Amalgamation of Companies: Concept, Objectives and Procedure
Concept of Amalgamation:
Amalgamation is the blending of two or more existing companies into one company. For example, if two existing companies say, X Ltd. and Y Ltd. go into liquidation to form a new company XY Ltd., it is a case of amalgamation.
The Institute of Chartered Accountants of India has issued Accounting Standard (AS-14): “Accounting for Amalgamation” which has come into force in respect of accounting periods commencing on or after 1.4.1995 and is mandatory in nature. With the issue of this standard the terms used earlier viz. amalgamation; absorption and external reconstruction have lost their distinction. It should be noted that amalgamation includes absorption and reconstruction.
Objectives of Amalgamation:
The main objective of amalgamation is to achieve synergetic benefits which arise, when two companies can achieve more in combination than when they are individual entities.
The other objectives of amalgamation are:
(i) To reap economies of scale
(ii) To eliminate competition
(iii) To build up goodwill
(iv) To reduce the degree of risk through diversification
(v) Managerial effectiveness.
Procedure of Amalgamation
The following procedure is followed in an amalgamation:
- The terms of amalgamation are finalized by the board of directors of the constituent companies.
- A scheme of amalgamation is prepared and submitted for approval to the respective High Court.
- Approval of the shareholders of the constituent companies is obtained.
- Approval of SEBI is obtained.
- A new company is formed (where necessary) and issues shares to the shareholders of the transferor company.
- The transferor company is liquidated and all assets and liabilities are taken over by the transferee company.
Types of Amalgamation:
For accounting purposes, AS-14 has categorized amalgamation into two:
- Amalgamation in the nature of merger.
- Amalgamation in the nature of purchase.
Amalgamation in the Nature of Merger:
An amalgamation is considered as ‘Amalgamation in the Nature of Merger’ if all the following five conditions are satisfied:
- All the assets and liabilities of the transferor company become the assets and liabilities of the transferee company after amalgamation.
- Shareholders holding not less than 90% of the face value of the equity shares of the transferor company (other than the equity shares already held therein, immediately before amalgamation, by the transferee company or its subsidiaries or their nominees) become equity shareholders of the transferee company by virtue of amalgamation.
- The consideration to the shareholders of the transferor company (who agree to become equity shareholders of the transferee company) is discharged by the transferee company wholly by issue of equity shares in the transferee company except that cash may be paid in respect of any fractional shares.
- The business of the transferor company is intended to be carried on, after the amalgamation, by the transferee company.
- No adjustment is intended to be made to the book values of the assets and liabilities of the transferor company when they are incorporated in the financial statements of the transferee company except to ensure uniformity of accounting policies.
Amalgamation in the Nature of Purchase:
An amalgamation is in the ‘Nature of Purchase’ if any one or more of the five conditions specified for Merger is not satisfied. In such kind of amalgamation shareholders of the company which is acquired normally do not continue to have a proportionate share in the equity of the combined company. The transferee company may also not intend to continue the business of Transferor Company.
Accounting for Amalgamation:
Accounting Standard AS-14 ‘Accounting for Amalgamation’ issued by the Institute of Chartered Accountants of India states the procedure for accounting for amalgamation.
AS-14 uses and defines the various terms as under:
(a) Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 1956 or any other statute which may be applicable to companies.
(b) Transferor Company means the company which is amalgamated into another company.
(c) Transferee Company means the company into which a transferor company is amalgamated.
(d) Reserve means portion of earnings, receipts or other surplus of an enterprise (whether capital or revenue) appropriated by the management for a general or a specific purpose other than a provision for depreciation or diminution in the value of assets or for known liability.
(e) Consideration for the amalgamation means the aggregate of the shares and other securities issued and the payment made in the form of cash or other assets by the transferee company to the shareholders of the transferor company.
Amalgamation in detail
What is Amalgamation?
Amalgamation is defined as the combination of one or more companies into a new entity. It includes:
- Two or more companies join to form a new company
- Absorption or blending of one by the other
Thereby, amalgamation includes absorption.
However, one should remember that Amalgamation as its name suggests, is nothing but two companies becoming one. On the other hand, Absorption is the process in which the one powerful company takes control over the weaker company.
Generally, Amalgamation is done between two or more companies engaged in the same line of activity or has some synergy in their operations. Again the companies may also combine for diversification of activities or for expansion of services
Transferor Company means the company which is amalgamated into another company; while Transferee Company means the company into which the transferor company is amalgamated.
|Existing companies A and B are wound up and a new company C is formed to take over the businesses of A and B||Amalgamation|
|Existing company A takes over the business of another existing company B which is wound up||Absorption|
|A New Company X is formed to take over the business of an existing company Y which is wound up.||External reconstruction|
How is Amalgamation different from a Merger?
Amalgamation is different from Merger because neither of the two companies under reference exists as a legal entity. Through the process of amalgamation a completely new entity is formed to have combined assets and liabilities of both the companies.
Types of Amalgamation
- Amalgamation in the nature of merger:
In this type of amalgamation, not only is the pooling of assets and liabilities is done but also of the shareholders’ interests and the businesses of these companies. In other words, all assets and liabilities of the transferor company become that of the transferee company. In this case, the business of the transferor company is intended to be carried on after the amalgamation. There are no adjustments intended to be made to the book values. The other conditions that need to be fulfilled include that the shareholders’ of the vendor company holding atleast 90% face value of equity shares become the shareholders’ of the vendee company.
- Amalgamation in the nature of purchase:
This method is considered when the conditions for the amalgamation in the nature of merger are not satisfied. Through this method, one company is acquired by another, and thereby the shareholders’ of the company which is acquired normally do not continue to have proportionate share in the equity of the combined company or the business of the company which is acquired is generally not intended to be continued.
If the purchase consideration exceeds the net assets value then the excess amount is recorded as the goodwill, while if it is less than the net assets value it is recorded as the capital reserves.
- To acquire cash resources
- Eliminate competition
- Tax savings
- Economies of large scale operations
- Increase shareholders value
- To reduce the degree of risk by diversification
- Managerial effectiveness
- To achieve growth and gain financially
Procedure for Amalgamation
- The terms of amalgamation are finalized by the board of directors of the amalgamating companies.
- A scheme of amalgamation is prepared and submitted for approval to the respective High Court.
- Approval of the shareholders’ of the constituent companies is obtained followed by approval of SEBI.
- A new company is formed and shares are issued to the shareholders’ of the transferor company.
- The transferor company is then liquidated and all the assets and liabilities are taken over by the transferee company.
Accounting of Amalgamation
- Pooling of Interests Method:
Through this accounting method, the assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts.
- Purchase Method:
In this method, the transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation.
Computation of purchase consideration: For computing purchase consideration, generally two methods are used:
- Purchase Consideration using net asset method: Total of assets taken over and this should be at fair values minus liabilities that are taken over at the agreed amounts.
|Agreed value of assets taken over||XXX|
|Less: Agreed value of liabilities taken over||XXX|
Agreed value means the amount at which the transferor company has agreed to sell and the transferee company has agreed to take over a particular asset or liability.
- Purchase consideration using payments method:Total of consideration paid to both equity and preference shareholders in various forms.
Example: A. Ltd takes over B. Ltd and for that it agreed to pay Rs 5,00,000 in cash. 4,00,000 equity shares of Rs 10 each fully paid up at an agreed value of Rs 15 per share. The Purchase consideration will be calculated as follows:
|4,00,000 equity shares of Rs10 fully paid up at Rs15 per share||60,00,000|
Advantages of Amalgamation
- Competition between the companies gets eliminated
- R&D facilities are increased
- Operating cost can be reduced
- Stability in the prices of the goods is maintained
Disadvantages of Amalgamation
- Amalgamation may lead to elimination of healthy competition
- Reduction of employees may take place
- There could be additional debt to pay
- Business combination could lead to monopoly in the market, which is not always positive
- The goodwill and identity of the old company is lost
Recently announced Amalgamation
One of the recent amalgamations announced on the corporate front is of PVR Ltd. Multiplex operator PVR Ltd has approved an amalgamation scheme between Bijli Holdings Pvt Ltd and itself to simplify PVR’s shareholding structure. As per the management, the purpose of the amalgamation is to simplify the shareholding structure of PVR and reduction of shareholding tiers. It also envisages demonstrating Bijli Holdings’ direct engagement with PVR. After the amalgamation, individual promoters will directly hold shares in PVR and there will be no change in the total promoters’ shareholding of PVR.
Other examples of Amalgamations
- Maruti Motors operating in India and Suzuki based in Japan amalgamated to form a new company called Maruti Suzuki (India) Limited.
- Gujarat Gas Ltd (GGL) is an amalgamation of Gujarat Gas Company Ltd (GGCL) and GSPC Gas.
- Satyam Computers and Tech Mahindra Ltd
- Tata Sons and the AIA group of Hongkong amalgamated to form Tata AIG Life Insurance.