Definition of Amalgamation and Absorption
Amalgamation refers to the merging of two or more companies into a single new entity. It is a type of corporate restructuring where two or more companies combine their businesses to form a new company. The new company is created as a separate legal entity, with the merging companies losing their separate legal identities.
Absorption refers to the merger of one company into another, where the absorbed company is dissolved and ceases to exist as a separate entity. The absorbed company’s assets, liabilities and shareholders are transferred to the absorbing company. The absorbed company’s shareholders will typically receive shares in the absorbing company in exchange for their shares in the absorbed company. Unlike amalgamation, Absorption does not create a new legal entity but the absorbed company’s shareholders become shareholders of the absorbing company.
What is Amalgamation?
Amalgamation refers to the merging of two or more companies into a single new entity. It is a type of corporate restructuring where two or more companies combine their businesses to form a new company. The new company is created as a separate legal entity, with the merging companies losing their separate legal identities. The shareholders of the merging companies will typically become shareholders in the new company.
There are two types of amalgamation:
- Horizontal Amalgamation: This is when two or more companies that operate in the same industry or market sector merge to form a new company. The goal of a horizontal amalgamation is typically to increase market share and economies of scale.
- Vertical Amalgamation: This is when a company merges with a supplier or customer, creating a new company. The goal of a vertical amalgamation is typically to increase control over the supply chain or distribution channels.
Amalgamation can have several advantages such as:
- Economies of scale, which can lead to cost savings and improved competitiveness
- Increased market share and revenue
- Improved productivity and efficiency through the sharing of resources and expertise
However, amalgamation can also have disadvantages such as:
- Loss of competition, which can lead to reduced innovation and higher prices for consumers
- Increased concentration of economic power, which can lead to negative impacts on smaller businesses and suppliers
- Risk of cultural clashes and difficulty in integrating the operations of the merged companies.
It is important to note that Amalgamation require a legal process that include legal and financial audit, obtaining approvals from shareholders and regulatory agencies, It also include drafting of new articles of incorporation and bylaws.
What is Absorption?
Absorption is a type of corporate restructuring where one company (the absorbed company) is merged into another company (the absorbing company). The absorbed company is dissolved and ceases to exist as a separate legal entity. The absorbed company’s assets, liabilities, and shareholders are transferred to the absorbing company. The absorbed company’s shareholders will typically receive shares in the absorbing company in exchange for their shares in the absorbed company. The absorbing company will then assume all of the absorbed company’s assets, liabilities, and obligations.
There are two types of absorption:
- Forward Absorption: This is when a smaller company is absorbed by a larger company. This type of absorption is typically used when the larger company wishes to acquire the smaller company’s assets, customers, or technology.
- Reverse Absorption: This is when a larger company is absorbed by a smaller company. This type of absorption is typically used when the smaller company wishes to acquire the larger company’s assets, customers, or technology.
Absorption can have several advantages such as:
- Increased efficiency and productivity through the consolidation of resources and the elimination of duplicative functions
- Greater market share and revenue
- Improved competitiveness through the acquisition of new technologies or customer base.
However, absorption can also have disadvantages such as:
- Loss of autonomy for the absorbed company and its shareholders
- Reduced innovation as the absorbed company may lose its identity and culture
- Increased concentration of economic power, which can lead to negative impacts on smaller businesses and suppliers.
It is important to note that Absorption process is also legal, it may include obtaining approvals from shareholders and regulatory agencies, The absorbed company is dissolved and ceased to exist after the merger.
Difference Between Amalgamation and Absorption
Amalgamation and absorption are both types of corporate restructuring, but they have some key differences. These include:
Definition: Amalgamation refers to the merging of two or more companies into a single new entity, whereas absorption refers to the merger of one company into another.
Nature of the merger: In amalgamation, two or more companies merge to form a new legal entity, whereas in absorption, one company is dissolved and ceases to exist as a separate legal entity.
Legal Status: Amalgamation creates a new legal entity, whereas in absorption the absorbed company is dissolved and its legal status is transferred to the absorbing company.
Effects on Shareholders: In amalgamation, the shareholders of the merging companies will typically become shareholders in the new company, whereas in absorption, the absorbed company’s shareholders will typically receive shares in the absorbing company in exchange for their shares in the absorbed company.
Tax implications: The tax implications of amalgamation and absorption can be different and can vary by jurisdiction.
Control and Management: In an amalgamation, the new company is controlled by new board of directors and management, whereas in absorption, the absorbed company loses its autonomy and is controlled by the management of the absorbing company.
The process and legal requirements of both merger type can be different and can vary by jurisdiction as well. It is important to consider the legal and financial implications of both options before making a decision.
Different implications on the employees, clients, suppliers and other stakeholders might be different between the two options. It’s important to consider the implications and possible consequences of any merger on all stakeholders before making a decision.
Conclusion
Amalgamation and absorption are two types of corporate restructuring that companies can undertake to achieve different goals. Amalgamation is the merger of two or more companies into a single new entity, where shareholders of merging companies become shareholders in the new company. Absorption is the merger of one company into another, where the absorbed company is dissolved and ceases to exist as a separate entity. Both amalgamation and absorption have their own advantages and disadvantages, which can vary depending on the specific circumstances of the merger. It’s important for companies to carefully consider the implications of a merger and weigh the costs and benefits before making a decision. Factors to consider include the legal and financial implications, effects on shareholders, employees, customers, and suppliers, as well as the long-term strategic goals of the company. As well as, the specific process and legal requirements of each merger type can vary depending on jurisdiction.
