Amalgamation: Meaning, Definition, Types, and Examples in Accounting

When you look at today’s highly competitive market, businesses are constantly searching for ways to scale effectively without spending too much money, and one strategic move businesses consider is amalgamation. 

Amalgamation is a process where companies combine and form a new organization to consolidate debts and increase market valuation. This one business strategy can change the entire course of the companies with a make-or-break situation. We have explained the amalgamate meaning, a real-world example, advantages and disadvantages of amalgamating in this blog. So read it till the end!

What is Amalgamation?

Amalgamation is the process by which two or more firms merge to create a new firm, and the firms that undergo the process no longer exist as independent legal entities. The new company has all the assets, liabilities, and rights of the companies amalgamating. 

Amalgamation as a business combination is the creation of a large competitive corporation in terms of corporate finance. Accounting-wise, it entails the consolidation of the financial statements of the merging companies and reporting them as one economic entity. 

However, unlike a merger or acquisition, where one of the companies continues to exist, amalgamation leaves a company without any survivor, only a new company. 

Amalgamation Definition in Business and Accounting 

Amalgamation may have some variations in its meaning according to the context, but the main concept is the same: combination and unification. 

In business, it refers to the process of combining businesses that might be in the same line of work or in complementary lines to share common strategic objectives. 

In accounting, amalgamation is the consolidation of financial information that includes: 

• Assets
• Liabilities
• Share capital
• Reserves
• Profits and losses.

All these are passed to the new business, which then proceeds to prepare its balance sheet and other financial results. 

What are the Types of Amalgamations? 

There are two types of amalgamations you must know about: amalgamation in the nature of a merger and amalgamation in the nature of a purchase. So, let’s discuss these here:

Amalgamation in the Nature of Merger

In the nature of a merger, amalgamation is a combination of two or more companies to create a third company, and shareholders of the amalgamating companies remain shareholders of the new company. The assets, liabilities, and reserve items are moved at the book value, and the businesses are to be operated as one and a going business. 

Amalgamation in the Nature of Purchase

Nature of purchase amalgamation occurs when a purchase is made by a company of another company. The owners of the transferor company might not own the new entity, and the liabilities are charged at fair values. This form is considered to be a purchase and not a continuation of business. 

Why Do Companies Perform Amalgamation?

There are a number of strategic, financial, and operational reasons why companies opt to amalgamate. Financial modeling and long-term planning primarily tend to be in favor of these motivations. 

• Access to New Markets: Through reamalgamation, firms are able to venture into new geographic locations or customer groups without necessarily beginning afresh and building from the ground up. The merging organization enjoys the presence in the market, licenses, accounting services, and recognition of the brand. 

• Access to New Technologies: Amalgamation permits businesses to merge intellectual property, technical skills, and innovative abilities to enable them to stay competitive in the rapidly evolving sectors. 

• New Clients and New Growth: Each amalgamating company comes with its own client base. The new entity acquires a wide range of clients, hence enhancing the stability of revenue and growth prospects. 

• Lower Financing Cost: Larger amalgamated organizations tend to have better credit ratings, lower interest rates, and greater capital market accessibility. This enhances the long term financial flexibility and sustainability. 

• Savings on Costs of Synergies: The synergies or overlapping operations are streamlined for the combined firm. These include collective suppliers and bargaining power, lower administration expenses, streamlined processes, and infrastructure. This kind of savings enhances profitability in the long run. 

• Eliminating Competition: With the rival companies merging, there is less competition in the market. This may enhance the power of prices; however, when competition is eliminated too much, this can attract the attention of the regulators. 

Advantages and Disadvantages of Amalgamation 

There are a number of advantages and disadvantages to amalgamation, which are described below: 

Amalgamation vs Merger vs Acquisition

No, let’s look at the different types of business combinations and how each one of these is different from the others. 

Amalgamation	Merger	Acquisition
Two or more firms merge to create an entirely new firm.	One firm absorbs another, and it remains in existence.	One firm acquires a majority interest in another.
A new legal entity is created.	Only one company survives.	Both firms continue to be independent legal entities.
The existing company owners of the old company become the shareholders of the new company.	The stockholders of the company that survives get shares in the surviving company.	The company gains control, and this is typically through the purchase of more than 50 percent of shares.
All the assets and liabilities are passed over to the new entity.	The assets and liabilities of the company that is being absorbed move to the survivor company.	Assets and liabilities are retained in their respective companies.

Example of Amalgamation 

One famous real-life case of amalgamation is the formation of Warner Bros. Discovery Inc. in 2022. AT&T sold its WarnerMedia business division to Discovery, Inc., establishing a brand-new company. In this merger, the legal entity of both WarnerMedia and Discovery, Inc. was no longer present. 

The new entity that was formed, Warner Bros. Discovery, Inc, presupposed: 

• The total property of the two companies 
• They are liable and have obligations under contract to handle expenses and finances for both companies. 
• Intellectual property, content library, and distribution networks are combined. 

The former company’s shareholders were given the new organization’s shares and were trading shares separately on the stock exchange. This case is a clear indication of the main feature of amalgamation: the absence of predecessor companies and the emergence of a new corporate entity. 

Accounting-wise, the amalgamation was successful because: 

• Assets and liabilities were fairly valued  
• Both companies had goodwill  
• Both had strong financial backing

This example emphasizes how amalgamation can be employed at any scale, for operational efficiency and long-term strategic alignment. 

Wrapping Up!

Amalgamation enables companies to combine to create one new company and aid in increasing operations, gaining more presence on the market, and achieving economies of scale. It also does not leave any independent business, like in the case of mergers or acquisitions. 

These advantages are great, though one can not overlook such issues as regulatory approvals, cultural alignment, and intricate accounting. Amalgamation is a good long-term growth strategy with proper planning, valuation, and compliance.