Amalgamation Explained: Mergers & Corporate Combinations

In corporate financeCorporate Finance OverviewCorporate finance deals with the capital structure of a corporation, including its funding and the actions that management takes to increase the value of, 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.

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 a 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 a new business and use mergers and acquisitions as a way to achieve synergy. 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 bankersInvestment BankingInvestment banking is the division of a bank or financial institution that serves governments, corporations, and institutions by providing underwriting (capital raising) and mergers and acquisitions (M&A) advisory services. Investment banks act as intermediaries, lawyers, accountants, and 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

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• Mergers and Acquisitions ProcessMergers Acquisitions M&A ProcessThis guide takes you through all the steps in the M&A process. Learn how mergers and acquisitions and deals are completed. In this guide, we'll outline the acquisition process from start to finish, the various types of acquirers (strategic vs. financial buys), the importance of synergies, and transaction costs
• IPO ProcessIPO ProcessThe IPO Process is where a private company issues new and/or existing securities to the public for the first time. The 5 steps discussed in detail
• How to Be a Good Financial AnalystThe Analyst Trifecta® GuideThe ultimate guide on how to be a world-class financial analyst. Do you want to be a world-class financial analyst?  Are you looking to follow industry-leading best practices and stand out from the crowd? Our process, called The Analyst Trifecta® consists of analytics, presentation & soft skills
• Financial Modeling Best PracticesFree Financial Modeling GuideThis financial modeling guide covers Excel tips and best practices on assumptions, drivers, forecasting, linking the three statements, DCF analysis, more