Amalgamation (Businesses) - Explained
What is an Amalgamation?
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Table of ContentsWhat is an Amalgamation?How does an Amalgamation Work?Types of AmalgamationPros and Cons of AmalgamationReference for AmalgamationAcademics research on Amalgamation
What is an Amalgamation?
Amalgamation is a consolidation of two entities to form a single entity. When two small businesses or companies are combined to form one, amalgamation has occurred. This is a little different from merger and acquisition in which an entity is buried into a bigger entity in the case of acquisition or two entities coming together but retaining the name of a stringer entity.
In amalgamation, the two combined entities survive as a legal entity, hence, the legal entity formed is a combination of the assets and liabilities of both companies. However, in recent times, mergers or consolidation are terms used in place of amalgamation.
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How does an Amalgamation Work?
Amalgamation is one of the ways of restructuring a corporate entity or companies, it refers to a combination or fusion of two separate to function as an entirely new company. This is done between two companies that perform similar business operations and compete in the same market and industry.
When two similar companies agree to come together to combine their assets and liabilities and expand their reach, amalgamation has occurred. Amalgamation can also occur in accounting, it is the consolidation of two accounts or accounts of two different entities. In this context, the financial statements of both entities are aggregated to form a consolidated financial statement. Amalgamation often results in the creation of a larger and stronger legal entity. Expansion of business and the ability to reach wider customers is another attribute of amalgamation.
Types of Amalgamation
There are two major types of amalgamation, one type of like a merger while the other type can be likened to a purchase. In the first type of amalgamation, the assets, liabilities, and shareholders of two companies are pooled together, however, one company is the transferee, while the other is the transferor.
Once all assets and liabilities of the transferee have been transferred to the transferor, the transferor continues business in its name and there is no adjustment to book values. In the latter type of amalgamation, a purchase occurs, in which a stronger company acquires a smaller or target company. The combined company is formed on the basis of purchase. Below are some important point you should know about amalgamation;
- Amalgamation refers to a combination of two entities to form a new legal entity. It is also referred to as merger or consolidation.
- The assets and liabilities of both entities are combined into one, forming an entirely new entity.
- There are two types of amalgamation, one is similar to a merger while the other is a purchase.
- In the merger, a smaller company is embedded into a bigger company and the name of the bigger company is retained after assets and liabilities have been merged. In a purchase, an acquirer purchases a target company.
- Amalgamation leads to the creation of a new entity with more assets, reduced liabilities and a stronger customer base.
Pros and Cons of Amalgamation
The pros of amalgamation are;
- Amalgamation can help to reduce or eliminate competition.
- It increases cash resources
- It reduces taxes on companies
- Amalgamation drives business growth, expansion, and financial gain.
- It reduces the level of risk and increases shareholders value.
The cons of amalgamation are;
- It can create a monopoly, especially if the competition is totally cut off in the market.
- It can cause a reduction workforce in which many employees lose their jobs.
- Amalgamation can lead to an increase in the new entity's debt load.
Amalgamation Procedure There are certain procedures that must be followed for an amalgamation to be successful. First, a plan for amalgamation must be submitted to the board of directors of each company.
The board must assent to the fusion of both entities before the amalgamation can be finalized. Also, a regulatory body such as the Securities Exchange Commission in the United Stated must receive a plan and also approve the shareholders of the new entity.
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