Amalgamation

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.

Why 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
Amalgamation

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,

  1. Conducting the preparation of the scheme and later submitting it for approval to the respective High Court.
  2. Obtains the approval of the shareholders of the constituent companies following the approval of SEBI.
  3. Form the new company and issue shares to the shareholders of the transferor company.
  4. The transferor company is then liquidated, and the transferee company takes over all the assets and liabilities

Difference between Amalgamation, Absorption, and External Reconstruction

Amalgamation

Existing companies A and B are wound up, and a new company C is formed to take over the businesses of A and B.

Absorption

Existing company A takes over the business of another existing company, B, which is wound up.

External reconstruction

A New Company X is formed to take over the business of an existing company, Y, which is wound up.

It is different from mergers too. To know more, refer to Amalgamation vs. Merger.

Conclusion

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.



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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