Amalgamation means the merging of two things together to form one such as the amalgamation of different companies to form a single company. For example, Ontario’s Business Corporation Act, at section 174 provides that “2 or more corporations…. may amalgamate and continue as one corporation”. 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, Ian MacFee Rogers wrote:
“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.”
Business corporations that amalgamate must apply for or correct the articles of amalgamation.
The board of directors of each business corporation that amalgamates must adopt a resolution and the articles of amalgamation. A director of each of the business corporations that amalgamates must sign these documents. There are two types of amalgamation we found in real world. They are as follows–
An ordinary amalgamation is a merger of at least two business corporations into a single entity. To carry out an ordinary amalgamation, the business corporations must sign an amalgamation agreement, which establishes the terms and conditions of the amalgamation (the agreement must contain certain provisions required by law). The directors of each of the business corporations must adopt a by-law approving the amalgamation agreement, which must be ratified by two-thirds of the shareholders present at the special general meeting held for that purpose.
A simplified amalgamation can be either the merger of a parent company with at least one of its subsidiaries, all of whose shares it owns, or the merger of two or more subsidiaries of the parent company. To carry out a simplified amalgamation, it is not necessary to sign an amalgamation agreement or to adopt an amalgamation by-law and have the shareholders of the corporations that are merging ratify it.
The corporation resulting from a simplified amalgamation must, if it has not already done so, file the current updating declaration required by the Act respecting the legal publicity of enterprises”.
The shareholder of each blending companies becoming substantially the shareholders of company which will carry on blended undertaking. There may be amalgamation by transfer of one or more undertaking to a new company or transfer of one or more undertaking to an existing company. Amalgamation signifies the transfers of all are some part of assets and liabilities of one or more than one existing company or two or more companies to a new company.
The Accounting Standard, AS-14, issued by the Institute of Chartered Accountants of India has defined the term amalgamation by classifying (i) Amalgamation in the nature of merger, and (ii) Amalgamation in the nature of purchase.
“1. Amalgamation in the nature of merger:
As per AS-14, an amalgamation is called in the nature of merger if it satisfies all the following condition:
- All the assets and liabilities of the transferor company should become, after amalgamation; the assets and liabilities of the other company.
- Shareholders holding not less than 90% of the face value of the equity shares of the transferred company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of the amalgamation.
- The consideration for the amalgamation receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity share in the transferee company, except that cash may be paid in respect of any fractional shares.
- The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.
- No adjustment is intended to be made in the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.
Amalgamation in the nature of merger is an organic unification of two or more entities or undertaking or fusion of one with another. It is defined as an amalgamation which satisfies the above conditions.
2. Amalgamation in the nature of purchase:
Amalgamation in the nature of purchase is where one company’s assets and liabilities are taken over by another and lump sum is paid by the latter to the former. It is defined as the one which does not satisfy any one or more of the conditions satisfied above.
As per Income Tax Act 1961, merger is defined as amalgamation under sec.2 (1B) with the following three conditions to be satisfied.
- All the properties of amalgamating company(s) should vest with the amalgamated company after amalgamation.
- All the liabilities of the amalgamating company(s) should vest with the amalgamated company after amalgamation.
- Shareholders holding not less than 75% in value or voting power in amalgamating company(s) should become shareholders of amalgamated companies after amalgamation
Amalgamation does not mean acquisition of a company by purchasing its property and resulting in its winding up. According to Income tax Act, exchange of shares with 90%of shareholders of amalgamating company is required”.
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:
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. 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.
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.
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.
Disadvantage of Amalgamation:
Merger also has its own disadvantages. One of the disadvantages is that a merger must be approved by votes of the stockholders of each firm. Typically, two-thirds (or even more) of the share votes are required for approval. Obtaining the necessary votes can be time-consuming and difficult. Furthermore, the cooperation of the target firm existing management is almost a necessity for a merger. This cooperation may not be easily or cheaply obtained. 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. Sometimes “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”.
Dealing with a merger can mean top managers in a company spend all their time on merger negotiations and fail to take proper care of the core business. “Potential difficulties with the transaction are frequently overlooked by managers who are too excited by the prospect of the deal. Success is less likely if the companies have very different corporate cultures. Cultural differences in the companies are often ignored in acquisitions that focus on the products or market involvement of the companies. Personnel issues can also be very difficult for companies to overcome. If employees at a target company are accustomed to a particular management style, they may be very reluctant to adapt to the culture of the purchasing company. The overall result of these changes may be resentment, hostility and a reduction in productivity. A study conducted by McKinsey provides further insight into the reasons behind merger failures. This study found that many companies direct a lot of focus on cost cutting after a merger and, at the same time, their revenues and profits often decrease. If they focus too much on integrating the two companies after the merge to the extent that they neglect their core business, customers are likely to leave. This leads to a loss of momentum that reduces the value of the merge for shareholders.” One size doesn’t fit all Mergers can fail for many reasons including a lack of management foresight, the inability to overcome practical challenges and loss of revenue momentum from a neglect of day-to-day operation. Some may better perform with Mergers, and some may not.
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 RSO 1990 Chapter B16
 By acquiring other companies a desired level of growth can be maintained by an enterprise.
 The value of merged company is always greater than the sum of the values of the individual companies.
 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.