What is Amalgamation?
Amalgamation is the consolidation or combination of two or more companies known as the amalgamating companies usually the companies that operate in the same or similar line of business to form a completely new company known as the amalgamated company with new legal existence but same existing shareholders and assets & liabilities.
To start with the basics, the most commonly adopted definition is
- Amalgamation is a combination of two or more companies into a new entity. Company A and B combine to form a new entity, C.
- It also includes Absorption. Absorption means that company A takes over company B, and the B is wound up.
The two most commonly used terms in amalgamation while referring to the companies are ‘transferor company’ and ‘transferee company.’
The transferor company is the amalgamating company, and the transferee company is the amalgamated company.
Types of Amalgamation
Nature of merger
It is said to be in nature of mergerMergerMerger refers to a strategic process whereby two or more companies mutually form a new single legal venture. For example, in 2015, ketchup maker H.J. Heinz Co and Kraft Foods Group Inc merged their business to become Kraft Heinz Company, a leading global food and beverage firm. on the satisfaction of the following five conditions:
- All the assets and liabilities of the transferor company become, after amalgamation, the assets and liabilities of the transferee company.
- Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their nomineesNomineesA nominee is an individual or entity that under financial terms gains access to assets and securities, including bank deposits, real property, and stocks, on behalf of the original owner. While serving as a trustee or guardian to safeguard assets in the absence of the actual owner, the designated party gets powers to conduct financial transactions. ) become equity shareholders of the transferee company by virtue of the amalgamation.
- The consideration for the receivable by those equity shareholders of the transferor company who agree to become equity shareholders of the transferee company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional sharesFractional SharesFractional share refers to just a part of equity stock which doesn't amount to a single stock unit. Such shares are acquired after stock splits, merger or acquisition, dividend reinvestments, capital gains and dollar-cost averaging. The shareholders cannot sell these stocks in the open market..
- The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.
- No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. of the transferee company except to ensure uniformity of accounting policies.
Nature of the purchase
If any of the above conditions are not met, then it is said to be in the nature of the purchase.
Need for amalgamation
- It helps in availing of various tax benefitsTax BenefitsTax benefits refer to the credit that a business receives on its tax liability for complying with a norm proposed by the government. The advantage is either credited back to the company after paying its regular taxation amount or deducted when paying the tax liability in the first place.. Many times it takes place as a measure of tax planningTax PlanningTax planning is the process of minimizing the tax liability by making the best use of all available deductions, allowances, rebates, thresholds, and so on as permitted by income tax laws and rules imposed by a country's government. It contributes to better cash flow and liquidity management for taxpayers, as well as better retirement plans and investment opportunities..
- By uniting through the way of amalgamation, companies take advantage of large economies of scale.
- It also helps in the elimination of competition amongst a similar group of industries. Sometimes, it also helps in the creation of a monopoly in the market.
- It is always viewed as an icon of growth; it generally increases the value of the companies.
- It carries prospects of financial and capital- growth & development.
- It provides synergy benefits. In simple terms, it means the benefits derived due to the combination.
Process of Amalgamation
During the entire process, one has to take care of the various set of laws, rules, regulations, legislations, etc. The applicability of different laws changes from case to case. Every case has to be considered separately for determining the ambit of the applicable laws. Also, it varies from country to country. For eg.: In India, Company Law, SEBI Law, RBI Rules & Regulations, FEMA, Income Tax Law, etc. has to be followed. These laws provide a legal framework for all the activities carried out under the scheme of amalgamation. Drafting the scheme of amalgamation, conducting board meetings, getting the board’s approval, consent of shareholders, filing various forms with ROC, informing the Stock ExchangesStock ExchangesStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ., Advertisements in newspapers, etc. are few of the legal steps involved. Everything needs to be done within the legal horizons of the respective countries.
- Due diligence is conducted for the corporate restructuring reforms like amalgamation, which gives a fair idea about the deals are viable or not. It considers various aspects and so there exist different kinds of due diligence such as financial due diligence, legal due diligence, operational due diligence, etc.
- Valuation is done for the businesses which are getting amalgamated. Pre-and-post amalgamation valuation is done and compared to know the value or worth. Now, valuation is altogether a vast area, which is a subjective exercise based upon numerous facts and assumptions.
- Next comes the deal presented by one to the other/(s), which intends to get amalgamated. The structuring of this deal is a tedious task. Many negotiations take place in the process of amalgamation. Negotiation is also an essential skill as it is very much required to come upon a successful conclusion and finalization of the deal.
- The costs are very high, so one needs to conduct a CBA analysisCBA AnalysisCost-benefit analysis is the technique used by the companies to arrive at a critical decision after working out the potential returns of a particular action and considering its overall costs. Some of these models include Net Present Value, Benefit-Cost Ratio etc. before entering into any amalgamation. The sharing or bearing of such costs has to be decided in advance.
- Finally, a legal agreement is signed between parties for amalgamation. The real test starts after the commencement. The successful deal should not confine itself only to papers, but the post amalgamation operations should work for the results the companies were expecting.
Problems of Amalgamation
- Though change is the law of nature, we all would agree that changes are complicated and not easily welcomed by us; the same goes for mergers.
- There are cultural differences, especially in the case of cross border merger. People don’t work in harmony; there are signs of discontentment.
- It is not possible every time that one gets a win-win situation out of amalgamations. One has to be ever ready for facing trials and tribulations.
- The attitude of the management is not always friendly; the hostile kind of attitude of the management is a sign of danger.
Examples of Amalgamation in Recent Times
Heinz and Kraft Foods
- The most exciting merger to study for many of us is Heinz and Kraft’s food, wondering why? Because we love food, don’t we? Apart from this, the following are some noteworthy points w.r.t this merger-
- This merger was vital because it involved a combination of two giants in the food industry.
- The merger helped in augmentation of annual sales and establishing a significant market share in the world and, more specifically, in the United States.
- The synergy benefits were expected out of the merger in the form of International Growth and economies of scale.
- Cost savings were expected as a result of combined operations. Different strategies were adopted to cut costs.
- The cost of the merger was approximately $42 billion. The merger was a horizontal mergerHorizontal MergerHorizontal mergers take place when two companies in the same industry merge. Typically, industry competitors seek such mergers for a variety of reasons, including increasing market share, achieving economies of scale, lowering competition, and so on..
- The Toyota mergers are particular kinds of mergers, the unique kind of feature observed in their mergers is that they believe in expansion through internal means.
- Mergers took place between two subsidiaries of the same parent companyParent CompanyA holding company is a company that owns the majority voting shares of another company (subsidiary company). This company also generally controls the management of that company, as well as directs the subsidiary's directions and policies..
- The motive behind this kind of mergers is the improvement of internal processes, utilizing the strengths of each other, and strengthening communication.
E-Bay and Paypal
- The reason behind this E-Bay and Paypal merger was a dependency on each other.
- The Paypal was dependent on E-bay for the majority of its income.
- The payment businesses are dependent on the volume of transactions & the Paypal was dependent on E-bay for this volume.
- This merger could not continue for a long, and again E-bay and Paypal parted their ways approximately after 12 years of its unity.
- The cost of the merger was approximately $1.5 billion.
Dow Chemical & Dupont
- This merger took place because the investors wanted to have a better-diversified portfolio for their investments.
- The Dupont was into the seeds industry, and the Dow was into the chemicals industry.
- A merger of these rare industries was strategically planned to achieve the best position in agriculture.
- The cost of the merger was approximately $130 billion. The merger is a kind of vertical mergerVertical MergerA vertical Merger is the combination of 2 or more business units operating at different production stages of the same supply chain for a common product or service. It often occurs between the product manufacturer & its raw material supplier. .
Citicorp and Travelers Group
- This merger was meant to create one of the most significant mergers in the sector of financial services of banking, insurance, and investment operations.
- It was done to bring various clients together who make use of the financial services and keen to invest in the markets. This move would increase its client base on individual levels.
- Through this measure, the investment products were made available to all kinds of customers.
- The cost of the merger was approximately $140 billion.
In a nutshell, we can conclude that mergers are dependent on various factors, and there is a reason behind every merger. The activity of a merger is an extended exercise wherein multiple courses of action have to be conducted to decide whether the merger will be fruitful or not. The work doesn’t end when the two companies get amalgamated, but a new journey starts from this very point. To make this a sure shot of success, efforts must be taken at the post amalgamation stage. It should bring about the optimum utilization of resources. The companies have to strive for growth and development continuously.