What are the Advantages of Amalgamation?
The ten principal advantages of amalgamation are depicted below.
The main benefits or advantages of amalgamation are as follows:
- Operating economics.
- Financial economics.
- Managerial effectiveness.
- Helps to face competition.
- Revival of sick units.
- Tax advantages.
- Increase in market share.
- Increases goodwill.
- Miscellaneous advantages.
Now let's discuss each advantage of amalgamation one by one.
1. Operating economics
Operating economics means expenses associated with business and its allied activities. These expenses are required to carry on day-to-day activities of the business. These generally include fixed cost and variable cost.
When companies amalgamate, their business operation expands. Such expansion helps them to use and manage the economies of large-scale production and distribution.
Under operating economies:
- Amalgamated companies optimally utilize their production and distribution capacity.
- They also manage to reduce operating cost, management cost, personnel cost, etc.
Hence, based on above discussion, we can say that, amalgamation results in operating economics.
Diversification means to have presence (establishment) in different business ventures, which are not related to each other.
An amalgamated company diversifies into new business ventures because of following main reasons:
- It has enough strength to handle the risks of diversification.
- It also has ample financial resources at its stake to diversify.
3. Financial economics
Financial economics means expenses associated with the acquisition of funds required to run the business. This covers long-term and short-term monetary obligations.
Under financial economies:
- An amalgamated company can get tax benefits, especially, when a loss-making company amalgamates with a profit-making company.
- It can borrow more funds from the market at lower rate of interest.
Thus, in short, amalgamation helps in achieving financial economics.
Generally, business operations of an amalgamated company grow faster than individual companies.
This growth is possible due to the following main reasons:
- An amalgamated company can face competition more effectively.
- It can share past experiences as and when required.
- It can also take maximum advantage of joint expansion plans.
5. Managerial effectiveness
Managerial effectiveness is a manager's skill to attain the desired outcome in the business operations.
An amalgamated company improves its managerial effectiveness by:
- Replacing ineffective management team with an effective and efficient management team.
- Mandating managers to share their past work-experiences in the best interest of the company as and when required.
6. Helps to face competition
Amalgamation inculcates business strategies that help to face market competition with ease and confidence.
Due to economies of large-scale production and distribution, the amalgamated companies are able to:
- Produce better and affordable quality goods and services.
- Sell such goods and services at competitive prices to sustain in the market.
7. Revival of sick units
Amalgamation contributes in curing sick industrial units. This can be achieved by:
- Amalgamating loss-bearing companies with the profit-making companies.
- Restarting the earlier shutdown companies.
Thus, amalgamation helps to alleviate the problem of industrial sickness.
8. Tax advantages
- When one of the amalgamated companies has accumulated business losses.
- When one of the amalgamated companies enjoys a subsidized rate of taxation.
In such a case, it will result in large tax savings for the amalgamated company.
9. Increase in market share
Amalgamation helps to increase the market share of the amalgamated-company. This can be achieved by:
- Increasing the combined sales of the amalgamated companies.
- Increasing the market presence (establishments) of the amalgamated company.
10. Increases goodwill
Amalgamation creates goodwill in the market. Most amalgamations happened in the global market have increased the goodwill of the amalgamating company.
11. Miscellaneous advantages
Miscellaneous advantages of amalgamation are listed as follows:
- Amalgamation helps to reduce competition among the companies operating in the same industry.
- It helps to increase the market price of the shares of the amalgamated company.
- It promotes the brand value of the amalgamated company.
- It results in yielding synergy (joint co-operation) gains (additional profit) to the amalgamated company.