Difference between Amalgamation and Absorption
Amalgamation and absorption in business are the process of expanding the business. While both processes involve the integration of companies, the key difference lies in whether a new entity is formed (amalgamation) or if one company is absorbed into another.
In this article, we will be discussing difference between amalgamation and absorption. We will also look into these acquisition methods individually.
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Table of Contents
Difference between Amalgamation and Absorption
The following table elaborates on the difference between amalgamation and absorption processes:
| Parameters | Amalgamation | Absorption |
| Definition | Merger of multiple companies to form a new entity. | Acquisition of the weaker company by a stronger company. |
| Resulting Entity | A new entity is formed | The acquiring company continues to exist and the acquired company ceases to exist. |
| Legal Status | Identity of companies dissolve and a new legal entity is built. | The acquiring company is the surviving legal entity. |
| Shareholding Structure | Shareholders of all merging companies are the shareholders of new entity. | Shareholders of acquired company are the shareholders of acquiring company. |
| Control | Shared between the merging companies. | Acquiring company assumes full control. |
| Management Structure | May integrate their management structures or retain separate management. | Acquiring company integrates the management structure and may replace management positions. |
| Assets and Liabilities | Merging companies transfer their assets and liabilities to new company. | Assets and liabilities of acquired are transferred to the acquiring company. |
| Financial Reporting | The merging companies’ financial statements are combined to form the financial statements of the new entity. | The absorbed company’s financial statements are consolidated into the acquiring company’s financial statements. |
| Tax Implications | Tax implications may exist depending on the jurisdiction and the structure of the amalgamation. | There may be tax implications, such as the treatment of assets and liabilities, based on the laws and regulations of the jurisdiction. |
What is amalgamation?
As the term suggests, amalgamation is the legal process in which multiple companies become one. During this process, existing companies combine to form a new entity. As a result of the amalgamation process, a new company is formed.
The companies involved in liquidation are known as amalgamating or vendor companies. Newly formed company is known as an amalgamated or vendee company. Through amalgamation, liquidating companies leave their identity and adopt a new identity.
Types of Amalgamation in a Business
Amalgamation occurs in two ways of merger or purchase. After the companies amalgamate through any of the following methods, a new company is formed. The legal identity of amalgamating companies ceases to exist. The newly formed company consists of the combined assets and liabilities of all amalgamating companies.
- Merger: During merger, there is no adjustment of book values. Shareholders’ interests, assets and liabilities are all combined. This allows business to be carried on easily. Shareholders are able to retain their equity share via the newly found company.
- Purchase: Unlike a merger, shareholders do not have the proportionate hold on market shares as was earlier. In this case, accounting works differently. When the purchase value exceeds the net asset value, the difference is recorded as goodwill on financial statements. In case the net asset value exceeds the purchase price, it gets recorded as capital reserves.
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Advantages of Amalgamation
The following are the advantages of amalgamation:
- Through amalgamation, there is a significant expansion in resources, workforce, processes and efficiency.
- As more resources are acquired, processes and production can be expedited. This helps in expanding the foothold over different regions and customer bases.
- Companies can expand their business portfolio as they acquire an experienced workforce to enter a new market.
- As the company expands in size, the position, reputation and status of the merging companies improve the financial credibility. These companies also gain tax advantage via amalgamation. Financial institutions are able to trust the borrowing companies more, due to which their borrowing capabilities expand.
What is absorption in business?
Absorption is a process which occurs between only two companies. Here, one company acquires the other company, but no new business entity is formed in the process. The larger company is the absorbing company that overtakes the smaller company, which is the absorbed company. In absorption, the smaller merged company completely loses its identity to the stronger company.
Types of Absorption in Business
The following types of absorption take place in corporate structures:
- Horizontal absorption: In this type of absorption, two companies from the same industry and supply chain level merge together. Since both companies are operating in the same industry, they have the combined goal of increasing the market share, upscaling the company and gaining a competitive edge.
- Vertical absorption: In this absorption, two companies at different supply chain levels are merged. The aim is to gain control over production, improve efficiency and cost reduction.
- Conglomerate Absorption: This absorption occurs when two companies from entirely different industries merge to form a single company. Through this merger, companies expand their business portfolio and minimize risks.
Advantages of Absorption
Absorption of businesses is advantageous in the following manner:
- Through the consolidation of overlapping functions, a number of parameters improve. There is a consolidation of overlapping functions, elimination of redundant processes and upscaling of economies. This helps in cost reduction and improves efficiency.
- By the process of absorption, the financial performance of a company also boosts up. There is an overall increase in revenues, profits, savings and reduction in costs.
- Once absorption is successfully done, the company gains a competitive advantage over other companies. This improves their market positioning, brand positioning and reputation among the target audience.
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FAQs
What is the purpose behind amalgamation and absorption?
The purpose is to combine the strengths and resources of companies to create a new, stronger entity. The purpose of absorption is for one company to gain control over another company's assets, market share, technology, or other strategic advantages.
What happens to the shareholders in the process of amalgamation and absorption?
In amalgamation, the shareholders of the merging companies become shareholders of the new entity, with their shares in the original companies being replaced by shares in the new company. On the other hand, in case of absorption, shareholders of the acquired company receive compensation in the form of cash, stock, or a combination of both from the acquiring company.
How do regulatory authorities view amalgamation and absorption?
Regulatory authorities, such as antitrust and competition commissions, closely scrutinize amalgamation and absorption to ensure they do not create monopolies or unfair competitive advantages. Approval is required to ensure compliance with relevant laws and regulations.
How do amalgamation and absorption differ?
The primary difference is that amalgamation results in the creation of a new entity, while absorption involves one company taking over another without forming a new entity. In amalgamation, both merging companies dissolve, whereas in absorption, only the target company dissolves.
What are the accounting treatments for amalgamation and absorption?
- Amalgamation: The new entity must follow specific accounting standards, such as IFRS or GAAP, to record the amalgamation.
- Absorption: The acquiring company records the acquired assets and liabilities at their fair value, and any difference between the purchase price and the fair value is treated as goodwill or a capital reserve.
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