Performance based rewards theory

“Amalgamation occurs when two or more companies are joined to form a third entity all one is absorbed into or blended with another”.

Generally Amalgamation is the process of combining or uniting multiple entities into one form. In business, the merging of two or more businesses into single entity is called amalgamation. Amalgamation is also used in the sense of amalgamating of two or more municipalities to affect cost-savings in the provision of otherwise duplicative municipal services. In this context, an amalgamation has been defined as a fusion of two or more legal entities[1] into a continued new union with the obligations, by-laws and assets of the former municipalities.

Merger and consolidation are the related terms of amalgamation. The joining of two or more corporations, either by merger or by is known as amalgamation. Justice Roney said:

“A consolidation is the union of two or more corporations into one corporate body, after which the constituent corporations cease to exist. A merger is the absorption of one corporation into another and amalgamation is used to designate a consolidation or merger.”

Amalgamation means the merging of two things together to form one such as the amalgamation of different companies to form a single company. Merger is a tool used by companies for the purpose of expanding their operations often aiming at an increase of their long term profitability. Usually mergers occur in a consensual setting. The dictionary meaning of Mergers is “to combine commercial or industrial firms”.

Ian MacFee Rogers said:

“An amalgamation has been defined as a fusion of two or more legal entities into a continued new union with the obligations, by-laws and assets of the former municipalities.”

For example of an amalgamation, Ericsson and Sony are two different companies. Sony and Ericsson decided to merge their mobile businesses in a joint venture[2] named Sony Ericsson. So Sony Ericsson is a form of amalgamation. Now a day’s amalgamation is very common in business.

Different forms of combination

There is some disagreement on the precise meaning of various terms relating to the forms of business combinations like merger, amalgamation, absorption, consolidation, acquisition, takeover, etc. Sometimes, these terms are used interchangeably, in a broader sense even when there are legal distinctions between the kinds of combinations.

Merger or Amalgamation

In business or economics a merger is a combination of two companies into one larger company. It may be in the form of one or more companies being merged into an existing company or a new company may be formed to merge two or more existing companies. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. A merger can resemble a takeover but result in a new company name and in new branding; in some cases, terming the combination a “merger” rather than an acquisition is done purely for political or marketing reasons. Merger is a financial tool that is used for enhancing long-term profitability by expanding their operations. Mergers occur when the merging companies have their mutual consent. There are two types of amalgamation:

  • Merger or amalgamation through absorption.
  • Merger or amalgamation through consolidation.

Absorption: A combination of two or more companies into an existing company is known as ‘absorption’. In absorption all companies expect one go into liquidation and lose their separate identities. As a result of the absorption, the Reliance Polypropylene Ltd (RPPL) was liquidated and its shareholders were offered 20 shares of RIL for every 100 shares of RPPL held by them.

Consolidation: A consolidation[3] is a combination of two or more companies into a new company. In this form of merge, all the existing companies, which combine, go into a new company. In this form of merger, all the existing companies, which combine, go into liquidation and form a new company with a different entity. The entity of the existing company is lost and their assets and liabilities are taking over by the new corporation or company. The assets of old concern are sold to a new concern and their management and control also passes into the hands of the new concerned. There are two companies called A ltd. and B Ltd. and they merge together to form a new company called AB Ltd. or C Ltd. it is a case of consolidation . The term consolidation is also sometimes used as amalgamation.

Types of Mergers or Amalgamations

From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:

  • Horizontal merger: Two companies that are in direct competition and share similar product lines and markets, join together it is known as a horizontal merger. The idea behind this type of merger is to avoid competition between the units. (e.g.: two manufacturers’ of same type of cloth, two transport companies operating on the same route-the merger in all these cases will be horizontal merger.) Horizontal mergers take place where the two merging companies produce similar product in the same industry. A horizontal merger is when two companies competing in the same market merge or join together. This type of merger can either have a very large effect or little to no effect on the market. When two extremely small companies combine, or horizontally merge, the results of the merger are less noticeable. These smaller horizontal mergers are very common. If a small local drug store were to horizontally merge with another local drugstore, the effect of this merger on the drugstore market would be minimal. In a large horizontal merger, however, the resulting ripple effects can be felt throughout the market sector and sometimes throughout the whole economy.
  • Vertical merger: A customer and company or a supplier and company. (e.g.: an ice cream maker merges with the dairy farm that they previously purchased milk from; now, the milk is ‘free’). Vertical mergers occur when two firms, each working at different stages in the production of the same good, combine. Vertical mergers involve firms in a buyer-seller relationship. A manufacturer merging with a supplier of component products, or a manufacturer merging with a distributor of its products. A vertical merger can harm competition by making it difficult for competitors to gain access to an important component product or to an important channel of distribution. This is called a “vertical foreclosure” or “bottleneck” problem.  Vertical mergers can further be classified into (a) Forward Integration[4] and (b) Backward Integration[5].
  • Market-extension merger[6]: Two companies that sell the same products in different markets (e.g.: an ice cream maker in the Netherlands merges with an ice cream maker in Canada)
  • Product-extension merger[7]: Two companies selling different but related products in the same market (e.g. a cone supplier merging with an ice cream maker).
  • Conglomeration: Two companies that have no common business areas where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company. Conglomerate mergers take place when the two firms operate in different industries. It is the merger of two companies that have no related products or markets. In short, they have no common business ties. Such merger moves for diversification of risk constitutes the rationale.

Acquisitions or Take-Over

An acquisition, also known as a takeover or a buyout, is the buying of one company by another. It is an act of acquiring control over management of other companies. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target’s board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one.

Reverse take-over: When a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover.

Distinction between Mergers or Amalgamations and Acquisitions

Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer “swallows” the business and the buyer’s stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a “merger of equals.” Both companies’ stocks are surrendered and new company stock is issued in its place.

Regardless of their category or structure, all mergers and acquisitions[8] have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved.

Benefit of Amalgamation:

It creates synergy[9]. The basic fact of an amalgamation is 1+1=3; else it does not make sense. Sometimes it fails because HR aspect is always ignored. Many have tried it out only few have succeeded. There can be several benefits and drawbacks from a merger to an existing business but it will really depend on whose side of the merge the company is looking for. For instance, a technology company may acquire another one as a means to gain market share. It is not uncommon for the products of the acquired company eventually disappear or its technology to make its way into the products of the acquirer. So from the standpoint of the company being acquired, there were no benefits. If the company that was acquired is left as a stand-alone company and can now benefit from larger economy of scale, easier access to capital, and better distribution channel, then it was a win-win for both companies.

For the acquirer, it’s not necessarily beneficial in all instances either.
In summary, there are several potential benefits as outlined above and by the other people that responded to your questions.

Some benefits[10] of Mergers and Acquisitions are:
? Generate cost efficiency through economies of scale

? Enhance the revenue through gain in market share

? Generate tax gains

? Get out the target company of a difficult financial situation

? Help entering in a new market

? Lower the labor costs, through staff reductions

? Provide new technology and intellectual property

? Reduce competition

? Synergy Gains

? Tax Benefits

? Diversification

? Increase in Market price of the stock

In common, the terminologies “Amalgamation” or “merger” would mean the two business entities joining together to make totally new business entity or to allow one business entity to survive absorbing the other one. Amalgamation or merger is also a method of reconstruction. In amalgamation, two or more companies are fused into one by merger or by one taking over the other. When two companies are merged and are so joined as to form third company or one is absorbed into other or blended with another, the amalgamating company loses its identity. There may be amalgamation either by transfer of two or more undertakings to a new company or by the transfer of one or more undertakings to an existing company. An amalgamation may be defined as an arrangement where by the assets of the two companies which has as its share holders all or substantially all the share holders of the two companies. But they differ in this regard that amalgamation is a used where two or more companies are there but merger is when one company is blended with another. Mergers and acquisitions have gained importance in recent times. Business consolidation by large industrial houses, consolidation of business by multinationals operating in different countries, increasing competition amongst domestic companies and competition against imports have all combined to prompt mergers and acquisitions activities.














[2] A contractual agreement joining together two or more parties for the purpose of executing a particular business undertaking; all parties agree to share in the profits and losses of the enterprise

[3] In storage terminology, the term consolidation is used mainly to refer to the concept of centralized storage where resources are shared among multiple applications and users

[4] A business strategy that involves a form of vertical integration whereby activities are expanded to include control of the direct distribution of its products

[5] A form of vertical integration that involves the purchase of suppliers in order to reduce dependency, a good example would be if a bakery business bought a wheat farm in order to reduce the risk associated with the dependency on flour

[6] As per definition, market extension merger takes place between two companies that deal in the same products but in separate markets. The main purpose of the market extension merger is to make sure that the merging companies can get access to a bigger market and that ensures a bigger client base.

[7] According to definition, product extension merger takes place between two business organizations that deal in products that are related to each other and operate in the same market. The product extension merger allows the merging companies to group together their products and get access to a bigger set of consumers. This ensures that they earn higher profits.

[8] In business, an acquisition is when one company purchases another.

[9] Synergy, in general, may be defined as two or more agents working together to produce a result not obtainable by any of the agents independently.

[10] Benefits of Mergers and Acquisitions are the main reasons for which the companies enter into these deals. Mergers and Acquisitions may generate tax gains, can increase revenue and can reduce the cost of capital. The main benefits of Mergers and Acquisitions are the following: mergers and acquisitions often lead to an increased value generation for the company. It is expected that the shareholder value of a firm after mergers or acquisitions would be greater than the sum of the shareholder values of the parent companies. Mergers and acquisitions generally succeed in generating cost efficiency through the implementation of economies of scale.