What is an amalgamation? It is defined as a process when two or more companies become a new entity. It is however different from a merger: in this case none of those firms survive as a legal entity. Amalgamation implies that the assets and liabilities of combined firms now belong to a totally new entity. It needs to be noted that this term, amalgamation, is coming out of use in some countries such as USA but is still commonly used in others like India.
Basics of amalgamation
Typically, amalgamations take place between several companies that share similar operations or the same business line. This also can be a tool to diversify and expand the range of services and activities conducted by a company.
The final result of amalgamation is a bigger company than the two or more companies were independently. Normally, the stronger transferee company absorbs a weaker transferor company to create a completely new entity. It is common for amalgamations to happen both between smaller and larger entities and between comparably big companies. The benefits coming from such a venture are a more solid and bigger base of customers and more assets in the ownership of a new company. It helps reduce operational costs thanks to operational synergy.
Advantages and disadvantages
The benefits of amalgamation include:
- Acquiring cash resources;
- Saving on taxes;
- Eliminating competition;
- Influencing the economies of large-scale operations;
- Increasing shareholder value;
- Improving managerial efficiency;
- Achieving company growth and financial gain;
- Reducing risk by diversification.
Nonetheless, we also need to take a look at the coin from the other side. Consumers and the marketplace, in general, can be harmed if an amalgamation cuts out too much competition and becomes a monopoly. In addition, sometimes amalgamation required the reduction of the workforce: after two companies become one some jobs are duplicated and therefore become not needed. Lastly, it is not only assets that become merged but also the liabilities which is generally looked at as increased debt.
Steps of amalgamation
The terms of amalgamation are decided among the boards of directors of each company entering the equation. At first, the plan is prepared and submitted in order to achieve approval. Usually, it is the local financial regulator of the country that approves such plans. Once the plan is approved, the new firm is allowed to create a new legal entity. Shares of the new entity are formed in this process and then they are given to the shareholders of the existing entities.
Key differences: amalgamation vs merger
The difference between these two processes is extremely fine since both of them imply a consolidation of multiple companies. Basically, amalgamations always result in an entirely new company as a rule. Therefore, all amalgamations can be considered mergers, yet not all mergers are amalgamations. Mergers can result in a new company or an existing one. Amalgamations are usually driven by all involved companies, while mergers are mostly pushed by the absorbing firm.
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