Today, staying ahead of the constantly evolving and competitive economy can become quite demanding. With this, M&A’s and business amalgamation are becoming increasingly common. However, many business owners frequently confuse themselves with the differences between these terms. In M&A’s one company takes over the other company, and the second company ceases to exist. In contrast, in amalgamation two companies combine together to form an entirely new entity. Therefore, to help you better understand business amalgamation, this article will discuss the meaning, types and pros and cons.
Meaning of Business Amalgamation
To clarify, business amalgamation is the arrangement where two or more companies merge to form a new entity and all the assets and liabilities of the merging companies are transferred to a new entity. Consequently, neither of the initial companies will retain their former names and structure. Generally, the new entity produced retains the position and ownership of employees, businesses and even shareholders for each entity. This process is the most effective if both companies engage in the same line of business and have similar production operations.
In particular, a few reasons a business may pursue amalgamation are:
- to enter a new market
- reduce competitors
- achieve synergy by bargaining with suppliers and customers
- expand the business into new geographical areas
- increase existing customer base
- gaining the cash or resources of the other
Differences between M&A and Amalgamation
As mentioned earlier, mergers and acquisitions and amalgamation are often used synonymously. However, there are a few distinctive features of both business restructuring methods. The following are the major differences:
|Mergers and Acquisitions||Amalgamation|
|Number of entities involved||A minimum of two businesses are involved and one ceases to exist.|
A+B ——-> A or B
|A minimum of two entities are involved and consolidated to create one new entity.|
A+B ——-> C
|Initiating entity||The company looking to absorb the other company initiates the deal||Both companies with equal interest initiate the deal.|
|Share distribution||Shares of the acquired company are distributed to the shareholders of the acquiring company||Shares of the new entity are given to the shareholders of existing companies|
|Size of companies||The size of the absorbing company is relatively larger than the absorbing company||The size of both companies in the deal is comparable|
|Accounting treatment||Assets and liabilities of the acquired company is consolidating||Assets and liabilities of the existing entities are housed and transferred into the Balance sheet of the newly formed entity|
Types of Business Amalgamation
Amalgamations generally take place between larger and smaller entities, where the larger one takes over smaller firms. In this case, there are two major types of amalgamation:
Amalgamation in the nature of merger
This process of amalgamation is where there is a genuine pooling not merely of assets and liabilities of the transferor and transferee companies but also of the shareholders’ interests and of the businesses of the companies. Purchase shareholders holding a minimum of 90% equity shares in the transferor company become shareholders in the new company. Additionally, the discharge of the purchase consideration for this process is wholly by the issue of equity shares of the new company.
Amalgamation in the nature of purchase
Amalgamation in the nature of purchase is where one company acquires the other, but the shareholders of the transferor company do not gain a proportionate shareholding interest in the equity of the transferee company. Thus, equity shares need not wholly discharge the consideration for the purchase. Additionally, in this type of amalgamation, the assets and liabilities taken over are recorded at their existing carrying amounts or the basis of their fair values.
Procedure for Amalgamation
An amalgamation process will commonly require a diverse range of experts. This includes investment bankers, lawyers, accountants, and executives at each of the combining companies. Significantly, the lawyers and bankers will work together to look at financial modelling and valuation to evaluate the potential transaction and advise the individual corporations.
The general procedure for amalgamation is:
- Initially, one company scopes out potential companies to combine with and approaches them.
- The board of directors from the constituent companies then deliberate and finalise the terms of the amalgamation.
- Subsequently, the new entity takes over all assets and liabilites.
- Then the transferor company goes into liquidation.
- Finally, a new entity is formed and shares are issued to shareholders of the transferor company.
Pros and Cons of Business Amalgamation
Several pros of amalgamation include:
- expanding capabilities (i.e., production and research)
- reduces tax on companies
- lowering financing needs
- streamlined management for operational efficiency
- driving business growth and expansion
- eliminating competitors
- increases shareholders value
- increases cash resources
- reduces level of risk
On the other hand, the cons of amalgamation are:
- Combined liabilities may increase debt
- amalgamation cuts healthy competition, therefore promoting monopoly, artificially inflating pricing and reducing selection for customers
- workforce reduction, may force layoffs
- may lose benefits of one company’s brand identity, therefore affecting goodwill of the company and products
To sum up
It is evident that the importance of amalgamation lies in the expansive new opportunities it provides competing companies. In summary, from driving business growth to streamlined management, it is worth considering whether business amalgamation is right for your company.
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