Nowadays, the deals of Merger and Amalgamation in India are increasing rapidly due to continuous change of dynamics, increased competition, technology adaption, business expansion and globalization. Therefore, every company opts for the process of merger to reap the benefits of associating with a large company.
Further, merger and amalgamation are often known as a single expression. However, there is significant differences between the two concepts.
As per the dictionary, ‘Merger’ is a combination of two or more companies that decide to merge and form a company. In contrast, ‘Amalgamation’ denotes the association of two or more independent companies into a single enterprise.
Further, a ‘Transferor Company’ means the company that proposes a merger, and a ‘Transferee Company’ means the company which is formed after the merger. However, in the case of amalgamation, Transferor Company is the ‘Amalgamating Company’ and Transferee Company is the ‘Amalgamated Companies
Why Companies Go For Amalgamation And Merger
- Diversification into multiple industries without going through hurdles of starting afresh
- To achieve the Economies of Scale for cost optimization, access to a larger market, effective utilization of resources, etc.
- To achieve Operational Synergy by targeting companies in the same industry similar product line.
- To achieve Growth targets in lesser time.
- The advantage in Taxation by combining a loss-making company with a profit-making company, thereby reducing the tax liabilities
- Reduced Competition in a specific industry by combining two entities
- To achieve Effective Financial Planning with a resultant entity having a bigger balance sheet and to utilize financial resources effectively.
- Increased Control Over Value Chain in a specific industry by way of forward integration
Difference Between Amalgamation And Merger
Because companies typically don’t want to join with their rivals, it often takes an outsider to put together an amalgamation. However, the surviving company is typically the one to take the lead in a merger and often doesn’t need an outside promoter.
When a merger happens, the culture and identity of the target company is lost and swallowed up in the surviving company. Amalgamation blends multiple companies together into a single entity that takes part of each company’s identity to create something new.
When companies merge, the assets and liabilities of the target company are joined with the assets and liabilities of the surviving company. Shareholders from both companies are merged with shareholders in the new company. During an amalgamation, shareholders of all companies involved receive new shares of the newly fused company.
Legal Identity Of Merger And Amalgamation
Parties to a merger lose their individual identities because a merger gives rise to a new entity. In an amalgamation, the company that acquires another retains its identity while the identity of the acquired company is dissolved.
Owners Of Shares Of Amalgamation
The shareholders of the companies who are parties to the merger become the shareholders of the new entity. On the other hand, the shareholders of the acquired company is added to the existing number of shareholders of the acquiring company in an amalgamation.
Types Of Mergers
There are five basic categories or types of mergers:
- Horizontal merger: A merger between companies that are in direct competition with each other in terms of product lines and markets
- Vertical merger: A merger between companies that are along the same supply chain (e.g., a retail company in the auto parts industry merges with a company that supplies raw materials for auto parts.)
- Market-extension merger: A merger between companies in different markets that sell similar products or services
- Product-extension merger: A merger between companies in the same markets that sell different but related products or services
- Conglomerate merger: A merger between companies in unrelated business activities (e.g., a clothing company buys a software company)
Key Difference Between Amalgamation And Merger
- There is a very fine difference as both processes are a way to a consolidation of multiple companies.
- Amalgamation is a type of consolidation processes used under a merger.
- Amalgamation results in the formation of an entirely new company. However, a merger is a consolidation process wherein the resultant company may be a new company or an existing company.
- Minimum two companies are involved in a merger; however, a minimum of three companies are required for the amalgamation process.
- The size of the companies involved in the amalgamation process is of a comparable level. However, the size of companies in the merger process is a different size as an absorbing company is expected to be relatively larger than the size of an absorbed company.
- Asset and liabilities of the existing entities in the amalgamation process are transferred to an entirely new entity. However, assets and liabilities of the absorbed entity in the merger process are consolidated into the absorbing entity.
- Shares of the absorbing company are given to shareholders of the absorbed company in the merger process. However, shares of the new entity formed in the process are given to the shareholders of the existing entities in the amalgamation process.
Both are the processes of consolidation of two or more companies into a new entity or an existing entity absorbing the target entity. In the process, a resulting entity may be a new entity, or it may be an existing entity. Amalgamation is a type of consolidation process under a merger.
In the amalgamation process, two company combines to form a new entity. And merger helps companies achieve their goals such as growth, increase in shareholders’ value, an increased economy of scale, synergy, access to larger market/new geographies, entry into a new industry, etc.
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