Amalgamation

Amalgamation

Combining two or more businesses into one new entity is an amalgamation. A merger and an amalgamation differ because neither business exists as a separate legal entity. Amalgamation is a tactic organisations use to lessen internal competition and increase the range of their product offerings. Benefits accrue to both the acquirer and the acquired businesses. It is a suitable corporate restructuring technique to effect positive transformation and create a competitive business environment. 

What is an amalgamation? 

Amalgamation is the process of joining two or more companies to create a single, sizable organisation. Two distinct divisions combine to form a completely new company through the process. The merger enables the enterprises to function jointly following their areas of specialisation and creates an independent new organisation. 

Unlike a typical merger, this one ends in the demise of both businesses. As a result of the stronger transferor firm being absorbed by the weaker transferee company, a new company with more resources and a wider customer base is formed. Combinations can increase financial resources, eliminate competitors, and lower company tax obligations. 

Understanding amalgamations 

In addition to transfers of businesses and/or shares, Singapore-incorporated companies seeking to restructure or justify their company structure should be aware of the possibility of completing an amalgamation in accordance with the Companies Act (Chapter 50 of Singapore) (the “Act”). 

The Act allows for several different amalgamations. A court order can be necessary, depending on the situation. However, the purpose of this note is to discuss solely the amalgamation procedures under the Act that do not require a court order, referred to as “voluntary amalgamations”, and the concerns to consider while completing such activity. 

Amalgamations sometimes involve two or more companies with some operational overlap or operations in the same economic sector. Businesses may merge to diversify their operations or increase the scope of their services. Investment bankers, attorneys, accountants, and executives from each joining company are often needed for an amalgamation.

The bankers often conduct detailed financial modelling and appraisal to assess the proposed transaction and advise the individual firms. As neither of the two corporations are independent legal entities, amalgamation differs from a merger. An entirely new entity with the merged assets and liabilities of the two companies is created through the amalgamation procedure. 

Pros and cons of amalgamations 

The amalgamation process includes benefits and drawbacks like any other corporate or financial procedure. All parties involved in the amalgamation process must fully comprehend the process, including all its pros and cons. 

The pros of amalgamation are: 

• The companies no longer compete with one another. 
• Reduced operating costs are possible. 

• The prices of the products remain stable. 
• R&D facilities can expand. 

The cons of amalgamation are: 

• Healthy competition could be eliminated as a result of amalgamation. 

• The former business no longer has its reputation or identity. 
• There can be more debt to repay. 
• Combining businesses risks creating a monopoly, which is not always advantageous. 
• The number of employees is reduced. 

Types of amalgamation 

Merger and purchase procedures are two different forms of amalgamation. In both situations, a new company with consolidated assets and liabilities replaces the old firms’ legal entities. 

• Merger  

The two businesses merge their shareholder assets, liabilities and interests using the merger amalgamation procedure. When the merger is completed, the company’s operations can continue without requiring revisions to book values for accounting purposes. Although the equity belongs to the new company, the shareholders retain ownership. 

• Purchase  

The purchase approach operates differently in terms of structure and accounting. It does not satisfy the amalgamation requirements for a merger. The shareholders of the purchased company do not retain a proportionate ownership stake in the newly created company, even when one company purchases the other. The business of the acquired firm does not remain as it would under the merger procedure. 

Example of amalgamation 

Amalgamations can be understood through the following example. Some mergers are well received, while others draw ire and give rise to legal issues. The two biggest grocery chains in the United States, Kroger and Albertsons, are one such merger tha received a lot of attention. Given that the top two grocery stores in the nation intended to join, the anticipated merger was likely create a monopoly in the food sector. 

Another example that we can look at is the new company known as ArcelorMittal which was created via the amalgamation of two companies, Mittal Steel and Arcelor. In the process, the Arcelor Group and  Mittal Steel both lost their identities. 

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