Amalgamation 101: The Ins and Outs
In the simplest terms, an amalgamation in business is the combination of two companies into one larger single company. In this sense, it has much in common with mergers and acquisitions, though the terms are not necessarily interchangeable in all cases. The basic differences are these:
In an acquisition, the combination of the two companies results in two companies coming out in the end–two surviving, separate entities. The acquiring company purchases more than 50% of the shares of the target company and both companies remain in business. While one company is owned by the other, both companies continue to operate and function as two separate organizations.
In a merger, the combination of two companies results in one company surviving in the end–the target company has been absorbed into the acquiring company, and they have merged into one company. The purchasing company buys the target company’s assets and those assets become part of the acquiring company’s assets.
In an amalgamation, the combination of two companies results in neither of the original companies surviving but the emergence of a new company that has the assets of both the target and acquiring company. Neither of the preexisting companies survives as they once were. It is a new entity.
Why Use an Amalgamation?
Amalgamations typically happen when there are two companies who operate in the same market space, either as competitors or as parallel operators, and there is a strategic advantage in joining the assets of both companies together into forming one single company that uses the best that both companies have to offer. Companies may combine to either diversify their activities or to expand their offered range of services.
The two companies are merging their assets, so the company that comes out as the combination of the two is a larger organization than the two previously existing companies. The target company (or transferor company–the weaker company) is absorbed into the stronger acquiring company (the transferee company), forming a company that is altogether new. This new entity has the assets of both the transferor and the transferee, giving it a larger customer base and more power.
Typically, an amalgamation takes place when a large entity takes over a small one, but sometimes equally-sized companies will amalgamate.
Types of Amalgamation
The first type of amalgamation, which is most similar to a merger, is when two companies pool together their assets and liabilities, along with their shareholder interests. All assets of the target company (the transferor) become absorbed by the acquirer (the transferee). No adjustments are made to the book value of the companies (an asset’s carrying value on a balance sheet), and the shareholders of the acquired company become shareholders of the acquirer’s company.
The second type of amalgamation is similar to a purchase. The target company is acquired by the purchaser, and shareholders of the transferor company do not get a proportionate share of the equity of the combined company. If the purchase consideration exceeds the net asset value, the excess is recorded as goodwill. If not, it is retained as capital reserves.
The Argument in Favor of Amalgamation
Amalgamation is a good way of acquiring resources–especially cash–eliminating competition and gaining economies of scale in your business. It may also increase shareholder value, reduce risks (especially of diversification), and help your company grow and become more profitable.
The Argument Against Amalgamation
The downside to amalgamation, ultimately, is that it can lead to a monopoly and anti-trust concerns. By amalgamating two or more similar businesses it can create a monolithic entity that can unfairly edge out the competition. It may also be bad for workers as it can make some jobs obsolete and force layoffs of duplicate positions. It also increases debt, as the two amalgamating companies are gaining the liabilities of both.
Virtual Data Rooms
Virtual Data Rooms (VDRs) are online, secure spaces where mergers and acquisitions (and amalgamations) can take place in a safe and secure environment without the unnecessary expense and hassle of having to travel between the acquiring company and the target company. In the case of an amalgamation, a VDR will allow the interested parties to gather together virtually and examine the sensitive financial documents that would have previously been under a literal lock and key, and now are available online in a highly protected, safe space that has just as much protection and clout as a brick-and-mortar data room–with all the ease of access of a smartphone or a tablet.