What Is an Amalgamation?

What Is an Amalgamation?

Let me explain what an amalgamation is: it's the combination of two or more companies into an entirely new entity. You should know that amalgamations are distinct from acquisitions because none of the companies involved survive as legal entities.

Instead, a completely new entity emerges, carrying the combined assets and liabilities of the former companies.

The term amalgamation isn't as popular in the United States anymore; it's been replaced by terms like merger and consolidation, which can mean the same thing. However, it's still commonly used in places like India.

Key Takeaways

Here's what you need to remember: amalgamation combines two or more companies into a new entity, merging their assets and liabilities. This differs from an acquisition or takeover because none of the original companies survive.

It can help companies increase cash resources, reduce competition, save on taxes, and more. But it can also lead to a monopoly if too much competition is eliminated, raise the new entity's debt to a dangerous level, and cost some employees their jobs.

How Amalgamations Work

Amalgamations typically occur between two or more companies in the same line of business or with similar operations. Usually, a larger entity, called the 'transferee' company, absorbs one or more smaller 'transferor' companies before forming the new entity.

The terms are finalized by the board of directors of each company involved. They prepare the plan and submit it to regulators for approval.

Amalgamations in India

In India, approval comes from the High Court and the Securities and Exchange Board of India (SEBI). Indian tax law defines amalgamation broadly as the merger of one or more companies with another or the merger of two or more to form one company.

It calls the merging companies 'the amalgamating company or companies,' and the resulting company 'the amalgamated company.'

Amalgamations in Canada

In Canada, amalgamations need approval from Corporations Canada and the relevant provincial and territorial governments. Canada defines it as when two or more corporations, known as predecessor corporations, combine to form a new successor corporation.

Once approved, the new company becomes a legal entity and can issue shares in its own name.

The Pros and Cons of Amalgamations

Let me break down the advantages: amalgamation allows businesses to acquire cash resources, reach a broader customer base, reduce or eliminate competition, gain market leverage, save on taxes, and achieve economies of scale.

It may also increase shareholder value, reduce risk through diversification, and improve managerial effectiveness. The new company can achieve financial results and growth that would have been harder for the separate predecessors.

On the downside, eliminating too much competition can create a monopoly, which troubles consumers and the market, potentially leading to government intervention.

It may also lead to job losses in the new company because positions become redundant. Additionally, it can increase debt, possibly to a dangerous level, as the new entity assumes all liabilities from the involved companies.

Example of Amalgamation

Take this example: In April 2022, telecom giant AT&T and television entertainment company Discovery, Inc. finalized a deal to combine AT&T's WarnerMedia business unit with Discovery.

That month, a new entity called Warner Bros. Discovery Inc. began trading on the Nasdaq under the symbol WBD. WarnerMedia and Discovery, Inc. ceased to exist.

Fast Fact

In accounting, amalgamations may also be referred to as consolidations.

Amalgamation vs. Acquisition

As I've explained, in an amalgamation, two or more companies combine assets and liabilities to form a new company. In contrast, an acquisition involves one company purchasing another, usually by buying its stock, and taking on its assets and liabilities without creating a new company.

Amalgamations are typically voluntary, while acquisitions can be hostile takeovers without the acquired company's assent.

What Is the Objective of an Amalgamation?

Generally, the objective is to create a unique entity that competes more effectively in the marketplace and achieves economies of scale. It's similar to acquisitions and other growth strategies in that respect.

What Are the Methods of Accounting for Amalgamation?

There are two primary methods in some countries: the pooling-of-interests method using book values, and the purchase method using fair market values. In the U.S., the Financial Accounting Standards Board (FASB) ended the pooling-of-interests method in 2001, requiring the purchase method. In 2007, FASB adopted the purchase acquisition accounting method.

What Is an Amalgamation Reserve in Accounting?

The amalgamation reserve is the amount of cash available to the new entity after completion. If negative, it's booked as goodwill.

The Bottom Line

Amalgamations are one way companies join forces to create a new company. Though the term is rare in the U.S., the practice continues there and worldwide. It can also apply to combining nonprofits, government agencies, or municipalities into a single entity.