Amalgamation occurs when two or more companies are joined to form a third entity or are absorbed into or blended into another.
Amalgamation or merger in business or economics is a combination of two companies into a single large company. A new company may be formed to merge two or more existing companies or it may be in the form of one or more companies being merged into an existing company. A stock swap or cash payment may be involved to the target as such actions are voluntary. The amalgamating company loses its identity when two companies are merged and are so joined as to form third company or one is absorbed into other or blended with another. By the transfer of one or more undertakings to an existing company, or transfer of two or more undertakings to a new company amalgamation can take place. 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 is also defined as an amalgamation.
Amalgamation takes place either through absorption or consolidation.
Absorption refers to the combination of two or more companies into an existing company. All other companies lose their identity after the absorption and merge into a new company with a new identity.
A new company is formed followed by a creation of a new entity by a combination of two or more companies. This process of formation of a new entity is known as consolidation.
METHODS OF AMALGAMTION:
Transfer of sales of shares from one company to another: Probably the simplest method of amalgamation is the transfer of shares. The sanction of the court is not required and only the approval of the shareholders is necessary. A minimum of 75% of the shareholders should approve the transfer of shares hence favoring the amalgamation. Shares are sold and registered in the name of the purchasing company. The shareholders selling their shares are either provided with compensation or shares in the new company formed.
By sale of undertaking: The second method involves a sale of the whole of the undertaking or a liability of a company to another company. Any person who is entitled to move to the court might make an application to the court. The court may sanction the theme & make the necessary orders:
(i) Transfer of the undertaking property & liabilities of one company to another.
(ii) The allotment by the transferee company of any share which has to be appropriated by the contract.
(iii) Dissolution without winding up of the company.
(iv) The provision to be made for any person who dissents from the scheme.
BENEFITS OF AMALGAMATION:
A part of the business and corporate strategies aimed at establishing sustainable competitive advantage for the firm is formed by the merger. Strategic decisions leading to the maximization of a company’s growth are mergers and amalgamations. Merger and amalgamations are usually intended to achieve any or some or all of the following purposes. Various reasons and advantages of amalgamation are:
- Synergistic operational advantages: These advantages are defined as a new or enhanced effect caused by a merger rather than separate effects.
- Economies of scale -The average cost of production and unit costs are reduced for enabling to offer products at more competitive prices & to grasp a larger market share.
- Reduction in production, administrative, selling, legal and professional expenses.
- Benefits of integration – Integration is the combination of two or more companies for their mutual benefit under the same control by the decrease in competition and reduction of saving costs diminishing overheads, capturing a larger market share, pooling technical or financial resources. Helping in the research or development etc integration may be horizontal or vertical and the latter may be backward integration or forward integration.
- Optimum use of capacities and factors of production.
- Tax advantages – carry forward and set off of losses of a loss-making amalgamating company against profits of a profit-making amalgamated company.
- Financial constraints for expansion – There are often companies which have the capacity to expand but cannot do so because of financial barriers. These companies when merge into another company capable of providing adequate funds for expansion are hugely benefited.
- Diversification: A form of corporate strategy for a company is diversification which can increase the profits by larger sales volume obtained form new products and new markets. Because of a merger, the new company can diversify and attain larger sales volume with the aid of adequate finance.
- Advantage of brand –equity: Marketing effects such as sales of a particular product having a well reputed brand name is highly different for the same product with a lesser known brand name. If a company suffering financial distress merges to another reputed & financially stable company which lends the product its brand name, the new company as a result of the merger will be highly favored due to increase in sales.
- Competitive advantage – The factors that give a company an advantage over its rivals. The company after merger if is producing the same product has high chances of monopolizing the market and selling products at higher prices weakening or almost eliminating competition.
- Revival of a weak or sick company: If a company, suffering heavy losses with low share values merges with a financially stable and successful company, it can prosper a great deal due to the new reputed brand name and the financial support provided by the strong company with a notable increase in share value price.
- Cost efficiency: A merger or acquisition is able to create economies of scale which in turn generates cost efficiency. As the two firms form a new and bigger company, the production is done on a much larger scale and when the output production increases, there are strong chances that the cost of production per unit of output gets diminished.
CASE: NOKIA SIEMENS AMALGAMATION
Nokia Siemens Networks is a European company, provider of data networking and telecommunications equipment. It is a joint venture between Nokia of Finland and Siemens of Germany.
As the result of a joint venture between Siemens’s COM division (minus its Enterprise business unit) and Nokia’s Network Business Group, the company was created.
The two titans Nokia & Siemens have been generating large impacts on the TD technologies even before the collaboration. As an international enterprise, Siemens has been supporting this technology in the recent 10 years. In the communication industry it is almost absurd for technologies to progress without technological support. Financial support is also immensely essential as without it, they cannot face changes of the industry, which when companies are combined into one can generate more funds and efforts to next generation technology. If this decision had not been taken earlier, it would have been hard for today’s market to prosper. There were five fundamental cultural factors that are responsible for the success. Such as: Customer Focus; the second is Winning Together; the third is Inspiring; the forth is Innovative; and the last is Open Communications. The Nokia Siemens Company usually carries out its business according to these five principles. However after amalgamation, they had to set the culture, policy, strategy, company structure and organizational structure clear, and the two sides go towards the same, not their respective, not opposite directions.
In the aspect of performance, Nokia- Siemens has done exceedingly well. As the performance of a company is expected to rise everyday there is hardly any satisfaction. But in the perspective of statistics, in the third and forth quarters of 2007, the sale volumes grew by 20% and 30% in comparison with the previous quarter respectively. So, the company grew well because of amalgamation, and the customers’ acceptance. Because of the promotions and introductions, the customers began to accept Nokia & Siemens as a leading company of the industry. Their order rolls, their sales volumes and the new project agreements show that the company has been recognized by the customers. From the perspective of the employees, since the company took a leading position in the market, they are very confident to stay and to work for the company. The best employees will stay to form a strong team, so that the customers will be more confident in the company.
As both the companies have merged successfully, they are financially more secured and wealthy. They promised TD-tech Limited to invest more in the aspect of marketing, distribution and services. The customers are very familiar with the two parent companies, but are not so familiar with TD-tech. Because of the merger these companies have planned a lot of schemes and ideas that it will use to achieve more success.
From the above case we can deduce the immense benefits that the companies Nokia & Siemens have gained after the merger. From the facts regarding the performance of the company, we can deduce the huge benefits enjoyed by the company. Because they are financially stronger now, they can invest in more projects. As both the companies are extremely reputed, the brand equity for the product has increased a great deal. Because of the merger, the new company can outcast its competitors by emerging as a vital pioneer in this field of technology.
For amalgamation of two companies, the method has to be perceived from the Transferor and Transferee Company:
The measures taken by the transferee company are as follows:
1. In its object clause, the Memorandum of Association must provide the power to amalgamate
2. A board meeting must be held for considering and passing the following resolutions:
-for approving the draft scheme of amalgamation. -for convening a general meeting, for the authorization for filing of application -for filing a petition for confirming scheme by high court.
3. For directions to convene a general meeting by way of Judge’s summons supported by an affidavit, an application shall be made to the court.
4. A copy of the application made to concerned H.C. shall also be sent to the R.D. of the region.
5. After hearing the summons, the necessary orders passed by the H.C shall include:
(a) Place & time of the meeting (b) Chairman of the meeting, (c) Fixing the quorum, (d) procedure to be followed in the meeting for voting by the proxy, (e) Advertisement of notice of the meeting, (f) Time limit for the chairman to submit the report to the court regarding the result of the meeting.
6. A notice of the meeting shall be sent to the creditors or shareholders from the chairman including: terms & effects of amalgamation, copy of proposed scheme, attendance slip.
7. The notice of the meeting must be advertised in newspapers.
8. Three copies of the notice of the meeting together with enclosures must be sent to the stock exchange.
9. Not less than a week before the meeting, an affidavit should be filed by the Chairman of the meeting with the court showing that directions regarding the issues of notices & advertisement have been complied with.
10. General Meeting:-The General Meeting shall be held to pass the following resolutions:
(a) The approval of amalgamation scheme by 75% of the majority.
(b) Special Resolution authorizing allotment of shares to persons other than existing shareholders or an ordinary resolution be passed subject to getting Central Government’s approval for the allotment as per the provisions of Section 81(1A) of the Companies Act,
(c) The resolution to empower directors to dispose of the shares not taken up by the dissenting shareholders at their discretion.
11. The result of the meeting must be reported to the court within the time fixed by the judge.
12. Formalities With ROC:- The following documents shall be filed with ROC along-with the requisite filing fees: (i)Form No. 23 of Companies General Rules & Forms + copy of Special Resolution, (ii)Resolution approving the scheme of amalgamation, (iii) Special resolution passed for the issue of shares to persons other than existing shareholders.
13. A petition shall be made to the H.C. within 7 days of the filing of report by the chairman, for of the scheme of amalgamation.
14. The scheme should be approved by the court & should be approved by the company by means of ¾th majority of the members present. The scheme should be authentic and should not be against the interests of the creditors, the company and the public interest.
15. After the court sanctions the scheme, it becomes an instrument liable to stamp duty.
16. After the certified copy of the order has been filed, a copy of the court’s order shall be annexed to every copy of the Memorandum of Association.
17. For allotment of shares, a board resolution is passed in exchange of shares held in the transferor-company and to fix the record date for this purpose..
From the case above we have seen the positive impact that an amalgamation of two companies Nokia & Siemens has brought. This amalgamation has caused the resultant company to garner immense benefits. Because of amalgamation of two companies, the resultant company becomes more financially stronger and can venture with new schemes to launch new products. Because of amalgamation, the resultant company can prosper a great deal by capturing a larger market share, increasing investment in research and development & becoming more cost efficient.
 A stock swap, also known as a share swap, is a business takeover or acquisition in which the acquiring company uses its own stock to pay for the acquired company.
 Dissolution (law), in law, means to end a legal entity or agreement such as a marriage, adoption, or corporation
 Monopolizing: Obtain exclusive possession or control
 Collaboration: Collaboration is working together to achieve a goal
 An affidavit is a formal sworn statement of fact.