Amalgamation

Amalgamation is the combination of two or more companies into a single legal entity. It can take two forms: the companies may merge into a brand-new company, with the original companies ceasing to exist, or one company may absorb the others, which are then dissolved. In both cases the assets, liabilities and businesses of the combining companies come together, and their shareholders typically receive shares in the combined entity.

The word is used most often in the law and accounting of India, Canada, the United Kingdom, New Zealand and other Commonwealth countries. In the United States and many other places the same transaction would usually be called a merger or consolidation. Amalgamation is a subset of mergers and acquisitions, but it differs from an acquisition, in which the buyer takes control of a target that often continues to exist as a subsidiary.

Picture two small clubs in the same town that both struggle to fill their pitches. Instead of one buying the other, they agree to combine into a single new club with one set of members, one bank account and one set of rules. The old clubs close, and everyone becomes a member of the new one. That is an amalgamation.

Sometimes one club keeps its name and simply welcomes the other's members and kit. The result is still one club instead of two. In company terms, the important point is that the businesses become one legal body, rather than one owning the other.

• Amalgamation by formation. A new company is created; the transferor companies transfer everything to it and are dissolved.
• Amalgamation by absorption. An existing company absorbs one or more others, which are dissolved.
• In the nature of merger. In Indian accounting terms, a genuine pooling in which nearly all shareholders continue and the businesses carry on, historically recorded at book value.
• In the nature of purchase. A combination that is effectively an acquisition, recorded at fair value with any excess paid recognised as goodwill.

Amalgamations usually require court or tribunal approval to protect shareholders and creditors. In India, schemes of amalgamation are governed by sections 230 to 232 of the Companies Act, 2013 and approved by the National Company Law Tribunal after meetings of shareholders and creditors. Canadian corporate statutes allow both long-form amalgamations, approved by shareholders, and short-form amalgamations between a parent and its wholly owned subsidiaries. A typical process includes board approval of a scheme, valuation reports to set the share exchange ratio, due diligence, filings with regulators, shareholder and creditor meetings, and final approval. Large combinations may also need clearance from competition authorities under antitrust law.

Accounting for amalgamations has moved towards the acquisition method used for business combinations worldwide. Under IFRS 3, and Ind AS 103 in India, one entity is identified as the acquirer and the others' identifiable assets and liabilities are measured at fair value, with goodwill recognised for any excess consideration. The older pooling-of-interests approach, which combined book values without restatement, is now generally limited to combinations of entities under common control. The combined company then prepares a single set of accounts rather than consolidated financial statements for a group.

Banking systems use amalgamation to strengthen weak institutions or to create larger lenders. In India, the government amalgamated ten public sector banks into four in April 2020, after earlier combining State Bank of India with its associate banks in 2017. Credit unions and building societies commonly amalgamate to gain scale, because their mutual ownership makes acquisitions in the usual sense difficult. Regulators sometimes order the amalgamation of a failing bank into a healthy one to protect depositors, as an alternative to liquidation.

Amalgamation can deliver economies of scale, wider product ranges, stronger capital and tax benefits, such as using accumulated losses where the law allows. It avoids leaving a subsidiary structure in place, simplifying governance. The risks resemble those of other mergers: culture clashes, integration costs, loss of staff and customers, and disputes over the share exchange ratio. Because the original companies disappear, all their contracts, licences and liabilities pass to the combined entity, so hidden problems in one company become the whole group's problem.