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 together to form a new entity C.
- It also includes Absorption. Absorption basically 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
This is said to be in nature of merger 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 nominees) 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 shares.
- 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 statements of the transferee company except to ensure uniformity of accounting policies.
Gature 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 benefits. Many times it takes place as a measure of tax planning.
- 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 future 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 board’s approval, consent of shareholders, filing various forms with ROC, informing the Stock Exchanges, 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 exists 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. Basically, pre-and-post amalgamation valuation is done and compared to know the value or worth. Now, valuation is altogether a very broad area which is a subjective exercise based upon numerous facts and assumptions.
- Next comes the deal which is 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 a very important 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 analysis 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 as well for the results the companies were expecting.
Problems of Amalgamation
- Though change is the law of nature. We all would agree with this point that changes are difficult and not easily welcomed by us, the same goes for mergers.
- There are cultural differences especially in 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 interesting 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 important for the reason that it involved a combination of two giants in the food industry.
- The merger helped in augmentation of annual sales and establishing the major 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 merger.
- 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 company.
- 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 the field of agriculture.
- The cost of the merger was approximately $130 billion. The merger is a kind of vertical merger.
Citicorp and Travelers Group
- This merger was meant to create one of the biggest mergers in the sector of financial services of banking, insurance and investment operations.
- This was done to bring various clients together who make use of the financial services and who are 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 arrive at the conclusion that mergers are dependent on various factors and there is a reason behind every merger. The activity of a merger is a long exercise wherein multiple courses of action have to be conducted to arrive at a decision 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 have to be taken at the post amalgamation stage. It should bring about the optimum utilization of resources. The companies have to continuously strive for continuous growth and development.