Amalgamation refers to the process of combining one or more entities into forming a new entity. Neither of the combining companies survives as a legal entity. The new entity formed houses the combined liabilities and assets of both the companies. Companies having synergy in their operations and having the same line of activity opt for amalgamation.
After having an insight, let’s look at the reasons to amalgamate.
The following are the reasons for a company to opt for amalgamation:
- Economies of large scale operations
- To acquire cash resources
- Tax savings
- Increase shareholders value
- Eliminate competition
- To reduce the degree of risk by diversification
- To achieve growth and gain financially
- Managerial effectiveness
Now that we have understood the concept of amalgamation, below are the advantages and disadvantages for understanding the concept further.
Advantages Of Amalgamation
The following are the advantages:
- Increase in R&D facilities
- Eradication of competition between the companies
- Maintains the stability in the prices of the goods
- Reduction in operating cost
Disadvantages Of Amalgamation
The following are the disadvantages:
- There could be additional debt to pay
- Healthy competition may be eliminated
- Reduction of employees may take place
- The business combination could lead to a monopoly in the market
- The old company loses the goodwill and identity gained over the years
Procedure For Amalgamation
The procedure involves the following steps:
The board of directors finalizes the terms of amalgamation for the amalgamating companies,
- Conducting the preparation of the scheme and later submitting it for approval to the respective High Court.
- Obtains the approval of the shareholders of the constituent companies following the approval of SEBI.
- Form the new company and issue shares to the shareholders of the transferor company.
- The transferor company is then liquidated, and the transferee company takes over all the assets and liabilities
Difference between Amalgamation, Absorption, and External Reconstruction
Existing companies A and B are wound up, and a new company C is formed to take over the businesses of A and B.
Existing company A takes over the business of another existing company, B, which is wound up.
A New Company X is formed to take over the business of an existing company, Y, which is wound up. Also, read the difference between internal and external reconstruction.
It is different from mergers too. To know more, refer to Amalgamation vs. Merger.
Amalgamation can prove to be beneficial to companies and can eliminate competition from the market. It serves as an advantage for all the companies involved and eventually leads to wealth maximization. It helps the companies in corporate restructuring and assists in taking a step towards improvement.