Definition
Amalgamation in finance refers to the process of combining two or more companies into one new entity, either by merging the companies or by completely absorbing one company by another. This strategic move is usually aimed at increasing business efficiencies, gaining a larger market share, or to achieve diversification. The resultant entity benefits from the combined assets, liabilities, and operational capacity of the individual organizations.
Key Takeaways
- Amalgamation is a financial strategy that involves the merging of two or more companies into a new entity. The smaller companies lose their identities and become part of the larger entity.
- Amalgamation can be beneficial for companies by potentially leading to cost synergies, resources optimization, business expansion, improved technology, and increased market share.
- However, the process of amalgamation can be complex and time-consuming. It involves numerous legal, financial, and administrative procedures which may affect the working of the companies involved.
Importance
Amalgamation is a significant term in finance as it pertains to the consolidation of two or more companies into a single entity.
This is typically done to leverage economies of scale, eliminate competition, diversify business operations, expand into new markets, or improve financial stability by combining resources and assets.
The process can have a profound impact on increasing efficiency, reducing costs, and boosting profitability.
Moreover, it often results in significant changes in the business landscape, impacting shareholders, employees, consumers and the dynamic of industry competition.
Therefore, understanding the concept of amalgamation is crucial in strategic financial management and corporate decision-making.
Explanation
Amalgamation, a key finance term, is denoted as a strategic move often pursued by corporations to amplify their market share, diversify product portfolio, achieve higher efficiency, expand into newer markets, or to facilitate economies of scale. Essentially, when two or more companies consolidate their business operations to form a larger business entity, we are looking at an amalgamation. This is carried out in order to reap the benefits of synergies that exist between the companies, offering them a competitive edge in the industry.
The concept is akin to a merger, however, the key difference lies in the formation of a new legal entity in the case of an amalgamation. The purpose of amalgamation is multi-fold. Apart from increased market access and customer base, it allows for reduction in competition.
Companies in a highly competitive market might want to amalgamate to avoid participation in cut-throat competition and maintain healthy profit margins. Additionally, by merging and forming a larger entity, companies can benefit from reduced costs of operations, increased efficiencies, and shared resources, all of which contribute to improved profitability and a solid footing in the market. Furthermore, amalgamation can also help in tax savings as the new entity can write off losses of the amalgamated company against its profits, leading to lower tax liability.
Examples of Amalgamation
Disney-Pixar Amalgamation: In 2006, The Walt Disney Company, a leading player in the entertainment industry, decided to acquire Pixar Animation Studios. This is often cited as an example of amalgamation as both companies shared a common business and by combining their resources, they were able to significantly enhance their content production and distribution capabilities.
Glaxo Wellcome-SmithKline Beecham Amalgamation: Pharmaceutical giants Glaxo Wellcome and SmithKline Beecham went through amalgamation in the year 2000 and formed the company GlaxoSmithKline. This amalgamation created one of the world’s largest pharmaceutical companies, with significantly increased research and development capabilities.
Exxon-Mobil Amalgamation: Oil companies Exxon and Mobil merged in a deal worth $
3 billion in 1999, forming the Exxon Mobil Corporation. This amalgamation resulted in the world’s largest publicly traded oil company, which allowed for increased economies of scale and operational efficiency.
FAQs on Amalgamation
What is Amalgamation?
Amalgamation is a process wherein two or more companies combine their businesses to form a new entity. It’s a strategic move for businesses looking to expand and diversify their operations, markets, and customer base.
What are the types of Amalgamation?
There are two types of Amalgamation: merger and consolidation. In a merger, one company absorbs the other company’s assets and liabilities, whereas in a consolidation, a new company is formed to take over the assets and liabilities of all the amalgamating companies.
What is the main purpose of Amalgamation?
The main purpose of Amalgamation is to achieve growth and expansion, reduce competition, diversify risk, and improve operational efficiency by attaining economies of scale.
What are the advantages of Amalgamation?
Amalgamation helps in acquiring new markets, increasing customer base, achieving economies of scale, and enhancing competitive strength. It can also lead to cost-effectiveness, better management, and increased financial power.
What are the disadvantages of Amalgamation?
The major disadvantages of Amalgamation include issues in synergy, valuation problems, potential culture clash between different organizations, and possible loss of original corporate cultures.
Related Entrepreneurship Terms
- Mergers and Acquisitions
- Consolidation
- Asset Pooling
- Corporate Restructuring
- Shareholder Value
Sources for More Information
- Investopedia: It is a trusted source for finance and investing terms. Detailed definition, explanation and examples related to Amalgamation can be found here.
- Accounting Tools: A great resource specifically for understanding accounting and finance terms.
- The Balance SMB: Provides personal finance information and small business resources which can further clarify the concept of Amalgamation.
- Corporate Finance Institute: Offers a wide range of financial analysis and modelling resources, apart from explanations to finance terms like Amalgamation.
