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Amalgamation

A type of merger / acquisition

What is Amalgamation?

In corporate finance, an amalgamation is the combination of two or more companies into a larger single company.

In accounting an amalgamation, or consolidation, refers to the combination of financial statements.  For example, a group of companies reports their financials on a consolidated basis which includes the individual statements of several smaller businesses.

 

amalgamation merging theme

 

What is the legal process of amalgamation?

An amalgamation is, in fact, a specific subset within a broader group of “business combinations”. There are three main types of business combinations, which are outlined below in more detail. It’s important to understand the subtle differences when talking about mergers, acquisitions, and amalgamations.

  1. Acquisition (two survivors): The purchasing company acquires more than 50% of the shares of the acquired company and both companies survive.
  2. Merger (one survivor): The purchasing company buys the selling company’s assets.  The sale of the acquired company’s assets leads to the survival of only the purchasing company.
  3. Amalgamation (no survivors): This third option creates a new company in which none of the pre-existing companies survive.

As you can see with the above examples, the difference comes down to the surviving companies.  In an amalgamation, a new company is created and none of the old companies survive.

 

Why perform an amalgamation?

Amalgamations are often done when competing companies engaged in similar business would achieve some synergy or cost savings by combining their operations, which can be quantified in a financial model. By contrast, it can also occur when companies want to enter new markets or get into new business and mergers and acquisitions as a way to achieve that.  Here is a list of reasons why companies perform consolidations:

  • Access to new markets
  • Access to new technologies
  • Access to new clients / geographies
  • Cheaper financing for a bigger company
  • Cost savings (synergies) achieved through bargaining power with suppliers and clients
  • Eliminating competition

 

Who is involved in amalgamations?

An amalgamation typically requires investment bankers, lawyers, accountants, and the executives at each of the combining companies.  The bankers will typically perform extensive financial modeling and valuation to evaluate the potential transaction and advise the individual corporations. In parallel to this process, the lawyers will work with the bankers and their corporate clients to determine which of the above legal structures is optimal: acquisition, merger, or amalgamation.

 

 

Additional resources

In order to keep learning and advancing your corporate finance career, we highly recommend these additional resources:

  • Mergers and acquisitions process
  • IPO process
  • How to be a good financial analyst
  • Financial modeling best practices

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