Amalgmation , Absorption and Reconstruction
Mergers and amalgamations form an integral part of the world of business we live in today. When two companies combine, the owners’ shares of the old company are normally exchanged for an equal number of shares of the new entity. During a takeover, the purchasing company normally gives the target firm’s shareholders a cash price per share or the acquiring firm’s shares to the target firm’s shareholders according to an exchange ratio. In any case, the acquiring firm effectively funds the target company’s acquisition, purchasing it outright for its shareholders.
i. Amalgamation in the nature of purchase:
This method is considered when the conditions for the amalgamation in the nature of merger are not satisfied. Through this method, one company is acquired by another, and thereby the shareholders’ of the company which is acquired normally do not continue to have proportionate share in the equity of the combined company or the business of the company which is acquired is generally not intended to be continued.
If the purchase consideration exceeds the net assets value then the excess amount is recorded as the goodwill, while if it is less than the net assets value it is recorded as the capital reserves.
Procedure for Amalgamation
1. The terms of amalgamation are finalized by the board of directors of the amalgamating companies.
2. A scheme of amalgamation is prepared and submitted for approval to the respective High Court.
3. Approval of the shareholders’ of the constituent companies is obtained followed by approval of SEBI.
4. A new company is formed and shares are issued to the shareholders’ of the transferor company.
5. The transferor company is then liquidated and all the assets and liabilities are taken over by the transferee company.
Accounting of Amalgamation
A. Pooling of Interests Method:
Through this accounting method, the assets, liabilities and reserves of the transfer or company are recorded by the transferee company at their existing carrying amounts.
B. Purchase Method:
In this method, the transfer company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual assets and liabilities of the transfer or company on the basis of their fair values at the date of amalgamation.
Computation of purchase consideration: For computing purchase consideration, generally two methods are used:
1. Purchase Consideration using net asset method: Total of assets taken over and this should be at fair values minus liabilities that are taken over at the agreed amounts.
2. Agreed value means the amount at which the transfer or company has agreed to sell and the transferee company has agreed to take over a particular asset or liability.
3. Purchase consideration using payments method: Total of consideration paid to both equity and preference shareholders in various forms.
Example: A. Ltd takes over B. Ltd and for that it agreed to pay Rs 5,00,000 in cash. 4,00,000 equity shares of Rs 10 each fully paid up at an agreed value of Rs 15 per share. The Purchase consideration will be calculated as follows:
Advantages of Amalgamation
• Competition between the companies gets eliminated
• R&D facilities are increased
• Operating cost can be reduced
• Stability in the prices of the goods is maintained
Disadvantages of Amalgamation
• Amalgamation may lead to elimination of healthy competition
• Reduction of employees may take place
• There could be additional debt to pay
• Business combination could lead to monopoly in the market, which is not always positive
• The goodwill and identity of the old company is los