An amalgamation is the combination of two or more companies into an entirely new entity. In stark contrast to acquisitions, none of the companies involved in an amalgamation continue to exist as a separate legal entity. Instead, a completely new entity with the combined assets and liabilities of the former companies is formed.
The term has generally fallen out of popular use in the United States, replaced by terms like mergers or consolidations. Nevertheless, it remains a common practice in countries such as India.
Key Takeaways
- Amalgamation combines two or more companies into a new entity by merging their assets and liabilities.
- Unlike an acquisition, none of the original companies survive individually after an amalgamation.
- Benefits of amalgamation include increased cash resources, reduced competition, and potential tax savings.
- Potential downsides include the risk of monopoly, increased debt levels, and workforce reductions.
How Amalgamations Work
Amalgamations often occur between companies in the same industry or with similar operations. Typically, this process involves a larger company, known as the “transferee” company, merging with one or more smaller “transferor” companies. Once the terms are determined and approved by respective regulatory authorities, a new entity is born.
In India, for example, the High Court and Securities and Exchange Board of India (SEBI) must approve amalgamation plans. Canadian laws require approval from Corporations Canada and relevant provincial and territorial governments.
Once approved, the new entity can issue shares of stock in its own name.
The Pros and Cons of Amalgamations
Amalgamation offers multiple strategic advantages for businesses:
- Acquire cash resources: Increase financial reserves.
- Expand customer base: Reach new markets and clients.
- Reduce or eliminate competition: Gain a stronger market position.
- Achieve economies of scale: Reduce costs by streamlining operations.
- Save on taxes: Leverage tax benefits.
Moreover, amalgamation can increase shareholder value, diversify risk, improve managerial effectiveness, and make achieving financial and growth targets more feasible.
However, it presents notable risks:
- Risk of Monopoly: Excessive control over the market could invite regulatory scrutiny.
- Job Losses: Workforce reductions due to role redundancies.
- Increased Debt: Higher liabilities since the new entity assumes all existing debts.
Example of Amalgamation
In April 2022, telecom giant AT&T and Discovery, Inc. announced a deal to merge AT&T’s WarnerMedia business unit with Discovery. This led to the formation of a new entity, Warner Bros. Discovery Inc., which began trading on the Nasdaq stock exchange under the symbol WBD.
Amalgamation in Accounting
In accounting terms, amalgamations may also be referred to as consolidations. U.S. accounting standards mandate using the purchase method for such transactions, focusing on fair market values.
Amalgamation vs. Acquisition
In an amalgamation, companies combine their assets and liabilities to create a new entity. In contrast, an acquisition involves one company purchasing another, with no new entity formed. Acquisitions can occur without mutual agreement, known as a hostile takeover.
Various Objectives and Methods
The goal of amalgamation is to create a more competitive entity capable of achieving economies of scale. Accounting methods for amalgamation include the pooling-of-interests method and the purchase method, though the latter is more commonly mandated.
The Bottom Line
Amalgamations enable companies to combine and establish an entirely new entity. While the term is seldom used in the U.S. now, the practice is global. Beyond corporate settings, amalgamation can also refer to merging nonprofits or public sector organizations like government agencies or municipalities.
Related Terms: acquisition, merger, hostile takeover, economies of scale, diversification.
References
- IncomeTaxIndia.gov. “Definitions”.
- Government of Canada. “Amalgamation (Corporations)”.
- AT&T. “Discovery and AT&T Close WarnerMedia Transaction”.
- International Federation of Accountants (IFAC). “Introduction to IPSAS”.
