Amalgamation: Definition, Pros and Cons, vs. Merger & Acquisition

What Is an Amalgamation?

An amalgamation is the combination of two or more companies into an entirely new entity. Amalgamations are distinct from acquisitions in that none of the companies involved in the transaction survives as a legal entity. Instead, a completely new entity, with the combined assets and liabilities of the former companies, is born.

The term amalgamation has generally fallen out of popular use in the United States, being replaced with terms like merger or consolidation, with which it can be synonymous. But it is still commonly used in certain countries, such as India.

How Amalgamations Work

Amalgamations typically happen between two (or more) companies that are engaged in the same line of business or that share some similarity in their operations. Usually, the process involves a larger entity, called a "transferee" company, absorbing one or more smaller "transferor" companies before the creation of the new entity.

The terms of an amalgamation are finalized by the board of directors of each company involved. The plan is prepared and submitted to regulators for approval. In India, for example, that authority resides in the High Court and Securities and Exchange Board of India (SEBI).

Indian tax law defines "amalgamation" somewhat broadly as "the merger of one or more companies with another company or the merger of two or more companies to form one company." It refers to the merging companies as "the amalgamating company or companies," while the company they merge with or which is newly formed as a result of the merger is "the amalgamated company."

In Canada, amalgamations must be approved by Corporations Canada and the relevant provincial and territorial governments. Canada defines amalgamation as "when two or more corporations, known as predecessor corporations, combine their businesses to form a new successor corporation."

Once approved, the new company officially becomes a legal entity and can issue shares of stock in its own name.

The Pros and Cons of Amalgamations

Amalgamation is a way to acquire cash resources, reach a broader customer base, eliminate competition, save on taxes, and/or improve economies of scale. Amalgamation may also increase shareholder value, reduce risk through diversification, improve managerial effectiveness, and help the new company achieve financial results and levels of growth that would have been more difficult for its predecessor companies.

On the other hand, if too much competition is eliminated, amalgamation may lead to a monopoly, which can be troublesome for consumers and the marketplace as well as bring about government intervention. It may also lead to the reduction of the new company's workforce by making some former employees redundant and costing them their jobs. In addition, it can increase debt, possibly to a dangerous level: by combining two or more companies together, the new entity assumes the liabilities of them all.

Example of Amalgamation

In April 2022, the telecom giant AT&T and the television entertainment company Discovery, Inc. announced that they had finalized a deal to combine AT&T's WarnerMedia business unit with Discovery. That month, a new entity known as Warner Bros. Discovery Inc. began trading on the Nasdaq stock exchange under the symbol WBD.

Amalgamation vs. Acquisition

As mentioned, in a typical amalgamation, two or more companies agree to combine their assets and liabilities and form an entirely new company. In an acquisition, by contrast, one company purchases another (usually by buying up enough of its stock) and takes on its assets and liabilities, with no new company being created as a result.

While amalgamations tend to involve voluntary agreements between the different parties, acquisitions can occur without the assent of the acquired company, in what's known as a hostile takeover.

The Bottom Line

Amalgamations are one of several ways that existing companies can join forces, in this case creating an entirely new company. While the term is rarely heard in the U.S. today, the practice continues both there and elsewhere around the world. Amalgamation can also refer to the combining of other types of organizations into a single one, such as nonprofit groups and entities in the public sector, including government agencies and municipalities.