liabilities. In other terms, each of the transferor company's assets and obligations is transferred to the transfer corporation. In this instance, it is planned for the transfer or company's operations to continue after the merger. Therefore, the book values will not be changed in any way. In addition, the shareholders of the vendor company who own at least 90% of the face value of the equity shares must change to become the shareholders of the vendee firm.

2.2 Amalgamation-like purchase:

This approach is considered when the prerequisites for an amalgamation in the sense of a merger are not met. Using this strategy, one firm is owned by another, and the operation of the acquired company is typically not planned to continue. As a result, the shareholders of the acquired company typically do not proceed to have a proportionate stake in the stock of the merged firm.

The excessive amount of the acquisition price is recognized as goodwill if it exceeds the net asset value and is documented as capital reserves if it is less than the net asset value.

3. Example of Amalgamation

The merger of media conglomerates Time Warner and Discovery, Inc., for approximately $43 billion, was scheduled for late 2021. Time Warner, a corporation acquired by AT&T (which the telecommunications company purchased in 2018), will be spun off and combined with Discovery. David Zaslav, the CEO of Discovery, will lead the new organization, which will be named Warner Bros. Discovery, Inc., which is anticipated to complete at a certain stage in late 2022.

4. Accounting of Amalgamation

4.1 Method of Pooling Interests

Using this accounting approach, the transferee firm records the transferor firm's assets, liabilities, and reserves at their current bearing balances.

4.2 Purchase Technique:

According to this technique, the transfer company accounts for the merger by either integrating the assets and liabilities at their current bearing amounts or allocating the consideration to specific transfer or firm assets & liabilities based on their fair values as of the merger date.

5. What is the legal procedure for amalgamation?

In reality, an amalgamation is a particular subset of a larger category of "mergers." The three primary categories of business mergers are discussed in further information here. While discussing mergers, acquisitions, and amalgamations, it's critical to recognize the minute distinctions.

1. Acquisition (two survivors): Both firms survive after the buying company purchases over 50% of the shares of the acquired company.

2. Merger (one survivor): The acquiring business purchases the selling company's assets. Only the buying company survives once the assets of the purchased company are sold.

3. Merger (no survivors): This third choice results in the formation of a new firm in which none of the original companies survives.

With the instances given above, it is clear that the surviving companies make the distinction. In an amalgamation, a new company is formed, and none of the previous businesses is left standing.

6. Cons and Advantages of Amalgamation

Even amalgamation has pros and cons, similar to any other commercial or financial transaction. Therefore, before conducting amalgamation, all the concerned businesses must completely understand the procedure and be aware of the advantages of amalgamation and disadvantages.

6.1 Pros of Amalgamation

• The organization will become more competitive in the market if the two businesses are combined to create a brand-new, stronger entity with better resources.

• The businesses benefit from tax savings as a result of this approach.

• Combining forces with other businesses enables all parties to diversify their business models and expand their market reach, which will assist the combined businesses in attracting more clients.

• Combinations can create economies of scale and increase shareholder value.

6.2 Cons of Amalgamation

• The amalgamation procedure may occasionally result in the concentration of excessive authority in a monopolistic corporation, which may eventually cause the new entity's debt load to rise.

• There is a potential that many workers who do not satisfy the new criteria and circumstances will be asked to quit their posts whenever two organizations merge, which could result in a few job losses.

7. Why performs an amalgamation?

A financial model can calculate the cost savings or synergies that could be realized by integrating the activities of competing companies operating in a comparable industry. In contrast, it can also happen whenever businesses employ mergers and acquisitions to achieve synergy when they wish to enter market opportunities or start a new business. The following is a list of the grounds because businesses consolidate:

• Entry into new markets

• Use of modern technology

• Access to new customers and regions

• More affordable finance for larger businesses

• Cost savings (synergies) obtained through negotiation with clients and suppliers

• Eliminating competition

Conclusion

One strategy that businesses might use to reduce internal competition and broaden their product choices is a merger. Both the acquirer and the acquired companies benefit from it. Therefore, it is a suitable business reorganization technique to effect positive transformation and create competitiveness.