While working in the corporate world or reading corporate news, we came across many technical terms related to the business and industrial world. Amalgamation and absorption are two different terms used in the corporate world. But for a normal human, it is difficult to differentiate between two.
The simple difference between two is, when two or more companies become one entity (i.e. X ltd.+ Y ltd.+ Z ltd.= XYZ ltd.) it is known as Amalgamation. On another hand, when one company (say X ltd.) takes over the business of another company (say Y ltd.) and no new entity is formed (i.e. X ltd. + Y ltd.= X ltd.) the process is called Absorption.
Amalgamation vs Absorption
The difference between Amalgamation and Absorption is that amalgamation is the merging of two or more companies to form a new company, absorption means when a company undertakes another company but does not form a new company. Amalgamation involves the same entities and works as one, absorption involves a company that overpowers another company.
To understand the two terms and differences between both let’s take a further look.
Comparison Table Between Amalgamation and Absorption
|Parameter of Comparison||Amalgamation||Absorption|
|Meaning||Two or more different companies join to become one, the process is called Amalgamation.||When one company takes over the business of another company, the process is called Absorption.|
|New entity||The new entity is formed.||No new entity is formed.|
|Minimum number of companies involved||In the process of amalgamation, there are at least three companies involved (two liquidating and one newly formed).||While in Absorption there are at least two companies involved.|
|Liquidating companies||At least two companies liquidate.||Only one company is liquidated (whose business is overtaken by the other).|
|Domination||No company dominates any other company.||The bigger company dominates the weaker company.|
What is Amalgamation?
When two or more companies of the same size, competing in similar business niche liquidate themselves to form a new company jointly the process is called Amalgamation.
Under this, two or more existing companies are operating in the same business category. These companies form a single separate entity by liquidating the existing companies.
In other words, the newly formed company takes over the business of the existing companies, which are liquidated for this purpose. Liquidating companies are generally called vendor companies or amalgamating companies. While the new company is called amalgamated or purchasing the company.
In this process, there should be a mutual agreement between the companies’ management and must be approved by the shareholders of the companies. Amalgamation is generally advantageous from the companies’ point of view as it serves many benefits to the company and also serves to increase the monopoly powers.
Let’s take an example to understand the whole process, there were two companies x ltd. And y ltd. Both were paper producers. They decided on Amalgamation. For which they set up a new entity xy ltd. And liquidated their existing companies and transferred their businesses to newly formed xy ltd. Now, both amalgamated as xy ltd.
The main purposes of amalgamation are-:
- To achieve a large production scale.
- Large market share.
- Avoiding competition.
- Lowering the cost of production.
- Efficiency in resource management etc.
What is Absorption?
When there are two companies and one of them is in a position to dominate the other or simply stronger and bigger than the other company and it acquires the business of the other company the process is known as Absorption.
In simple words, the large organization acquires the business of a small organization operating in its niche, for expansion and growth. In this process, no new entity is formed and only the smaller organization (the one getting absorbed) liquidates. When a large company purchases the business of smaller company it is known as Absorption.
Let’s take an example to understand this. Say P ltd. was a market leader in mobile phone manufacturing and R ltd. was a small manufacturer of mobile phones and P ltd. brought the whole business of R ltd., the process is that of Absorption. As there is no new company formed, only R ltd. liquidated and P ltd. acquired the business of R ltd.
The main advantages of Absorption are -:
- Faster growth.
- Increased efficiency.
- Increased brand value.
- More resources etc.
Main Differences Between Amalgamation and Absorption
- Amalgamation is when two or more companies join and liquidates to create a new company. On the other hand, when one company acquires the other company the process is known as Absorption.
- A new entity/company is formed under the process of Amalgamation. While no new company is formed under the process of Absorption.
- There are at least three companies involved in the process of Amalgamation. Two being liquidated and one being formed. While under the process of Absorption, there are only two companies. The one acquiring and other being acquired.
- Under Amalgamation, the companies are of similar size. However, under Absorption one company is larger than the other.
- Amalgamation is a broader concept. While Absorption is a narrow concept, as Amalgamation includes Absorption.
- Companies involved in Amalgamation are not in a position to dominate each other. While under Absorption one company is in a position to dominate the other.
Frequently Asked Questions (FAQ) About Amalgamation and Absorption
What are the types of amalgamation?
When in the corporate world two or more companies form a new entity by merger or taking over, this process and the result is called amalgamation.
There are two types of amalgamation:
- Merging – In this type of amalgamation, two or more companies merge together and create a new company. The original and individual identities of both companies are lost and the new identity of the merged company takes place over them.
- Purchasing – In this type of amalgamation, a larger enterprise takes over a small enterprise by purchase.
Generally, the small enterprise loses its identity and fuse with the larger company.
What are the objectives of amalgamation?
The main objective of an amalgamation is to obtain those benefits that can only be obtained by the merging of two or more entities together and are not possible individually.
There are some other additional benefits of an amalgamation:
- Reduce the competition in the market along with the benefit of the customers or merged entities
- Create goodwill and share the risk through diversification
- Amalgamation provides an opportunity to share and discuss ideas between the directors and investors of merged companies.
This increases the chances of succeeding in the market with good management.
What is an amalgamation reserve?
Amalgamation reserve is an account that is created at the time of amalgamation. It includes the portion of earnings, surplus like capital and revenue or receipts that are appropriated by the management.
It acts as a provision for a known liability or for depreciation in the value of assets.
What is the purchase consideration?
Purchase consideration means when an agreement is made between the purchasing company, also known as transferee company, and the vendor company, also known as transferor company for a particular amount in exchange of the ownership of the vendor company.
Purchase consideration is not necessarily in the form of cash. It can also be in the form of assets or shares.
There are four different methods of purchase consideration:
- Net asset
- Net payment method
- Lump-sum, and
- Intrinsic value or share exchange
After studying the concept of Amalgamation and Absorption, we can say that there is a thin line difference both the terms. Both include acquisition and are done for expansion, growth, bigger market share, etc. But, since both terms are not the same, we can conclude that Amalgamation is when two existing companies form a new company and Absorption is when one company acquires the other company.
In Amalgamation, there are at least three companies involved, while in Absorption there are only two companies involved. Amalgamation gives rise to a new entity, while Absorption doesn’t give rise to any new entity. At least two companies are liquidated under the process of Amalgamation.
On another hand, only one company is liquidated under Absorption. Amalgamation is always voluntary and proceeds with a mutual agreement between the management of companies and the consent of shareholders.
However, Absorption may be or may not be voluntary. Amalgamation is a wider concept compared to Absorption, as Amalgamation includes Absorption.
Let’s sum up this with an example:
If x ltd. and y ltd. join to form xy ltd. it is Amalgamation and if x ltd. is acquired by y ltd. and x ltd. is no more there, now there is only y ltd. it is the process of Absorption.
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