Amalgamation: Definition, Pros and Cons, vs. Merger and Acquisition

An amalgamation combines two or more companies into an entirely new entity. Amalgamations are distinct from acquisitions in that none of the companies involved in the transaction survive as a legal entity. Instead, a completely new entity, with the combined assets and liabilities of the former companies, is born.

The phrase amalgamation has mainly lost favor in American culture and has been replaced by words like merger or consolidation, which can be considered synonyms. But certain nations, like India, continue to use it often.

Amalgamations’ Workings

Amalgamations often include two (or more) businesses active in the same industry or with certain operational similarities. Typically, the procedure entails the acquisition of one or more smaller “transferor” corporations by a bigger organization, referred to as a “transferee” company, before the formation of the new entity.

Each corporation’s board of directors makes the final decisions about an amalgamation. The strategy is created and presented to the authorities for approval. For instance, the High Court and the Securities and Exchange Board of India (SEBI) have that jurisdiction in India.

According to the fairly vague definition provided by Indian tax law, “amalgamation” is “the merger of one or more companies with another company or the merger of two or more companies to form one company.”

The merging firms are called “the amalgamating company or companies.” In contrast, the new entity created due to the merger or with which they combine is called “the amalgamated company.”

In Canada, Corporations Canada and the appropriate provincial and territory governments must both authorize amalgamations. According to the definition given by Canada, amalgamation occurs “when two or more corporations, known as predecessor corporations, combine their businesses to form a new successor corporation.” The new business is given legal status upon approval and can issue stock in its name.

The Benefits and Drawbacks of Mergers

Combining businesses is a technique to increase economies of scale, get access to more clients, eliminate competitors, and avoid taxes. Increased shareholder value, risk reduction via diversity, management effectiveness, and the ability of the new business to attain financial outcomes and levels of development that would have been more challenging for its predecessor companies are all potential benefits of the merger.

Conversely, if excessive competition is eliminated, merging may result in a monopoly, which might be problematic for customers and the market and trigger government involvement. Making some previous workers redundant and losing ir jobs might also decrease the number of employees at the new firm. Additionally, it can raise debt levels, perhaps to risky levels, because when two or more businesses come together, the obligations of each are transferred to the new firm.

Illustration of Amalgamation

The merger of AT&T’s WarnerMedia business segment with Discovery was officially announced in April 2022 by the telecom behemoth AT&T and the television entertainment conglomerate Discovery, Inc. That month, a new company, Warner Bros. Discovery Inc., started trading on the Nasdaq stock market under the ticker WBD.

Comparing merger and acquisition

As already established, an amalgamation is when two or more businesses merge their assets and liabilities to create a brand-new business. Contrarily, in an acquisition, one business buys another (often by purchasing a sufficient share) and assumes all its assets and obligations without forming a new firm.

Whereas acquisitions can take place without the consent of the acquired firm. This is characterized as a hostile takeover, whereas amalgamations often include consensual agreements between the various parties.

What Purpose Does an Amalgamation Serve?

The goal of an amalgamation is often to create a singular company that can compete more successfully in the market and gain from larger economies of scale. This makes it similar to acquisitions and other company growth strategies.

What Accounting Procedures Apply to Amalgamation?

In certain nations, the pooling-of-interests technique, which utilizes book values, and the purchase method, which uses fair market values, are the two main methods used to account for an amalgamation. The Financial Accounting Standards Board (FASB) banned using the pooling-of-interests technique in the US in 2001 and mandated that merging businesses use the purchase method instead. But in 2007, the FASB approved a brand-new regulation called the buy acquisition accounting technique.

What Does an Accounting Amalgamation Reserve Mean?

The cash still at the new firm after the merger is known as the amalgamation reserve in accounting. If this sum is negative, goodwill will be recorded in its place.

One of the many ways that existing businesses may collaborate is through mergers, in this case, creating a brand-new business. Although the phrase is no longer often used in the United States, the practice is still present there and elsewhere in the world. Amalgamation may also refer to joining several kinds of organizations into one, such as charities and public-sector organizations like municipalities and government agencies.

Conclusion

• Amalgamation is joining two or more businesses by combining their assets and liabilities.
• In contrast to an acquisition or takeover, none of the firms engaged in this remain separate legal entities.
• Among other possible advantages, mergers can help businesses have more financial resources, lessen competition, and save money on taxes.
• However, if too much competition is eliminated, it can also result in a monopoly, increase the new entity’s debt load to a risky level, and result in the loss of certain employment.