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Amalgamation Meaning
Amalgamation is the process of combining two or more businesses to form one large entity. In the process, two separate units come together to create an entirely new company. The combination helps the businesses act collectively with respect to their expertise and make the new entity self-sufficed.
In the process, neither of the units has a legal existence. Instead, the legal rights and authorities are shifted to the newly formed entity, combining them. However, the operations are diverse, so they do not have to outsource services to a third-party entity, which saves a lot of costs.
- An amalgamation is the consolidation or combination of two or more companies.
- Usually, companies that operate in the same or similar line of business form an entirely new company known as an amalgamated company with new legal existence.
- The process widely operates in two broad forms – the nature of the merger and the nature of the purchase.
- Though it helps eliminate competition amongst a similar group of industries, sometimes, it creates a monopoly in the market.
Amalgamation Explained
Amalgamation leads to joining two or more entities as one, thereby making them the support system of each other. The process is opted for when entities find it better to work collectively than rely on third-party entities for various services. While it is the combination of two or more business units in corporate finance, amalgamation is defined as the combination of multiple financial statements in accounting.
For corporate entities to amalgamate, at least two companies of similar nature need to liquidate. A new company is established to combine the amalgamated units. The firms that liquidate are vendor companies, while the new one established to take over them becomes the purchasing company. The purchase provision is considered when the latter issues equity shares for investors to build capital.
Amalgamation Explained in Video
Types of Amalgamation
Amalgamation occurs in two forms - the nature of the merger and the nature of the purchase. The former is the combining entities wherein the assets and liabilities of the involved participants are pooled and collectively viewed along with the interests of shareholders and of the businesses these entities are a part of. In the process, all the corporate elements of the companies are merged. So far as its accounting is concerned, the figures related to capital, reserves, assets, and liabilities represent the sum of everything reflected in the accounts of the amalgamating companies.
The nature of purchase depicts the acquisition of one company by another company where the acquired company's shareholders choose not to have an equity share in the amalgamated company.
Objectives
Amalgamation makes two or more entities operate as one and benefit from the functions they offer. The similar nature makes the combining entities share common goals and objectives, which keep them working smoothly and efficiently. The process eliminates competition as two or more major entities join hands and start operating as entirely new firms.
Company amalgamation helps enjoy various tax benefits and acts as a significant measure of tax planning. By uniting through amalgamation, companies take advantage of significant economies of scale. The amalgamation product becomes an icon of growth. It is because it generally increases the value of the companies.
The newly formed entities carry financial and capital growth and development prospects and provide synergy benefits, which means benefits from the combination.
Accounting Methods
In accounting, amalgamation means combining financial statements. The accounting methods depend on the type of amalgamation. For example, the pooling interest method is used for the combinations that occur through the nature of the merger, where the transferor company's assets and liabilities become the transferee company's elements after amalgamation.
The purchase method of accounting applies in the same way as in the case of the normal asset purchase. In the process, the transferee company accounts amalgamate by incorporating the assets and liabilities to be carried forward or by allocating individually identified assets and liabilities of the transferor. The calculation is based on the fair values applicable on the amalgamation date. Here, these assets and liabilities' accounts must not be those belonging to the financial statements of the transferor entity.
Examples
The example below helps define amalgamation better by showcasing the procedure in detail:
Example #1
PT Telkom Indonesia is all set to amalgamate for better and more significant business goals through the nature of the merger. It has picked Goldman Sachs as a considerable advisor to help with the process while having the Indonesian financial group PT Bank Mandiri that would look after the transactions involved. The Jakarta-listed company aims to offer broader broadband and wireless network connections to people across the region. This merger would take the entity's value to a new height, making it worth over $30 billion. The shares in Telkom have surged to 8% to date in 2022, thereby increasing the company's value to around $28 billion.
Example #2
While some amalgamations receive a warm welcome, a few invites criticism, and legal disputes. One such much-talked-about merger is of the two major grocers of the United States - Kroger and Albertsons. The expected merger is likely to set a monopoly in the grocery industry as the top two grocers of the country plan to unite.
Advantages & Disadvantages
Amalgamation has a lot of positive reforms to bring to the market, but it is not devoid of flaws. Listed below are some of the pros and cons of the process:
| Pros | Cons |
|---|---|
| Improved competition | Eliminates competition establishes a monopoly |
| Better economies of scale | This leads to the loss of jobs when human resources combine |
| Diversifies functions | Differences in culture, possibilities of conflicts |
| Reduces tax liabilities | Increases debt liabilities |
| Expands businesses | Might not always turn out to be friendly. |
| Increases shareholder value, cash resources, etc. |
Amalgamation vs Merger vs Absorption
People, most often, confuse amalgamation with concepts like merger and absorption. However, the terms differ widely with respect to their formation.
- Amalgamation is where two companies liquidate to form an entirely new entity. For example, companies A and B amalgamate, and form company C, a new entity.
- A merger is a process where one company combines with another, continuing as one of the existing entities or a completely new entity. If companies A and B merge, they might operate fully as A or B or form an entirely new entity, C, to continue their services.
- On the other hand, absorption is where one company absorbs another company, and the former start functioning under the latter's label. Company B absorbs company A, which starts functioning completely as company B.
Frequently Asked Questions (FAQs)
In accounting, the process means combining financial statements. There are two methods of accounting using which the accounts of combining entities amalgamate. One is by pooling the interests of the shareholders. Another is by the purchase method, applicable for combinations that occur through the nature of the purchase. The latter applies to the accounts not identified as the accounts of the transferor company.
The process is opted for to increase the value of the business, build capital, enjoy tax benefits, eliminate competition, have diversified business functions, expand a business, etc.
Though the goals and objectives of the two amalgamating entities are the same, differences in opinion are quite common. In addition, there is a vast difference in the culture the two companies followed as separate entities in the past. Such issues might take an ugly turn in the long run. Therefore, it is recommended that the amalgamating companies clarify the doubts and agree on specific terms before proceeding with the merger or purchase.
Amalgamation Video
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