Amalgamation is the term given to the process of combining one or more entities into forming a new entity. Neither of the combining companies survives as legal entities. The new entity formed, houses the combined liabilities and assets of both the companies. Companies having synergy in their operations and have the same line of activity opt for amalgamation.
After having an insight into amalgamation, let’s have a look at the reasons to amalgamate.
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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 advantages and disadvantages to understand the concept further.
Advantages Of Amalgamation
The following are the advantages of Amalgamation:
- Increase in R&D facilities
- Competition between the companies gets eradicated
- Stability in the prices of the goods is maintained
- Reduction in operating cost
Disadvantages Of Amalgamation
The following are the disadvantages of Amalgamation:
- There could be additional debt to pay
- Healthy competition may be elimination due to amalgamation
- Reduction of employees may take place
- Business combination could lead to monopoly in the market
- The old company loses the goodwill and identity gained over the years
Procedure For Amalgamation
The following steps are involved in the procedure for Amalgamation:
The board of directors finalize the terms of amalgamation for the amalgamating companies.
- Preparation of the scheme of amalgamation is to be conducted and later submitted for approval to the respective High Court.
- Approval of the shareholders’ of the constituent companies is to be obtained followed by approval of SEBI.
- Formation of the new company takes place and shares are will be issued to the shareholders’ of the transferor company.
- The transferor company is then liquidated and all the assets and liabilities are taken over by the transferee company
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.
Amalgamation can prove to be beneficial to the 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.