Meaning:
Amalgamation means the merging of two or more than two companies for eliminating competition among them or for growing in size to achieve the economies of scale. Amalgamation is a broad term which includes mergers (uniting of two existing companies) and acquisition (one company buying out another company).
There are two types of amalgamation: According to AS-14 amalgamation is divided into the following two categories for accounting purposes:
A. Amalgamation in the nature of merger; and
B. Amalgamation in the nature of purchase.
Objectives of Amalgamation of Companies:
The following are the main objectives of amalgamation of companies:
1. To avoid competition:
The main purpose of amalgamation of companies is to avoid competition among themselves. This will give the company an edge over its competitors.
2. To reduce cost:
The amalgamated company can derive the operating cost advantage through lowering the cost of production. This is possible because of ‘economies of large scale’.
3. To gain financially:
The amalgamated company can derive financial gain which may be in the form of tax advantage, higher credit worthiness and lower rate of borrowing.
4. To achieve growth:
The amalgamated company can pool its resources to facilitate internal growth and to prevent the advent of a new competitor.
5. To diversify the activities:
The risk of a company can be lowered by diversifying its activities into two or more industries. At times, amalgamation may act as hedging the weak operation with a stronger one.
