Amalgamation

What Is an Amalgamation?

An amalgamation is a combination of two or more companies into a new entity. Amalgamation is distinct from a merger because neither company involved survives as a legal entity. Instead, a completely new entity is formed to house the combined assets and liabilities of both companies.

The term amalgamation has generally fallen out of popular use in the United States, being replaced with the terms merger or consolidation even when a new entity is formed. But it is still commonly used in countries such as India.

Key Takeaways

  • Amalgamation is the combination of two or more companies into a brand new entity by combining the assets and liabilities of both entities into one.
  • This differs from a traditional merger in that neither of the two companies involved survives as an entity.
  • The transferor company is absorbed into the stronger, transferee company, leading to an entity with a stronger customer base and more assets.
  • Amalgamation can help increase cash resources, eliminate competition, and save companies on taxes.
  • But it can lead to a monopoly if too much competition is cut out, scale down the workforce, and increase the new entity's debt load.

Understanding Amalgamations

Amalgamation typically happens between two or more companies engaged in the same line of business or those that share some similarity in operations. Companies may combine to diversify their activities or to expand their range of services.

Since two or more companies are merging together, an amalgamation results in the formation of a larger entity. The transferor company—the weaker company—is absorbed into the stronger transferee company, thus forming an entirely different company. This leads to a stronger and larger customer base, and also means the newly formed entity has more assets.

Amalgamations generally take place between larger and smaller entities, where the larger one takes over smaller firms.

The Pros and Cons of Amalgamations

Amalgamation is a way to acquire cash resources, eliminate competition, save on taxes, or influence the economies of large-scale operations. Amalgamation may also increase shareholder value, reduce risk by diversification, improve managerial effectiveness, and help achieve company growth and financial gain.

On the other hand, if too much competition is cut out, amalgamation may lead to a monopoly, which can be troublesome for consumers and the marketplace. It may also lead to the reduction of the new company's workforce as some jobs are duplicated and therefore make some employees obsolete. It also increases debt: by merging the two companies together, the new entity assumes the liabilities of both.

Pros
  • Can improve competitiveness

  • Can reduce taxes

  • Increases economies of scale

  • Potential to increase shareholder value

  • Diversifies the firm

Cons
  • Can concentrate too much power into a monopolistic firm

  • Can lead to job losses

  • Increases the firm's debt load

Amalgamation Procedure

The terms of amalgamation are finalized by the board of directors of each company. The plan is prepared and submitted for approval. For instance, the High Court and Securities and Exchange Board of India (SEBI) must approve the shareholders of the new company when a plan is submitted.

The new company officially becomes an entity and issues shares to shareholders of the transferor company. The transferor company is liquidated, and all assets and liabilities are taken over by the transferee company.

In accounting, amalgamations may also be referred to as consolidations.

Example of Amalgamation

In late 2021, it was announced that media companies Time Warner and Discovery, Inc. would combine in a deal worth an estimated $43 billion. Owned by AT&T, Time Warner (which the telecom company acquired in 2018) would be spun off and then amalgamated with Discovery. The new entity, known as Warner Bros. Discovery, Inc., is expected to close at some point in late 2022 and will be headed by Discovery CEO David Zaslav.

Types of Amalgamation

One type of amalgamation—similar to a merger—pools both companies’ assets and liabilities, and the shareholders’ interests together. All assets of the transferor company become that of the transferee company.

The business of the transferor company is carried on after the amalgamation. No adjustments are made to book values. Shareholders of the transferor company holding a minimum of 90% face value of equity shares become shareholders of the transferee company.

The second type of amalgamation is similar to a purchase. One company is acquired by another, and shareholders of the transferor company do not have a proportionate share in the equity of the combined company. If the purchase consideration exceeds the net asset value (NAV), the excess amount is recorded as goodwill. If not, it is recorded as capital reserves.

What Are the Objectives of an Amalgamation?

An amalgamation is similar to a merger in that it combines two firms, but here a brand new entity is formed as a result. The objective is thus to establish a unique entity that rests on the business combination in order to achieve greater competitiveness and economies of scale.

What Are the Methods of Accounting for Amalgamation?

There are two primary ways to account for an amalgamation. In the pooling of interests method, the transferee company takes on the balance sheet of the transferor—valued at the date of amalgamation. In the purchase method, assets are treated as acquired by the transferee where discrepancies are accounted for as goodwill or a capital surplus.

What Is an Amalgamation Reserve?

The amalgamation reserve is the amount of cash left over by the new entity after the amalgamation is completed. If this amount is negative, it will be booked as goodwill.

Article Sources

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  1. Securities and Exchange Board of India. "Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 199."

  2. CNBC. "AT&T announces $43 billion deal to merge WarnerMedia with Discovery."

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