Amalgamation occurs when two or more companies are joined to form a third entity or one is absorbed into or blended with another
In general, amalgamation is the process of combining or uniting multiple entities into one form. Amalgamation is the act of merging many things into one. In business, it often refers to the mergers and acquisitions of many smaller companies into much larger ones.
In the context of financial accounting, consolidation or amalgamation refers to the aggregation of financial statements of a group company as a consolidated account. Under the Halsbury’s Laws of England , ‘amalgamation’ is defined as “a blending together of two or more undertakings into one undertaking, the shareholders of each blending company, becoming, substantially, the shareholders of the blended undertakings. There may be amalgamations, either by transfer of two or more undertakings to a new company, or to the transfer of one or more companies to an existing company“. Thus, the two concepts are, substantially, the same. However, the term amalgamation is more common when the organizations being merged are private schools or regiments.
In the business world, amalgamated refers to an organization that has undergone amalgamation. Amalgamated organizations may use “amalgamated” in their name to signify that it is the amalgamation of its component companies or trade unions.
Amalgamation or Mergers & Acquisitions (M&A) refers to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.
Mergers and Acquisitions
A corporate merger is the combination of the assets and liabilities of two firms to form a single business entity. In everyday language, the term acquisition tends to be used when a larger firm absorbs a smaller firm, and merger tends to be used when the combination is portrayed to be between equals. In a merger of firms that are approximate equals, there often is an exchange of stock in which one firm issues new shares to the shareholders of the other firm at a certain ratio. For the sake of this discussion, the firm whose shares continue to exist (possibly under a different company name) will be referred to as the acquiring firm and the firm whose shares are being replaced by the acquiring firm will be referred to as the target firm.
Excluding any synergies resulting from the merger, the total post-merger value of the two firms is equal to the pre-merger value. However, the post-merger value of each individual firm likely will be different from the pre-merger value because the exchange ratio of the shares probably will not exactly reflect the firms’ values with respect to one another. The exchange ratio is skewed because the target firm’s shareholders are paid a premium for their shares.
Synergy takes the form of revenue enhancement and cost savings. When two companies in the same industry merge, such as two banks, combined revenue tends to decline to the extent that the businesses overlap in the same market and some customers become alienated. For the merger to benefit shareholders there should be cost saving opportunities to offset the revenue decline; the synergies resulting from the merger must be more than the initial lost value.
To calculate the minimum value of synergies required so that the acquiring firm’s shareholders do not lose value, an equation can be written to set the post-merger share price equal to the pre-merger share price of the acquiring firm as follows:
|(pre-merger value of both firms + synergies)||= pre-merger stock price|
|post-merger number of shares|
The above equation then can be solved for the value of the minimum required synergies.
The success of a merger is measured by whether the value of the acquiring firm is enhanced by it. The practical aspects of mergers often prevent the forecasted benefits from being fully realized and the expected synergy may fall short of expectations.
Types of Business Amalgamations
There are three forms of business combinations:
- Statutory Merger: a business combination that results in the liquidation of the acquired company’s assets and the survival of the purchasing company.
- Statutory Consolidation: a business combination that creates a new company in which none of the previous companies survive.
- Stock Acquisition: a business combination in which the purchasing company acquires the majority, more than 50%, of the Common Stock of the acquired company and both companies survive.
- Amalgamation: Means an existing Company which is taken over by another existing company. In such course of amalgamation, the consideration may be paid in “cash” or in “kind”, and the purchasing company survives in this process.
Benefits of a Merger or Acquisitions
There are many good reasons for growing your business through an acquisition or merger. These include:
- Obtaining quality staff or additional skills, knowledge of your industry or sector and other business intelligence. For instance, a business with good management and process systems will be useful to a buyer who wants to improve their own. Ideally, the business you choose should have systems that complement your own and that will adapt to running a larger business.
- Accessing funds or valuable assets for new development. Better production or distribution facilities are often less expensive to buy than to build. Look for target businesses that are only marginally profitable and have large unused capacity which can be bought at a small premium to net asset value.
- Your business underperforming. For example, if you are struggling with regional or national growth it may well be less expensive to buy an existing business than to expand internally.
- Accessing a wider customer base and increasing your market share. Your target business may have distribution channels and systems you can use for your own offers.
- Diversification of the products, services and long-term prospects of your business. A target business may be able to offer you products or services which you can sell through your own distribution channels.
However, a merger or acquisition can also create its own problems.
Identify targets for Merger or Acquisition
There are several ways to find the right firm for a merger or acquisition before you approach the owners.
Making a target shortlist
First, develop a profile of the sort of firm you want. Gather and review as much relevant information as you can on the markets, companies, products and services you need. Once you have developed the target profile, you can:
- Consider firms you sell to, or buy from, already. Many acquisitions and mergers take place between companies that have an existing commercial relationship.
- Encourage senior staff to use their networks to gather information about likely prospects in your sector.
- Circulate the details of what you are looking for. Use investment banks or corporate finance firms who sell similar companies, if appropriate.
The most effective way to find a target is usually through using a professional adviser in your sector. They should be experienced in handling deals similar to the size of both yours and the target business. Although you should typically ask for a shortlist of ten potential businesses, you would normally pay the bulk of the adviser’s fee when you have successfully completed business with the final target.
Opportunities to grow by merger or acquisition may exist where the target business:
- is undervalued
- does not use its assets to maximum effect
- would benefit from relocation
- has poor management
- has managers who want to leave or retire
- has complementary products or services which, when combined with yours, will enhance the offering to customers
Approach a target business
When you have identified a suitable target business to acquire or merge with, you will need to register your interest in doing so with the owners or management of that business.
Make sure the target understands why you are interested in a deal and how you intend to finance it. Prepare the questions you would like answered. This is also your opportunity to explain your business and your future plans.
If you are planning an acquisition, find out if the owner of your target business already has plans to sell and, if so, whether they intend to remain involved in it. Consider their motives for selling.
Assess the target business
f you are considering a merger or acquisition, you should assess your target business. Talk to those who regularly interact with it – the customers and suppliers.
Consider asking customers about:
- the business’ products or services
- the comparison with competitors in terms of payments
- who their main contacts are
- how much their relationship with the business relies on dealing with the owner
Ask your target business for:
- Financial information. If you have to rely on unaudited financial accounts, get warranties from the seller.
- Details about their customer base.
- Trends in sales and profit margins.
- Future forecasts. Consider whether forecasts are realistic and tally with your knowledge of the market and its prospects.
- Stock levels and debt collection trends, investments and the business’ debts.
- Information about its marketing.
- Information about key employees and their plans – in particular, the extent of the involvement of the owner.
- Information about its systems, suppliers and legal and contract issues.
Legal aspects to consider
Different legal issues can arise at different stages of the acquisition process and require separate and sequential treatment.
Due diligence stage
Due diligence is the process of uncovering all liabilities associated with the purchase. It is also the process of verifying that claims made by the vendors are correct. Directors of companies are answerable to their shareholders for ensuring that this process is properly carried out.
For legal purposes, make sure you:
- obtain proof that the target business owns key assets such as property, equipment, intellectual property, copyright and patents
- obtain details of past, current or pending legal cases
- look at the detail in the business’ current and possible future contractual obligations with its employees (including pension obligations), customers and suppliers
Always use a lawyer to conduct legal due diligence.
When you are considering general terms of a potential deal you will probably seek certain confirmations and commitments from the seller of the target business. These will provide a level of assurance and comfort about the deal and are indications of the seller’s own confidence in their business.
A written statement from the seller that confirms a key fact about the business is known as a warranty. You may require warranties on the business’ assets, the order book, debtors and creditors, employees, legal claims and the business’ audited accounts.
A commitment from the seller to reimburse you in full in certain situations is known as an indemnity. You might seek indemnities for unreported tax liabilities, for example.
Your professional adviser can assist in reviewing the content and adequacy of warranties and indemnities.
One size doesn’t fit all. Many companies find that the best way to get ahead is to expand ownership boundaries through mergers and acquisitions. For others, separating the public ownership of a subsidiary or business segment offers more advantages. At least in theory, mergers create synergies and economies of scale, expanding operations and cutting costs. Investors can take comfort in the idea that a merger will deliver enhanced market power.
By contrast, de-merged companies often enjoy improved operating performance thanks to redesigned management incentives. Additional capital can fund growth organically or through acquisition. Meanwhile, investors benefit from the improved information flow from de-merged companies.
Unknown Author., (n.d). In Mergers and Acquisitions, Retrieved March 27, 2011 from
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Unknown Author., (n.d). In Mergers and Acquisitions, Retrieved March 27, 2011 from
Unknown Author., (n.d). In Retrieved April 01, 2011 from
 Halsbury’s Laws of England is a uniquely comprehensive and authoritative encyclopaedia of law, and provides the only complete narrative statement of law in England and Wales. It has an alphabetised title scheme covering all areas of law, drawing on authorities including Acts of the United Kingdom, Measures of the Welsh Assembly, UK case law and European law. It is written by or in consultation with experts in the relevant field
 See, http://www.quickmba.com/finance/mergers-acquisitions/
 See, http://en.wikipedia.org/wiki/Amalgamation_%28business%29
 See, http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1074409301&r.l1=1074404796&r.l2=1074404799&r.l3=1074407579&r.s=sc&type=RESOURCES
 See, http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1074409624&r.i=1074409547&r.l1=1074404796&r.l2=1074404799&r.l3=1074407579&r.s=sc&r.t=RESOURCES&type=RESOURCES
 See, http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1074409624&r.i=1074409607&r.l1=1074404796&r.l2=1074404799&r.l3=1074407579&r.s=sc&r.t=RESOURCES&type=RESOURCES
 See, http://en.wikipedia.org/wiki/Mergers_and_acquisitions
 See, http://www.investopedia.com/university/mergers/mergers6.asp
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