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What Is Amalgamation in Business?

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Last editedJul 20212 min read

Between mergers and acquisitions, there are multiple ways for businesses to join forces. Amalgamation is another term used to describe what happens when two or more businesses become a single entity. We’ll explore how amalgamation works below, as well as its potential benefits.

What is amalgamation?

Sometimes called consolidation, amalgamation carries a couple of different meanings depending on the context.

Amalgamation meaning in accounting: when two or more companies combine their financial statements
Amalgamation meaning in corporate finance: when two or more companies combine into a single, larger company

When two companies blend to form a new entity, this qualifies as amalgamation. In most cases, the two companies will engage in the same type of activity. However, sometimes companies will combine to diversify their business activities or expand into a new market.

How does Amalgamation work?

Amalgamations are closely related to mergers and acquisitions, all of which involve combining or consolidating multiple businesses. However, there are subtle differences between the three.

With an acquisition, the purchasing company buys out over 50% of the acquired company’s shares, giving them control over both organizations. Both companies can retain their business name and assets, but one controls the other. By contrast, in a merger the purchasing company buys another company’s assets, along with its brand identity and shares. The result is a single, merged company.

In an amalgamation, both pre-existing companies merge into a single entity, forming a completely new company. Neither of the old companies retain their former names and structure, instead consolidating assets to create something new.

Amalgamation examples in business

There are many amalgamation examples in the business world. When India’s Maruti Motors joined forces with Japan’s Suzuki, they formed a new, amalgamated company called Maruti Suzuki Limited. A second example would be when Tata Sons amalgamated with Hong Kong’s AIA group to form a new, separate company called Tata AIG Life Insurance.

Types of Amalgamation

There are two types of amalgamation, including merger and purchase methods. In both cases, the legal entity of the preexisting companies vanishes, replaced by a new company with combined assets and liabilities.

Merger method

With the merger amalgamation method, the two companies combine shareholder interests as well as assets and liabilities. No adjustments need to be made to book values for accounting purposes, and the company’s business can be carried on after the amalgamation is complete. The shareholders retain their equity, but it transfers to the new company.

Purchase method

The second type of amalgamation is the purchase method, which works a bit differently both in accounting and structure. With the purchase method, the amalgamation conditions for a merger aren’t met. One company acquires the other, but the shareholders in the acquired company don’t continue to hold proportionate equity in the newly formed company. The acquired company’s business doesn’t continue as it would with the merger method.

For accounting purposes, if the purchase value exceeds the net assets value, the difference should be recorded on the financial statements as goodwill. If the purchase price is less than the net assets value, it should be recorded as capital reserves.

What are the Advantages of Amalgamation?

There are several reasons why competing companies decide to merge their efforts together. Here are a few of the advantages:

Access to more affordable financing
Cost savings with greater bargaining power
Access to pooled technologies
Access to international markets
Access to wider client base
Reducing competition by joining forces
Tax savings
Increased shareholders value
Reduction of risk by diversifying offering

As you can see, the importance of amalgamation lies in the fact that it opens a wealth of new opportunities to competing companies. From cost savings to diverse markets, it’s worth considering whether amalgamation could be beneficial to your business.

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