What is amalgamation?
The term amalgamation is used most commonly in the business sector to define the combination of two or more companies to form a new entity. When a company “A” combines with company “B” to form Company “C”, generally known as amalgamation. In amalgamation, neither of the original companies continues to exist as a legal entity, i.e., they lose their legal persona.
The assets and liabilities of both companies become one, and they shall be jointly known as the assets and liabilities of the new entity. In accounting, amalgamation refers to the consolidation of financial statements. Amalgamation in corporate finance generally happens between two entities in the same line of companies.
For example, Maruti Motors and Suzuki amalgamated into Maruti Suzuki (India) Limited. Satyam computers and Tech Mahindra were amalgamated to form Mahindra Satyam. Vodafone amalgamated with Idea to form Vodafone Idea with the brand name ‘Vi”.
Advantages of amalgamation include:
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It could improve the financial condition of the two entities as it combines the assets and liabilities of both entities. The company’s financial condition will improve with the combined amount of assets.
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Through amalgamation, the new entity could diversify its activities or expand the range of services with the combined resources
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The new entity could compete better in the market and save many taxes through the combination of assets. The market share of both companies can substantially increase.
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Amalgamation enhances the economies of scale and can potentially improve the share value.
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It can reduce risks, increase cash resources, improve administration, and help achieve financial growth by combining resources and assets. The combination of resources can reduce the risk and increase cash resources. It can substantially improve the administration with the combined management, and it can substantially improve growth.
The disadvantages of amalgamation are as follows:
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It may result in a monopoly as more companies get amalgamated, which removes healthy competition in the market.
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It can increase the liabilities if one of the companies has more liabilities. This could result in a loss with the combined liabilities possibly exceeding the combined assets.
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It can result in the loss of jobs as the amalgamation of companies would result in surplus labour.
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Reduces consumer choices. The amalgamation of a few similar companies would result in fewer products, as the two companies won’t survive.