Meaning, Types, Limitations of Amalgamation

15th October 2021 0 By indiafreenotes

An amalgamation is a process of combining two or more companies to create a new company. The amalgamation is quite different from the merger, as all the companies involved in the process of amalgamation lose their previous identity to become a new entity. The newly formed entity holds the assets and liabilities of all combined companies.

Amalgamation is defined as the combination of one or more companies into a new entity. It includes:

  • Two or more companies join to form a new company
  • Absorption or blending of one by the other

Types of amalgamation

  1. The first type of amalgamation

The first type of amalgamation is a kind of amalgamation where all the companies involved in the amalgamation process combine their assets, liabilities, and shareholders’ interests. All the assets and liabilities of the transferor company became the assets and liabilities of the transferee company.

The shareholders of the transferee company become the transferor company holding a minimum of 90% face value of equity shares. In this type of amalgamation, no adjustments are made among the companies to book values.

  1. The second type of amalgamation

The second type of amalgamation is a kind of purchase of one company to buy the other company. That means, the larger companies buy the smaller company and all its assets. In this type of amalgamation, the transferor company doesn’t hold any share in the equity of the newly formed company after the amalgamation.

If the purchase considerations are higher than the Net Asset Value (NAV), then the increased value is referred to as goodwill. On the other hand, if purchase considerations are lower than the Net Asset Value, then the decreased amount is referred to as Capital Reserves.

Advantages of Amalgamation

  • R&D facilities are increased.
  • Operating cost can be reduced.
  • Competition between the companies gets eliminated.
  • Stability in the prices of the goods is maintained.
  • The controlled price of goods in the market.
  • Diversification can be achieved.
  • Amalgamation is one of the best ways when a company wants to expand its business.
  • The goodwill of a company increases in the market when it associates with a more prominent company.

Disadvantages:

  • Amalgamation sometimes eliminates the healthy competition in the market.
  • Amalgamation can also result in increased debt.
  • Companies taking part in amalgamation lose their identity, which affects the goodwill of the company and its products.
  • The monopoly achieved through amalgamation is not always healthy for the market.
  • The amalgamation of two or more companies results in the reduction of the number of employees. That means employees working in the companies become unemployed, which is not healthy for the economy.
  • The management of newly formed companies becomes very complicated.