Meaning of Amalgamation

Nowhere in the Companies Act is the term amalgamation defined. It is said to be a term of art
without any clear or precise legal meaning. However, Halsbury has attempted a definition
which reads, “Amalgamation is the blending of two or more existing undertaking into one
undertaking with the shareholder of each blending company becoming substantially the
shareholders in the company which is to carry on the blended undertakings”1

Weinberg defines ‘Amalgamation’ in his book on the Takeovers and Amalgamations 2nd
edition as, “an arrangement whereby the assets of two companies become vested in or under
the control of one company (which may or may not be one of the original companies) which
has its two shareholders all or substantially all the shareholders of the two companies.” In
essence “under a merger two or more companies are merged either de-jure by consolidation of
their undertakings or de-facto by the acquisition of a controlling interest in the share capital of
one by the other or of the capital of both by a new company.” This is the view of Gower.2

According to Mitra’s Legal and Commercial Dictionary the term ‘amalgamation’ means
merger.3

Oxford Economic Papers defines amalgamation as uniting of two companies, the shareholders
in each unit emerging as shareholders in the resultant organization. The companies are often of
similar size. Thus, the success of the consumer co-operative movement depends upon the
extent to which the smaller units are amalgamated with similar neighbouring primary
consumers stores to secure the benefits of economics of scale and provide diversified services
to cater to the tastes and needs of consumers.4

1
Halsbury Laws, Third Edition, Vol. 6, Pg.764.
2
Gower, Principles of Modern Company Law, Third edition, Pg. 61.
3
Mitra’s Legal and Commercial Dictionary as quoted.
4
Acquisition Objectives and Policies, OxfordEconomicPapers,Vol.49,No.3,July 1997.
Types of mergers or amalgamation
Merger depends upon the purpose of the offered company it wants to achieve. Based on the
objective profile of an offer, business combinations such as mergers, acquisitions or takeovers
could be categorised as vertical, horizontal etc. as following:
• Horizontal combination
• Vertical combination
• Circular combination
• Conglomerate combination
• Within stream mergers

1. Horizontal combination
This is a merger of two competing firms belonging to the same industry which are at the same
stage of the industrial process. These mergers are carried out to obtain economies of scale in
production by eliminating duplication of facilities and operation and broadening the product
line, reducing investment in working capital, eliminating competition through product
concentration, reducing advertising costs, increasing market segments and exercising a better
control over the market. It is also an indirect route to achieving technical economies of a large
scale.

The acquisition of American Motors by Chrysler in 1987 represents a horizontal merger.

Thus in horizontal mergers it can be said that the primary function of the firm is not changed
by simply enlarged. The additional advantages of horizontal mergers are as follows:
1. Plant specialisation - the entire time and effort of the individual plants may be devoted to
the production of various styles of a particular product.
2. Marketing economies - goods may be delivered from the nearest plant, thus saving on
transportation costs. The duplication of advertising and sales effort may be eliminated.
3. Production or marketing companies - competition between the individual plants and sales
territories may lead to greater efficiency. Technical improvements perfected at one plant or
sales programmes effective in one. territory may be extended to others.
4. Elimination of competition - horizontal merger is the type most likely to link up the direct
competition in which case such competition is abruptly eliminated.
Due to the advantage mentioned above horizontal mergers are also known as trade or parallel
or unit integration and afford opportunities for effecting external economies in sphere of
buying, manufacturing, selling and research.
For example-horizontal merger of Tata Oil Mills Limited (TOMCO) by Hindustan Lever
Limited (HLL) and Tata Industrial Finance Limited with Tata Finance Limited.

2. Vertical combination
This is one where a company takes over or seeks a merger with another company in order to
ensure backward integration or assimilation of the source of supply or forward integration
towards market outlets. The acquirer company gains a strong position due to the imperfect
market of its intermediary products and also through control over product specifications.
However, these gains must be. weighed against the adverse effects of the merger. For instance,
firms which have monopoly power in one stage may increase barriers to entry through vertical
integration and this would help to discriminate between different purchases by monopolisation
of raw material supplies or distributive outlets.
Vertical mergers are of two types,
(1) Backward mergers, wherein companies merge with its suppliers company supplying raw
material.
(2) Forward vertical mergers wherein companies merge with its consumers or when one of the
two companies is an actual or potential supplier of the goods to the other so that these
companies become engaged at different stages of the production cycle within the same
industry.
An example of this is where a car manufacturer and a sheet metal manufacturer merge. Merger
of Reliance Petrochemicals with Reliance Industries is a vertical merger with backward
linkage. There can be many reasons elaborated for a firm which is to be vertically integrated.
These include the following:
• To remove the wasteful and unnecessary expenses
• To reduce cost and dependence
• To secure economy in marketing, advertising and transport.
• To eliminate middleman functioning between various units, with a view to avoid unnecessary
expense on them.
• To maintain control over the quality of raw material and finished products.
Vertical mergers are suitable to the industries where the finished object of one constitute the
raw material to another firm, and one processes complementary to another.

Reasons for Amalgamation:

Reason # 1. Economies of Scale:

An amalgamated company will have more resources at its command than the individual
companies. This will help in increasing the scale of operations and the economies of large scale
will be availed. These economies will occur because of more intensive utilisation of production
facilities, distribution network, research and development facilities, etc. These economies will
be available in horizontal mergers (companies dealing in same line of products) where scope
of more intensive use of resources is greater. The economies will occur only upto a certain
point of operations known as optimal point. It is a point where average costs are minimum.
When production increases from this point, the cost per unit will go up.

Reason # 2. Operating Economies:

A number of operating economies will be available with the merger of two or more companies.
Duplicating facilities in accounting, purchasing, marketing, etc. will be eliminated. Operating
inefficiencies of small concerns will be controlled by the superior management emerging from
the amalgamation. The amalgamated companies will be in a better position to operate than the
amalgamating companies individually.

Reason # 3. Synergy:

Synergy refers to the greater combined value of merged firms than the sum of the values of
individual units. It is something like one plus one more than two. It results from benefits other
than those related to economies of scale. Operating economies are one of the various synergy
benefits of merger or consolidation.

The other instances which may result into synergy benefits include, strong R &D facilities of
one firm merged with better organised production facilities of another unit, enhanced
managerial capabilities, the substantial financial resources of one being combined with
profitable investment opportunities of the other, etc.

Reason # 4. Growth:

A company may not grow rapidly through internal expansion. Merger or amalgamation enables
satisfactory and balanced growth of a company. It can cross many stages of growth at one time
through amalgamation. Growth through merger or amalgamation is also cheaper and less risky.

A number of costs and risks of expansion and taking on new product lines are avoided by the
acquisition of a going concern. By acquiring other companies, a desired level of growth can be
maintained by an enterprise.

Reason # 5. Diversification:

Two or more companies operating in different lines can diversify their activities through
amalgamation. Since different companies are already dealing in their respective lines there will
be less risk in diversification. When a company tries to enter new lines of activities then it may
face a number of problems in production, marketing etc.

When some concerns are already operating in different lines, they must have crossed many
obstacles and difficulties. Amalgamation will bring together the experiences of different
persons in varied activities. So amalgamation will be the best way of diversification.

Reason # 6. Utilisation of Tax Shields:

When a company with accumulated losses merges with a profit making company it is able to
utilise tax shields. A company having losses will not be able to set off losses against future
profits, because it is not a profit earning unit.

On the other hand if it merges with a concern earning profits then the accumulated losses of
one unit will be set off against the future profits of the other unit. In this way the merger or
amalgamation will enable the concern to avail tax benefits.
Reason # 7. Eliminate Competition:

Many M&A deals allow the acquirer to eliminate future competition and gain a larger market
share in its product's market. The downside of this is that a large premium is usually required
to convince the target company's shareholders to accept the offer. It is not uncommon for the
acquiring company's shareholders to sell their shares and push the price lower in response to
the company paying too much for the target company.