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What Is Amalgamation?

mergers and acquisitions

In many mergers and acquisitions, one company takes over the business of another, and the second company ceases to exist as an organization. That's known as absorption. Sometimes, though, there are enough benefits associated with a completely new brand or legal entity that two companies combine to form an entirely new entity. That process is known as amalgamation.

None of the companies involved in an amalgamation survive as entities, which makes it very different from a merger or acquisition. In those cases, one of the organizations is intact, and, at the very least, the brand name remains in the marketplace. During an amalgamation, the employees, business and even shareholders for each entity might still retain positions and ownership, but it would be in the new organization.

Amalgamations aren't extremely common in the United States, though they can and do occur. They're much more common in countries such as India. An example of a highly successful amalgamation in the United States is Amalgamated Sugar, which produces the White Satin product line. The company was formed in 1902 when the Ogden Sugar Company and the Logan Sugar Company consolidated, and the resulting business entity is still viable today.

Types of Amalgamation

Two types of amalgamations exist: amalgamation in the nature of a merger and amalgamation in the nature of a purchase.

An amalgamation in the nature of a merger is a transaction that works more like a merger. One company (the transferee) absorbs the other company (the transferor) as the two entities pool shareholders' interests as well as assets and liabilities. It's a "what's yours is mine" approach, with the two companies marrying under a new name. The business of both companies continues to be carried out under the new organization, book values aren't adjusted, and shareholders of the transferor company that meet minimum requirements become shareholders in the new entity.

If any of those conditions aren't met, then it's not an amalgamation in the nature of a merger. Instead, it's more like a purchase made by the transferee company, though a new entity is still created. The shareholders of the transferee company become shareholders in the new entity, though the shareholders of the transferor company do not.

It may seem like splitting hairs, but one reason it's important to denote which type of amalgamation takes place is because they require different methods of accounting.

Why Do Companies Perform Amalgamation?

Companies consolidate for a variety of reasons. For example, a case can be made that the Ogden and Logan sugar companies merged under a new business in part to expand into other markets because Ogden wasn't successfully competing with the Utah Sugar Company at the time.

Aside from the need to expand into new markets, amalgamations might occur because:

  • One company needs the cash or resources of the other
  • Financial analysis indicates a lack of competition between the two entities would be good economically for both
  • A new business structure offers potential tax savings
  • The economy of scale associated with a larger operation could increase profits or provide other worthwhile benefits
  • It would be more effective to manage a consolidated company
  • Merging would lead to a diversified product line or business capability, reducing risks for both businesses
  • Growth is not as possible as individual entities

In some cases, amalgamation reduces operating costs and expands research and development capabilities. But it's not without disadvantages. Companies, particularly in the United States, must consider the necessity of healthy competition in the market and the oversight of monopoly laws prior to merging. They should also conduct a brand analysis to ensure they aren't losing more in goodwill and customer loyalty to the original brand than they gain in growth or profit due to the consolidation.

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