Introduction: In modern years, business houses combined with each other to obtain economics of large-scale production or to control prices and to avoid combination. Thus, the combination or merger may take the form of amalgamation or absorption.
Amalgamation of Companies:
Definition:
The term “Amalgamation” is used when two or more existing companies goes into liquidation and a new company is formed to take over their business. The distinction features of amalgamation are:
1) The companies, which are merged together, goes into liquidation.
2) A new company is formed to take over the business of the existing companies, which have gone into liquidation.
The exiting companies are called “Amalgamating companies” and the new is so formed is called “Amalgamated company”.
Example:
If a new company AB Ltd is formed to take over the business of two existing companies A Ltd and B Ltd, it is a case of amalgamation. The existing companies A Ltd and B Ltd will lose their separate legal entity as soon as they are merged into new company AB Ltd.
Absorption of Companies:
When an existing company takes over the business of another existing company it is known as “Absorption”.
Thus the distractive features of absorption are:
i) No new company is required to be formed to take over the business of existing company or companies.
ii) Only the absorbed company or companies go into liquidation while the absorbing company continuous its legal entity.
The company which goes into liquidation is called absorbed company and the company which purchase the business is called absorbing company.
Example:
If the business of an existing company B Ltd is absorbed by another existing company A Ltd, it is a case of absorption. In this case, B Ltd, goes into liquidation while A Ltd continuous its legal entity.
Classification of Amalgamation:
There are generally three common ways in which companies can amalgamate together to gain advantage in their market. They are as under:
Horizontal: It is an amalgamation that takes place between two companies in the same line of business; for example, when a tea company amalgamates with another tea company. The main purpose of horizontal amalgamation is the acquisition of a competitor, by their companies, in the same line of business, which increases the market share and reduces competition in one stroke.
Vertical: It is an amalgamation that takes place when a company amalgamates with a supplier or a customer. Both strengthen the amalgamated company’s competitive position and may enable it to diversity.
Conglomerate: Conglomerate is a diversified group of companies. In a conglomerate amalgamation, the amalgamating companies are in totally unrelated lines of business.
No comments