Definition of Amalgamation
In general, the definition of amalgamation can be stated as follows.
"Amalgamation is a union of two or more companies, made with an intention to form a new company."
In terms of finance, the definition of amalgamation can be given as under.
"Amalgamation is an agreement (deal) between two or more companies to consolidate (strengthen) their business activities by establishing a new company having a separate legal existence."
Image credits © Brad Ross.
Meaning of Amalgamation
Before we proceed to know, What is Amalgamation? First let's understand the meaning of two terms viz., 'amalgamating companies' and 'amalgamated company'. The meaning of these terms is as follows:
- Amalgamating companies are those two or more companies which willingly unite (combine) to carry on their business activities jointly.
- Amalgamated company is a newly formed union (alliance) of two or more amalgamating companies. It has a separate legal existence with a new unique name.
Now let's discuss the meaning of amalgamation with some examples.
To amalgamate means to unite or combine or blend. It is an act or process in which two or more things fuse together to form a new potent thing.
Amalgamation is an emerging trend of today's business world. It results in the formation of a new, strong, stable and large company. It also results in the growth and expansion of this newly formed company.
During amalgamation, two or more companies willingly come together to cooperate with each other and diversify (expand) their business activities.
After amalgamation, two or more companies dissolve (disintegrate) and lose their individual legal status (existence), hence they no longer exist anymore. However, they again re-establish themselves, but now jointly, by forming a new company having a unique name.
Thus, amalgamation results in the formation of a new (separate) company which has a unique name, logo, identity and existence.
The management of amalgamated company is led (directed) by members of two or more companies getting amalgamated.
Example of Amalgamation
Consider the example of amalgamation shown in the following diagram.
In the above example, Company 'A' and Company 'B' are operating (existing) in the market. Company 'A' is one amalgamating company while Company 'B' is another amalgamating company. Company 'A' and Company 'B' are getting amalgamated to form a new (separate) Company named 'AB'.
In this example of amalgamation, Company 'A' and Company 'B' will surrender all their equity shares (ownership shares) to the newly formed Amalgamated Company 'AB'. The assets and liabilities of Amalgamating Companies 'A' and 'B' will be transferred to Company 'AB'. The shareholders of the Company 'A' and Company 'B' will be given the shares of Company 'AB'. The amalgamating companies 'A' and 'B' will lose their individual existence (identity) and continue to operate jointly under the name of Company 'AB'.
Two good examples of amalgamations are as follows:
- Maruti Motors operating in India and Suzuki based in Japan amalgamated to form a new company called Maruti Suzuki (India) Limited.
- Tata Sons operating in India and AIA Group based in Hong Kong amalgamated to form a new company called TATA AIG Life Insurance.