Meaning of Amalgamation of Business
When two businesses combine with each other to form a new entity, it is called an amalgamation of Businesses. The purpose of amalgamation is to take advantage of each other’s brand value, workforce strength, cash flows, and assets. It tends to provide a competitive advantage to businesses at large and help them chase wider competition in the market. It also helps businesses foster into market leaders and create a monopoly.
Businesses can take the advantage of financial synergies too. The literal meaning of synergy is to work together.
With amalgamation, companies can coordinate and innovate strategies, share know-how and exchange tangible resources.
Types of Amalgamation of Business
Amalgamation in the Nature of Merger
In this type, the resources of both transferor and transferee companies are pooled together to make one company. In this, the shareholder of the transfer company, who must hold 90% of the shareholding of his company, becomes a shareholder of the vendee company. The business of the transferee company is not hampered in any form and is continued.
Amalgamation in Nature of Purchase
In this, the transferor and transferee do not have an equal stake in the company. In this, one company acquires the other, and thus, they eventually end up starting a new business or closing the existing business.
Advantages of Amalgamation of Business
With amalgamation, the directorship of two companies is combined and they can take benefit of a collective board of directors and their respective decisions. The amalgamation also makes the shareholding pattern better with new managers and the workforce.
New people bring the experience they have absorbed from past jobs and employ that wisdom in current operations.
Thus, amalgamation pumps in a boost to management and shapes a new horizon for the working of the organization.
Amalgamation helps business share tangible assets and intangible resources. Free cash flows help in meeting the working capital deficit of the organization. Also, with expansion new job roles are assigned and people are promoted. This helps to diversify business and avoid duplication of efforts. Managers also get more time to focus on the exploration of newer avenues.
The expansion also brings in potential strategies for acquiring new business and reducing inter-unit competition in the market.
If one business possesses strong marketing skills while the other is rich in financial optimization, it would be a successful amalgamation where the new business can better network, grow and ace the market. With growth, there will be ease in production and assembling of larger manpower.
If one company is loss-making while the other is profit-making, the new business can take the tax benefit as the total tax liability of the company will reduce due to lower net profit.
Disadvantages of Amalgamation of Business
Increase in debt capacity
Every coin has two sides. Thus, with assets and resources, the amalgamation would also invite the exchange or combination of liabilities of the businesses. So, if one company is profit-making while another is loss-making then the profit which is stored for retention would now be used for paying the debts of the loss-making company.
Threat of Monopoly
If two companies amalgamate, there is a threat in the market amongst competitors concerning monopoly. If the new company tries to impose a monopoly then all other market players would be swiped off. The company would also freely create artificial demand and quote high prices to its consumers.
There would also be no choices left amongst consumers; compelling them to buy even at higher prices.
Threat to Employees
Amalgamation involves huge capital expenditure and operational cashflows which catches on the nerves of companies. This forces them to reduce their cost of production by either reducing fixed costs or variable costs. Most companies find “employee layoff” as the most feasible option for cost-cutting.
Employee layoff refers to the forceful suspension of employees to manage the cost to the company.