Amalgamation is where two or more companies combine to form an entirely new entity. It typically comprises a horizontal integration where neither of the companies involved retain their own name, brand identity or structure. Instead, their assets and liabilities are merged to form a new legal company.
"Amalgamations can be the ideal way to solidify and greatly enhance a company's position and offering in its chosen industry," says Jim Shaw, CEO and Founder of Shaw & Co, a corporate finance advisory firm. "The value of the new combined businesses can be significantly more than the sum of its parts."
Amalgamation vs. merger: what's the difference?
A merger typically involves two companies joining to form a new single entity, with one company 'absorbing' the other. On the other hand, as explained, amalgamation involves the blending of two or more companies into a new entity, resulting in a distinct third company.
The distinction between these terms often varies based on legal and corporate structuring specifics across different regions or countries.
How does an amalgamation work in business?
Amalgamations are often a "meeting of equals or near equals," says Shaw, which means the companies involved tend to be of a similar size and conduct similar business activities. But this can make the process of amalgamation challenging. Agreeing on the value of each company, the strategic direction of the newly formed entity, its culture and who takes leadership roles, for example, can all make for contentious sticking points early on.
Jeannette Linfoot, CEO and Founder of Jeannette Linfoot Associates, recommends learning as much as possible about your counterpart before starting discussions. Look at what they offer, how they are performing, their market position and market share, financial performance, ownership structure and who the key people are within the business, she suggests. Then flesh out what the benefits of amalgamating could be.
"It could be that you have different customer segments that, together, would allow you to reach the whole market, you might have complementary products and services, perhaps operate in different geographical locations that would then allow you to gain combined market share," she explains. "It's important to review the strategic drivers for growth."
In addition to carefully evaluating the financial benefits of an amalgamation, Linfoot says a business owner should also consider what their role would be going forward. They should also understand whether the company shares similar values and what the impact will be on customers and employees.
"When a merger is between two companies of comparative scale, you will need to navigate a significant cultural integration," Shaw observes. "Often, it will be desirable to rebrand the enlarged business to reflect its new status in the market and give the market clarity that this is a new and improved offering," he adds. This can take a "significant investment" of time and money to get right.
Assets and liabilities
When companies amalgamate, the newly formed entity inherits all the assets of the former two companies, such as cash, property, equipment and vehicles. It also takes on the liabilities of both previous companies or, in other words, any debts and obligations such as salaries, utilities, loans and leases.
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Types of amalgamation in business
For an amalgamation to happen, there is a sale and purchase taking place between the companies involved. From an accounting perspective, there are two ways this can be done:
The merger method
Under the merger method, the two original companies combine shareholder interests and their assets and liabilities, at their existing values. This means the shareholders retain their equity but it transfers to the new company.
The purchase method
For the purchase method, one company acquires the other company, which means the shareholders of the company that is purchased do not continue to have a proportionate share in the equity of the combined company.
Example of amalgamation
Earlier this year, mobile operators Vodafone and Three announced they were planning to amalgamate to form a new company. The companies say the move will drive growth, innovation and job creation, bringing faster speeds and better coverage to customers across the UK. The final name hasn't yet been publicised and, if given regulatory approval, the transaction is expected to complete at the end of 2024.
However, it isn't just large corporations that amalgamate. In the UK, amalgamation can take place between two willing companies of any size, providing the legislation that governs transactions relating to amalgamations is followed, The Companies Act of 2006 [1].
Advantages of amalgamation
"A key driver for most amalgamations will be the commercial benefits that the enlarged business can access, because of revenue and cost synergies," explains Shaw. For example, accessing new distribution routes and removing duplicated overheads. Other common reasons for businesses to amalgamate include:
- Expanding reach: The new entity will leverage the combined customer base of both firms, enhancing sales.
- Entering new markets: The amalgamated company can access a broader geographic network due to its constituent companies' individual market presence.
- Improving finances: By pooling resources and assets, the new entity has more capital for growth, increasing competitiveness.
- Reducing costs: Merging operations cuts down duplicate expenses, therefore lowering costs. This may include consolidating offices.
- Diversifying products or services: The combined resources allow the newly formed company to diversify or expand its offerings.
"A merger by its very nature will lead to a concentration of market share, providing the enlarged business with a stronger position in the market, not to mention greater buying power," says Shaw. "If properly executed, the result should be an improved profit margin and greater returns to the shareholders as a result."
Disadvantages of amalgamation
Amalgamation drawbacks often stem from inadequate planning, leading to negative impacts on customers, employees and stakeholders, according to Shaw. Clear deliberation is needed over leadership roles such as appointing the CEO of the new firm, defining the other business owner's role and managing potential duplication of board-level roles.
Then there's the impact on wider employees and customers. "Whenever an integration takes place, there is inevitably a disruption to the day-to-day running of the business which means that some members of the team may decide to move on to other opportunities outside of the organisation and short-term trading can be disrupted," says Linfoot.
For an amalgamation to go smoothly, it's important to pay attention to the key post-deal integration topics upfront, so there are no nasty surprises, notes Linfoot.
"Ask yourself what you're trying to achieve and why does it make sense to amalgamate with another business rather than growing organically," she adds. "Bigger isn't always better, so make sure you are doing things for the right reason."
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Sources
[1] UK Government, The Companies Act, 2006
