Which is the best way to merge two or more companies? The answer, of course, is Amalgamation. This process involves merging both entities into a single new company that takes on their assets and liabilities while also retaining some formality from each original entity – like suing them in court!
Combining two or more companies into one is called amalgamation. Still, unlike a merger, which combines the assets and liabilities from each company involved in an attempt at survival for legal existence afterward, amalgamations only create new entities that house all elements combined within them – this means any debts are now owed by both old firms but also carries potential benefits such as less paperwork if done post-merger!
The process of amalgamation is distinct from mergers because it combines two or more companies into a new entity while not involving any company’s survival. In contrast, this action is being taken by the firms engaged in an Amalgamated Company that houses their assets and liabilities together into one body – which may be known as “The NewCo.”
The idea of an amalgamation is to combine two or more companies into one new entity. This can be done without either the original company surviving, but instead creating an entirely separate legal body for their assets and liabilities after combining them all together in one package deal!
The term is not widely used in the United States right now. It is often referred to as merger consolidation, even when a new entity is formed. This act differs from a traditional merger in that neither of the two companies involved survives as an entity. The term amalgamation is commonly used in countries like India even today.
Who does it?
Amalgamation commonly occurs between two (or more) companies involved in the same field of business or even the companies that operate similarly. Companies may also come together to diversify their business or expand their range of services or pursue new ventures.
Amalgamations commonly happen between larger and smaller entities, in which the larger one takes over smaller firms. Amalgamation results in forming a larger entity because two or more companies merge together. The weaker company is called the transferor company. The transferor company gets absorbed into the stronger company, called the transferee company, forming a completely different company. This merging results in a bigger customer base. The newly formed entity also has more assets.
Why amalgamation?
Amalgamation is done to acquire cash resources, get rid of competition, save taxes or take advantage of the economies of large-scale operations.
Amalgamation might also increase shareholder value, lower risk by diversification, enhance administrative efficacy and help the company accomplish growth and economic progress.
The cons
- When competition is removed, amalgamation can get a monopoly. While it’s suitable for the company, consumers get stuck without options in the marketplace.
- During an amalgamation, the new entity may not require the combined workforce and thus, some employees may lose their jobs.
- The debt increases when two companies merge because the newly formed entity will carry the liabilities of both.
Procedure
The board of directors of both or each company finalizes the terms for amalgamation. The plan is drafted and presented for approval. For illustration, the High Court and Securities and Exchange Board of India (SEBI) should approve the shareholders of the company when a plan is submitted.
The new company then officially becomes an entity and issues shares to the shareholders of the transferor company. Now, the transferor company is liquidated. The transferee company takes over all assets and liabilities.
Note: In accounting, amalgamations might also be referred to as consolidations.
Types of amalgamation
One type of amalgamation is very similar to a merger:
It will merge the assets and liabilities of the two companies, along with the shareholders’ interests. The assets of the transferor company become the transferee company’s assets. The transferor company’s business is uninterrupted as usual after the amalgamation. There are no adjustments to book values. Now, the transferor company’s shareholders holding at least 90% face value of equity shares will become shareholders of the transferee company.
Another type of amalgamation is similar to a purchase:
A company is acquired by another company. The shareholders of the transferor company will not have a proportionate share in the equity of the resulting combined company. If the purchase consideration surpasses the net asset value (NAV), the extra amount is documented as goodwill. Otherwise, it might also be recorded as capital reserves.
Objectives of an amalgamation
An amalgamation is similar to a merger – it combines two firms; however, here, as a result of the amalgamation, a completely new entity is formed. The objective is to establish a new distinctive entity different from the two or more companies that combine the business of both or more companies to achieve more.
Methods of accounting amalgamation
There are two ways to account for an amalgamation:
Pooling of interests method
In this method, the transferee company will take on the transferor’s balance sheet valued at the date of amalgamation.
Purchase method
In this method, assets are treated; however, it is acquired by the transferee. If there are discrepancies, they are accounted for as capital surplus or goodwill.
Amalgamation reserve
Amalgamation reserve is the cash still left by the new entity after the amalgamation is completed. If the amalgamation amount is negative, it will be recorded as goodwill.
