Amalgamation occurs when two of more companies are joined to form a third entity or one is absorbed into or blended with another – explain and illustrate.
1. INTRODUCTION:
To operate the business more successfully and to make more profit, the business people often take different kinds of initiatives[1]. Sometimes they switch to other type of business or continue the current business with different strategy. Some strategies that can be taken by the business people are amalgamation, joint venture etc[2]. Amalgamation is simply the merger of two or more business companies into one company. According to Wikipedia “amalgamation is the process of combining or uniting multiple entities into one form”[3]. Another website named www.projectguru.in also defines amalgamation in the same way as Wikipedia does. According to projectguru.in, “ordinarily amalgamation means merger”[4]. Halsbury’s Laws of England describes amalgamation as the process of blending two or more existing business units into one new business unit. The share holders of the amalgamated companies ultimately become the share holders of the new blended company[5]. But according to Andhra Pradesh High Court held in S.S. Somayajulu v Hope Prudhomme & Co., the word “amalgamation” has no definite legal meaning. It contemplates a state of things under which two companies are so joined as to form a third entity, or one company is absorved into and blended with another company. Amalgamation does not involve a formation of a new company to carry on the business of the old company[6].
2. TYPES OF AMALGAMATION:
There are various types of amalgamation. According to /www.ic.gc.ca, there are three types of amalgamation[7]. These are as follows:
- A vertical short-form amalgamation, when a holding cooperative amalgamates with one or more of its wholly owned subsidiary cooperatives;
- A horizontal short-form amalgamation, when two or more wholly owned subsidiary cooperatives amalgamate and continue as one cooperative; and
- A long-form amalgamation, when members and, if any, investment shareholders of each amalgamating cooperative approve an amalgamation agreement before filing articles of amalgamation.
3. REASONS FOR AMALGAMATION:
Along with other business strategies, amalgamation is one of the most successful strategies to operate business. Normally business people do not think about joint venture or amalgamation until and unless they face any lose or they find it profitable in engaging in these kinds of activities. So there might have some reasons behind going for amalgamation. These reasons are described in the next section.
There are various reasons behind going for amalgamation for any business entity. The reasons are obviously related with the financial issue. Since earning profit is the heart of any business, so people will go for this kind of business strategy either to earn more profit or to avoid loss. Liberalization is forcing companies to enter new business, exit from others, and merge in some all together. According to mbaknol.com some other reasons behind amalgamation are as follows[8]:
a. Economies of scale: When two or more companies will join together, it achieves economies of scale. By joining together the new company produces more products than before and the average cost of production decreases. As result the unit cost also reduces. This gives the new company as opportunity to sell the products at a cheaper price compared to its competitors. By this way the company can achieve economies of scale.
b. Operating economies: With the merger of two or more companies, operational economies will be achieved. Operating inefficiencies of small concerns will be controlled by the superior management emerging from the amalgamation[9]. The amalgamated company will always be in a better position rather than the amalgamated companies individually in terms of operation.
c. Synergy: The concept of synergy is two plus two is always greater than four. So the sum of the values of individual units is less than the combined value of merged firms. This is another reason for which companies amalgamate with each other.
d. Growth: It might not be possible for a company to grow rapidly through internal expansion. In this case amalgamation the company gets the opportunity to grow rapidly and safely. Growth through merger is cheaper as well[10].
e. Diversification: When two or more companies with experience of operating in different lines will amalgamate, they will easily diversify their activities. The new amalgamated company might face some problems in marketing, in finance, in production or in any other section of the business. These problems would be solved by the amalgamated company more easily because the people of the merged companies have knowledge and skill in different categories. So it would definitely help the new amalgamated company to face any obstacle.
f. Utilization of tax shield: When a company with a loss merges with a profit making company, it is able to utilize tax shield. Any company which is facing a huge loss has no possibility to set off the loss against future profit because it is loss. But if the company merges with a company which is earning profit will help the accumulated losses of one unit to be set off against the profit of the other unit.
g. Increase in value: One of the major reasons of amalgamation is to increase the value of the merged company[11].
h. Elimination of competition: When two or more companies merge or amalgamate with each other, it will eliminate the competition among them. So there will be no need of advertisement. The companies will be able to save the advertising cost. As a result the price of the products will also decrease which is a benefit for the consumers.
i. Better financial planning: The merged companies will be able to have a better financial plan than the financial plans of the separate concerns. Two or more companies will have more financial resources which will help the merged company to better. Growth period is also a concern here[12].
j. Economic necessity: Sometimes companies are forced to merge with each other. It may seem that two companies are not doing well in their perspective businesses. In that cas the government might force the two companies to merge and operate the business. Sometimes a strong business unit is required to merge with a sick unit for some reasons[13].
4. DISADVANTAGES OF AMALGAMATION:
The reasons behind amalgamation are the benefits of doing so. But like all other business strategies, amalgamation also has some drawbacks. According to mundaring.wa.gov the drawbacks are as follows[14]:
a. Need approval of stockholders: An amalgamation must need the approval of the stockholders of each firm. The stock holders give approval by vote. Typically, two-thirds (or even more) of the share votes are required for approval[15]. But getting those votes can be difficult and time consuming.
b. Help of the existing management: The cooperation of the existing management of the target firm is also necessary which is also not easy to obtain[16].
c. Potential loss of local identity: Sometimes the merged company may lose the identity locally. That means the merging company will have such a name which is totally different from the names of the merged companies. In that case the local people might not be able to recognize the new company.
d. Time consuming: It is not a matter of second to make an amalgamated company. Lot of paper works need to be done. Interested firms need to take permission from the proper authority (most of the cases the government). They also need to analyze the market to decide whether amalgamation will be beneficial or not. All these stuffs are very time consuming.
e. Resource consuming: Here resource means mainly the money. For the integration of staff, planning schemes, information technology, local laws, policies, stationery and logo changes etc. need a lot of cost[17].
f. Higher representation of elected members: The amalgamated company normally needs to take representatives from all the companies. So whenever any decision is necessary to take, the management has to take into consideration the opinions of all the representatives. It is very time consuming and complicated[18].
g. Significant cost increase: The cost of reforming any company through the process of amalgamation can be high. The company needs to take new sites to accommodate new employees and to upgrade the central facility[19].
h. Decreased level of service: Sometimes the amalgamated company faces the problem of setting the standard for itself. Since new people start to work with each other, so there remains a communication gap among them. So they do not get the idea that what kind of product or service needs to be provided to the customers. As time precedes this kind of problems get removed[20].
i. Time to achieve cost savings: Experiences in other states point out that cost savings through apparent economies of level are not realized for a number of years, if at all (to date no empirical evidence to support savings through amalgamations in other states.[21])
5. CONCLUSION:
Merger/amalgamation have gained importance in recent times. Since the ultimate goal of any business is always earning profit, so to earn that profit companies might need to undertake different kind of strategies. Getting merged or amalgamated is one of the strategies that can be taken. Like all other strategies, amalgamation also has some drawbacks. But some strong positive sides of amalgamation are there as well. The huge amount of financial support is available in the case of merger. This huge amount of money can be used to expand the business and to earn more profit. On the other hand the initial cost of merger/amalgamation is very high. The company needs to be patient at this stage. This initial cost needs to be incurred to achieve something more in future.
This is not necessary that every business strategy will see the face of success. Some strategies might be proved ineffective. But nobody knows which strategy will work and which will not. So the business people needs to be patient and needs to have the habit of taking risk. They have to consider both the positive and negative sides of any strategy. Amalgamation, without some of the risks associated with it, is a wonderful strategy for business. So the business people should think wisely and step carefully to this strategy to expand the business and to reach the ultimate goal of any business which is making more profit.
[1] Since making profit is the only and only aim of any business, so it is very obvious that business people will take d adopt different strategies for additional profit.
[2] More details at http://bizcovering.com/business/types-of-business-strategies/
[3] Please see http://en.wikipedia.org/wiki/Amalgamation for more details
[4] www.projectguru.in
[5] Almost every business company operates publicly. So it has many shareholders. In the case of amalgamation the shareholders of any company become the ultimate shareholders of new company.
[6] http://www.projectguru.in/publications/?p=346
[7] http://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs01228.html
[8] http://www.mbaknol.com/management-concepts/economics-or-reasons-of-mergers/
[9] http://www.mbaknol.com/management-concepts/economics-or-reasons-of-mergers/
[10] By acquiring other companies a desired level of growth can be maintained by an enterprise.
[11] The value of merged company is always greater than the sum of the values of the individual companies.
[12] Suppose one of the merging companies has shorter growth period. So the profit from that company will used to finance the other company which has a longer growth period. When the company with the longer growth period starts eating profits then it will progress financial situation as a whole.
[13] Reasons can be better utilization of resources, improve the management etc. Sometimes deduction of unemployment is also included here.
[14] http://www.mundaring.wa.gov.au/AboutCouncil/Publications/Documents/Handout%201%20-Amalgamation.pdf
[15] http://www.associatedcontent.com/article/1189676/the_advantages_and_disadvantages_of.html
[16] Sometimes the management of the existing firm does not cooperate to the firm’s management which is planning to take over the firm.
[17]http://www.google.com/url?sa=t&source=web&cd=2&ved=0CB8QFjAB&url=http%3A%2F%2Fwww.brookton.wa.gov.au%2Freform%2Fpowerpoint%2Ffile%2Fat_download&rct=j&q=Disadvantages%20of%20amalgamation%3A&ei=dEiWTdHFJ4vwsgaO-MzGCA&usg=AFQjCNHn0rIy-aPGNeYKmYVki22hK2e2ng&cad=rja
[18] It is possible of having different opinions of different representatives, so it becomes very hard to come to any decision. One representative might prefer any alternative while the other might not. Then it becomes a problem for the company.
[19] http://www.mundaring.wa.gov.au/AboutCouncil/Publications/Documents/Handout%201%20-Amalgamation.pdf
[20] When the employees came to know each other, they form a relationship with each other. Moreover the management also gets stable by that time. So it becomes easier for the employees to work with each other with the right direction of the management.
[21] http://www.mundaring.wa.gov.au/AboutCouncil/Publications/Documents/Handout%201%20-Amalgamation.pdf