Amalgamation of Two Companies: Everything You Need to Know
The amalgamation of two companies is the combination of two entities into a single company or the combination of two or more financial statements in accounting.3 min read
The amalgamation of two companies in corporate circles means that the two entities are combined into a single company. In accounting, it means the combination of two or more financial statements. For instance, a group of companies can consolidate the financial statements of each individual company and report their financials as one single entity.
Amalgamation Versus Absorption
Amalgamation refers to the joining of multiple companies and should be differentiated from absorption, which is the process by which a more- powerful company takes control of a weaker one. The transferor company is the company that is amalgamated, while the transfer company is the company into which the transferor company is amalgamated into.
Better Corporate Restructuring
Amalgamation is a powerful tool that can help to improve market offerings while helping companies avoid competing among themselves. It is of mutual advantage to both the acquired and acquiring company. It is a fitting approach to better corporate restructuring and helps improve the competitiveness of the business environment.
'Consolidation' and 'Mergers'
However, the term “amalgamation” is seldom used. Instead, other terms such as “consolidation” and “mergers” are used more often. Amalgamation is a term that is more common in countries like India.
Merging is an activity that may take a long period before actualization since multiple courses of action must be reviewed and either discarded or adopted to ensure that the merger is favorable to all concerned. When merging, utmost care should be taken, since a little mistake can cause heavy losses to both the transfer and transferor company. A merger can lead to separation just the same way some marriages end up in divorce.
Defensive Mechanisms Used by Disgruntled Shareholders/Management
Not all mergers and takeovers are supported by the management or shareholders. When any of these parties are not convinced of the benefits of the merger, they may become insecure about the amalgamation proposal and take various defensive steps/mechanisms to halt or hamper the process. Some of the mechanisms they employ include greenmail, crown jewels, white squire defense, white knight defense, Packman defense, golden parachutes, poison pills, and many more.
The process doesn't end after the amalgamation procedures have been concluded. The combined companies enter the post-amalgamation phase, where efforts must be made to ensure that the amalgamation becomes and remains a success. A successful amalgamation must ensure the optimal utilization and distribution of resources, and the companies involved should strive for continued growth and development.
An amalgamation is actually a subset of a group of business combinations that include acquisitions and mergers.
This occurs when the purchasing company obtains more than 50 percent of the shares of the company being acquired. In this type of combination, both companies survive.
A merger occurs when the purchasing company buys the assets of the acquired company. Since all the assets of the acquired company are owned by the purchasing company, only the latter survives. After the merger, the business of the purchasing company continues, and book values are not adjusted. Shareholders who hold at least 90 percent of the face value of the acquired company's equity shares become shareholders of the purchasing company.
As earlier explained, this option creates an entirely new company where none of the participating companies survive. Amalgamation occurs when two or more companies that compete or engage in similar businesses can achieve some cost savings or synergy by combining their assets and operations. This cost savings or synergy should be quantifiable by a financial model.
Benefits of Amalgamations
An amalgamation can also occur when a company wishes to enter a new market/ industry, and a merger or acquisition is the best way to do so. The following are some of the reasons why companies engage in an amalgamation:
• Access to new clients.
• Tax savings.
• Economies of large scale operations.
• Increase shareholders value.
• Managerial effectiveness.
• Growth and financial gain.
• Acquisition of cash resources.
• Access to new technologies.
• Access to new markets.
• Access to new geographies.
• Receive cheaper financing for a larger company.
• Eliminate competition.
• To obtain synergy or cost savings through increased bargaining power with clients and suppliers.
Amalgamations usually require the services of professionals such as accountants, lawyers, and investment bankers, as well as the executives of the participating companies. The bankers carry out extensive valuation and financial modeling to estimate the value of the proposition and advise the companies accordingly. The lawyers work with the participating companies and the bankers to determine the optimal legal structure/pathway to follow, whether amalgamation, merger, or acquisition.
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