What Is an Amalgamation? – Definition & Detailed Explanation

An amalgamation is the joining of two or more businesses to form a new entity. Amalgamation differs from merger in that neither company survives as a legal entity. Instead, a completely new entity is formed to house both companies’ combined assets and liabilities.

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Key Takeaways

• Amalgamation is the merger of two or more companies into a single new entity by combining their assets and liabilities
• In contrast to a traditional merger, neither of the two companies involved survives as a separate entity
• The transferor company is absorbed by the stronger, transferee company, resulting in a stronger entity with more assets and a larger customer base
• Amalgamation can help businesses increase their cash resources, eliminate competition, and save money on taxes
• However, if too much competition is eliminated, the workforce is reduced, and the new entity’s debt load is increased, it can result in a monopoly.

Understanding Amalgamations

Amalgamation typically occurs between two or more companies engaged in the same line of business or that share some operational similarities. Companies may merge to diversify their activities or to broaden their service offerings.

An amalgamation occurs when two or more companies merge, resulting in the formation of a larger entity. The weaker transferor company is absorbed by the stronger transferee company, resulting in the formation of an entirely new company. This results in a stronger and larger customer base, as well as more assets for the newly formed entity.

The Pros and Cons of Amalgamations

Amalgamation is a method of acquiring cash resources, eliminating competition, reducing taxes. Or influencing the economies of large-scale operations. Amalgamation may also boost shareholder value, reduce risk through diversification, boost managerial effectiveness, and aid in company growth and financial gain.

On the other hand, if too much competition is eliminated, can be problematic for consumers and the marketplace. It may also result in a reduction in the new company’s workforce because some jobs are duplicated, rendering some employees obsolete. It also increases debt because, by combining the two companies, the new entity assumes the liabilities of both.

Pros

• Can boost competitiveness
• Taxes may be reduced
• Boosts economies of scale
• Possibility of increasing shareholder value
• Increases the firm’s diversification

Cons

• A monopolistic firm may amass an excessive amount of power
• Can result in job losses
• Increases the company’s debt load

Amalgamation Procedure

The board of directors of each company finalises the terms of the merger. The plan has been completed and submitted for approval. When a plan is submitted, the High Court and the Securities and Exchange Board of India (SEBI) must approve the shareholders of the new company.

The new company becomes an entity and issues shares to the transferor company’s shareholders. The transferor company is liquidated, and the transferee company assumes all assets and liabilities.

Example of Amalgamation

It was announced in late 2021 that media companies Time Warner and Discovery, Inc. would merge in a $43 billion deal.

AT&T’s Time Warner (which the telecom company purchased in 2018) would be spun off and merged with Discovery. The new company, known as Warner Bros. Discovery, Inc., is set to be formed in late 2022 and will be led by Discovery CEO David Zaslav.

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