Merger and Amalgamation are widely used tactics in business takeovers aimed at growth and better market returns. These deals are on the rise, with amalgamation having one business company getting one or more companies to create a new one. A merger involves the process of merging two or more companies to form a single body. The newly formed company possesses a fresh management structure, often a mix of the joining companies’ management. In this blog, we shall see the difference between amalgamation and merger in India.
Understanding Merger
The combination of two businesses into one new legal entity on largely equal conditions is known as a merger. In terms of size, clientele, and operational scope, the merging companies are about equal. The phrase “merger of equals” is sometimes used as a result.
Different Types of Mergers:
There are many types of mergers, which are as follows:
- Vertical Merger: Whenever the merger and merging companies run in the same type of business but at different levels of the supply chain. This is known as a vertical merger. The main reason for this is to achieve savings of scale.
- Congeneric Merger: It’s a form of a merger in which two companies work in the same or linked business or markets but don’t sell the same things. These businesses usually join to boost market share and spread product lines since they share similar delivery networks, production methods, or shared technology, among other things.
- Reverse Merger: A merger in which a parent company joins with a division or a successful company merges with a lost one. A triangle merger is another name for it.
- Horizontal Merger: Whenever a merger and a merged company are in the same line of business and supply chain level, they are almost always competitors. This type of union is called a horizontal merger. Mergers are generally done to grow the client base, raise shares in the market, and increase market power, among other things.
- Conglomerate Merger: The merger of companies that work in varied fields. This type of merger happens to spread and share risk in the event that the current company is not profitable.
Legal Framework Governing Mergers:
The Companies Act of 2013 mainly controls the legal basis for mergers in India. This law requires processes for shareholder reviews, legal clearances from authorities like the National Company Law Tribunal and the Competition Commission of India, the value of shares, and the protection of minority owners’ rights.
Understanding Amalgamation
Amalgamations usually occur between two or more businesses that operate in the same industry or with some degree of operational similarity. Typically, the procedure involves one or more smaller “transferor” corporations being absorbed by a bigger organisation, known as a “transferee” company, prior to the formation of the new entity.
Differences between Amalgamation and Merger:
- In Amalgamation, a new entity is made with combined assets and liabilities, while in a merger, one company takes another without making a new entity.
- Amalgamations usually involve companies in the same or similar line of business looking to form a better joint body, whereas mergers can involve companies from different fields.
Legal Provisions for Amalgamation in India:
In India, the legal system for amalgamations is overseen by officials like the High Court and the Securities and Exchange Board of India. The process includes settling terms by the board of directors of each company and sending plans for governmental permission.
Major Differences between Merger and Amalgamation
The main reasons for the difference between mergers and amalgamation in India are as follows:
1. Number of Entities Required:
- A minimum of two companies is needed as one merger company will survive after merging the target company.
- A minimum of three companies are needed as an amalgamation of two companies results in a new entity.
2. Controlling Stake:
- The controlling stake can be mutually agreed upon and discussed between the two parties during a merger.
- In amalgamation, the controlling stake belongs to the acquirer, and the target company becomes a minority shareholder.
3. Size of the Companies:
- The size of the merger company is relatively larger than that of the merging company.
- In Amalgamation, the size of the target companies is comparable.
4. Accounting and tax treatment:
- Liabilities and assets of the merging company are pooled.
- The newly formed corporation or firm’s balance sheet receives the assets and liabilities of the existing businesses.
5. Driver for the consolidation:
- Mergers are generally driven by the merging company only.
- Both companies generally initiate amalgamation with an equal interest.
6. Impact on their stocks:
- Shares of the merging organisation are given to the shareholders of the merger agency.
- Shares of the new company are given to shareholders of the present companies.
7. Impact on Shareholders:
- Shareholders of the merger agency preserve their possession. However, shareholders of the merged business gain possession of the merging employer.
- All the shareholders in the current entities become shareholders in the new entity.
8. Legal Formalities:
- Mergers typically involve more complex legal formalities.
- Amalgamations usually have less legal formalities compared to mergers.
9. Taxation:
- Mergers are taxed as capital gains or share exchanges.
- Meanwhile, amalgamations are taxed as a transfer of capital assets.
10. Approval Process:
- Mergers need the approval of the shareholders of both agencies and the Competition Commission of India (CCI).
- Amalgamations, however, require the approval of the owners of both organisations, the CCI and the Ministry of Corporate Affairs.
11. Continuity of Business:
- In a merger, the merging agency keeps the business of the merged enterprise.
- While in an amalgamation, the newly fashioned entity keeps the business of each of the amalgamating companies.
Advantages of Merger and Amalgamation in India for Companies
- Diversification Across Industries: Amalgamation and mergers allow businesses to move into multiple industries easily, removing the need to start from scratch.
- Economies of Scale: Fostering savings of scale is the main cause. This includes cost management, efficient resource utilisation, access to bigger markets, and more.
- Synergy in Operations: Companies seek to achieve unity in operations by targeting businesses in the same product line or field, boosting their combined effectiveness.
- Rapid Growth: Mergers provide a means for businesses to achieve growth quickly without the long process of spontaneous expansion.
- Tax Advantages: Combining a successful company with a loss-making one can result in lowered tax bills, giving brilliant tax benefits.
- Competition Reduction: Mergers serve to reduce competition within a specific business by merging two companies.
- Effective Financial Resource Utilisation: By joining an organisation with a bigger balance sheet, businesses can utilise financial resources more effectively and improve financial planning.
- Control Over the Value Chain: Amalgamation and mergers enable businesses to increase their control over the value chain through backward and forward integration strategies.
Challenges and Considerations
Navigating mergers and amalgamations includes addressing significant hurdles and factors. Regulatory hurdles involve compliance with legal frameworks, getting approvals, and meeting regulatory standards to ensure a smooth transfer. Valuation difficulties result from finding the worth of companies involved, considering assets, liabilities, and market conditions. Cultural integration post-merger/amalgamation includes matching corporate cultures, beliefs, and practices to promote teamwork and unity among workers from different backgrounds. Successfully handling these challenges is crucial for the smooth merging of businesses and the realisation of benefits in mergers and amalgamations.
Future of Mergers and Amalgamations in India
The future of mergers and amalgamations in India is set for continued growth driven by changing trends and expectations. Technology and globalisation will play crucial roles, enabling cross-border deals, digital merging, and improved organisational benefits. These improvements are expected to change standard business models, encouraging creativity and smart alliances. Potential changes in legal systems may focus on adjusting to technological advances, ensuring regulatory compliance, and handling new difficulties in mergers and amalgamations. Overall, the environment is set to experience increased volatility, driven by technological developments, globalisation, and changing legal requirements.
Conclusion
The difference between merger and Amalgamation is important for businesses considering strategic growth efforts. Mergers involve the merging of similar businesses, supporting competitiveness and practical unity, while amalgamations often encompass a bigger company, taking smaller entities to achieve growth and diversification. In learning the difference between merger and amalgamation in India, I learned that each method comes with its unique benefits, from getting a competitive edge and diversifying across industries to achieving economies of scale and tax advantages. Furthermore, the different types of mergers and amalgamations provide companies with a range of strategy choices suited to their unique goals. Understanding these details is important for businesses looking to handle the complex system of corporate reform and mergers in India’s dynamic market.
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