| Amalgamation occurs when two or more companies are joint to form a third entity or one is absorbed into or blended with another – explain & illustrate. |
Introduction:
Basically Amalgamation means merging of two things together to form one such as the amalgamation of different companies to form a single company. To be more precisely, it is an arrangement or reconstruction. It is a legal process by which two or more companies are to be absorbed or blended with another. As a result, the amalgamating company loses its existence and its shareholders become shareholders of new company or the amalgamated company. In case of amalgamation a new company may came into existence or an old company may survive while amalgamating company may lose its existence.
According to Halsbury’s law of England amalgamation is the blending of two or more existing companies into one undertaking, 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]
Example:
Sanofi-Aventis Bangladesh Limited is a legal amalgamation of three different companies:
Aventis Limited, Fisons (Bangladesh) Limited and Hoechst Marion Roussel Limited. The three legal have been amalgamated effective from December 11, 2007. The sanofi-aventis group is the world’s third largest pharmaceutical company, ranking number 1 in Europe. Backed by a world-class R&D organization, sanofi-aventis is developing leading positions in seven major therapeutic areas: cardiovascular disease, thrombosis, oncology, diabetes, central nervous system, internal medicine, vaccines. The Sanofi-Aventis Group is listed in Paris (EURONEXT: SAN) and in New York
Reasons:
A number of amalgamations (mergers), take-overs and consolidation[2] have take place in the recent times. The major reason cited, for such mergers, is the liberalization of economy. Liberalization is forcing companies to enter new business, exit from others, and consolidate in some simultaneously. The following are the other important reasons for mergers or amalgamations:
1. Economies of scale: An amalgamation company will have more reasons at its command that the individual companies. This will help in increasing the scale of operations and the economies of large scale will be available. These economies will occur because of more intensive utilization of production facilities, distribution network, research and development facilities, etc. these economies will be available in horizontal mergers were scope of more intensive use of resources is greater.
2. Operating economies: A number of operating economies will be availed with the merger of two or more companies. Duplicating facilities in accounting, purchasing, marketing, etc. will be eliminated. Operating inefficiencies of small concerns will be controlled by the superior management emerging from the amalgamation. The amalgamated company will be in a better position to operate than the amalgamating companies individually.
3. Synergy: Synergy refers to the greater combined value of merged firms than the sum of the values of individual units. It is something like one plus one more than two. It results from benefits other than those related to economies of scale. Operating economies are one of the various synergy benefits of merger or consolidation. The other instances which may result into synergy benefits includes, strong R&D facilities of one firm merged with better organized facilities of another unit, enhanced managerial capabilities, the substantial financial resources of one being combined with profitable investment opportunities of the other.
4. Growth: A company may not grow rapidly throw internal expansion. Merger or amalgamation enables satisfactory and balanced growth of a company. It can cross many stages of growth at one time through amalgamation. Growth through merger or amalgamation is also cheaper and less risky. A number of costs and risk of expansion and taking on a new product line are avoided by the acquaint of a going concern. By acquiring other companies a desired level of growth can be maintained by an enterprise.
5. Diversification: Two or more companies operating in different lines can diversify their activities through amalgamation. Since different companies are already dealing in their respective lines there will be less risk in diversification. When a company tries to enter new lines of activities then it may face a number of problems in production, marketing etc. where some concerns are already operating in different lines, they must have crossed many obstacles and difficulties. Amalgamation will bring together the experience of different persons in various activities. So amalgamation will be the best way of diversification.
6. Utilization of tax shield: When a company with accumulate losses merges with a profit making company it is able to utilize tax shields. A company having losses will not be able to set off losses against future profits, because it is not a profit making unit. On the other hand if it merges with a concern making profits then the accumulated losses of one unit will be set off against the future profits of the other unit. In this way the merger or amalgamation will enable the concern to avail tax benefits.
7. Increase in value: one of the main reasons of merger or amalgamation is the increaser in value of the merged company. The value of merged company is greater than the sum of the independent values of the merged company.
8. Elimination of competition: the merger or amalgamation of two or more companies will eliminate competition among them. The companies will be able to save their advertisement expenses thus enabling them to reduce their prices. The consumers will also benefit in the form of cheap or goods being available to them.
9. Better financial planning: the merged companies will be able to plan their resources in a better way. The collective finances of merged companies will be more and their utilization may be better than in the separate concerns. It may happen that one of the merging companies has short gestation period while the other has the longer gestation period. The profits of the company with short gestation period will be utilized to finance the other company. When the company with the longer gestation period starts eating profits then it will improve financial position as a whole.
10. Economic necessity: It may force the merger of some units. If there are two sick units, government may force their merger to improve their financial position and over all working .a sick unit may be required to merge with the healthy unit to insure better utilization of resources, improve and better management. Rehabilitation of sick units is asocial necessity because their closure may result in UN employment etc.
Advantages and Disadvantages of Amalgamation:
June 2006 was one of the busiest periods in amalgamation (merger) history. In a span of less than 100 hours, mergers and acquisitions totaling about $ 110 billion were finalized around the world in various industries. Amalgamation (merger) is the complete absorption of one firm by another. Amalgamation (merger) has its own pros and cons.
A primary advantage of the transaction is that amalgamation (merger) is legally simple and does not cost as much as other forms of acquisition. The reason is that the firms simply agree to combine their entire operations. Thus, for example, there is no need to transfer title to individual assets of the acquired firm to the acquiring firm.
Besides that, amalgamation also reduces the number of competition in the market and captures additional economic scales of the market. This will keep the company growth with the amalgamation of the competitive advantages of both firms.
Amalgamation also enables the company to restructuring and strengthening the organization as firms involved in the transaction share strategies to strengthen the organization, thus eliminate weaknesses in the firm. By the way, two heads are better than one.
After the amalgamation transaction took place, acquiring firm enables to make new investment with the surplus money available. Perhaps, the organization may invest in larger investment to yield more profit.
The transaction also allows the acquiring firm to gain more market share, thus results better confidence from its current customers as the firm seems more reliable. This also results increase of new customers and also attracts other parties to have relationships with the organization in loads of kinds.
Amalgamation also has its own disadvantages. One of the disadvantages is that amalgamation 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.
According to Julia Taggart, amalgamation can simplify group company structure. Some 41 companies amalgamated (or merged) in Bermuda during 2005. The amalgamation process is often used to simplify an unnecessarily complex group structure or to effect a “friendly” takeover of a company.
Of the 41 amalgamations, 34 involved exempted companies while seven related to local companies. (Source: Registrar of Companies).
The Companies Act 1981 (the “Act”) governs amalgamations, with the procedures required to amalgamate depending on the type of companies involved. The Act contemplates the amalgamation of: Bermuda registered companies; group companies; or Bermuda registered exempted companies with foreign corporations to form either a Bermuda exempted company or a foreign corporation that will continue and be registered outside Bermuda.
The time it takes to amalgamate will depend primarily on the type of companies involved. The more complex procedure is known as the Long Form Amalgamation, and is required in all cases where there is no common ownership between the amalgamating companies (i.e. the amalgamating companies are neither a holding and wholly-owned subsidiary company, nor wholly-owned subsidiaries).
Long Form Amalgamation requires (in addition to other documentation) an amalgamation agreement to be entered into between the amalgamating companies, and consent of both the Board of Directors and the Shareholders of the amalgamating companies. A Long Form Amalgamation can take approximately four to six weeks to complete.
An amalgamation agreement is necessary for a Long Form Amalgamation because the amalgamating companies may have different interests (e.g. share holdings) and it is necessary to determine and agree what will happen to the Shareholders’ interests as well as making provision for various other issues in the agreement.
The Act specifies certain matters that must be addressed in the amalgamation agreement, which include the following: how the shares of each company are to be converted into shares (or other securities) of the amalgamated company; what the holders of shares of a company will receive if the shares of their company are not converted into shares or securities in the amalgamated company; which of the amalgamating companies’ Bye-Laws are to apply, or if the Bye-laws are to be amended; and any other practical issues following the amalgamation including any management and operational considerations.
Short Form Amalgamations are permitted under the Act where there is common ownership between the amalgamating companies. The process for this type of amalgamation is simpler without the need for an amalgamation agreement or shareholder.
Conclusion:
An amalgamation in essence involves a blending of the business of one company with the business of one or more other companies to form an amalgamated company. The shareholders of each blending company become the shareholders in the amalgamated company. In that way two or more businesses are combined and the respective owners of those businesses continue to own them through the amalgamated company. Usually no cash changes hands. The respective owners of the businesses that are combined are each issued shares in the amalgamated company in proportion to their contribution to the amalgamated company’s assets. In other words the percentage shareholding each person gets in the amalgamated company is determined by the value of their business relative to the value of each other business with which it is combined in the amalgamated company. Mergers must form part of the business and corporate strategies aimed at cretin sustainable competitive advantage for the firm. Amalgamations are strategic decisions leading to the maximization of a company’s growth.
Bibliography
[1]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 transferor 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 conditions3.
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.
1. All the properties of amalgamating company(s) should vest with the amalgamated company after amalgamation.
2. All the liabilities of the amalgamating company(s) should vest with the amalgamated company after amalgamation.
3. 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.
[2] Consolidation is the process of maturation in some markets whereby smaller companies are acquired or run out of business, leaving only a few dominant players; here also called shakeout.
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