If a company wants to grow or survive in a highly competitive market, it must restructure and focus on its competitive advantage. Corporate restructuring is the process of reorganising a company's activities in order to increase productivity and profitability. Restructuring is now a purposeful corporate decision rather than an option. The primary goals of corporate restructuring are cost-cutting strategies to boost productivity and profitability.
Every company restructuring initiative seeks to maximise benefits while minimising downsides. It hopes to obtain synergy benefits through a well-planned restructuring strategy. A larger corporation can benefit from economies of scale. Larger sizes are also connected with higher corporate prestige. As a result, it may be able to access cheaper funding sources. Higher earnings emerge from such a reduction in the cost of capital.
Did you know? The merger of HDFC Ltd. and HDFC Bank, valued at $58.5 billion, which took place in April 2022, accounted for the majority of the corporate growth in India.
What is an Amalgamation of Partnership Firms?
The amalgamation of two or more businesses with another business or the joining of two or more firms to form a single company is a merger under the Income Tax Act of 1961 (ITA) is known as an amalgamation of partnership firms. A completely new corporation is created as a result of the merging. The companies undergoing the merger are comparable in size. In amalgamation, the corporations taking part in the merger process are separate. This is due to the fact that an absorbing company is anticipated to be larger than an absorbed business.
Even when a new company is formed, amalgamation typically loses favour in the United States and is replaced with a merger or consolidation. But nations like India continue to utilise it frequently.
A combination of financial statements is referred to as an amalgamation in accounting. For instance, a group of firms that incorporates the individual financial statements of multiple smaller enterprises discloses its financials on a consolidated basis.
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Types of Amalgamation
Amalgamation are mainly of two types. The following will give a brief overview of the both-
Merger Method
The two companies combine shareholder interests as well as assets and liabilities using the merger amalgamation process. Accounting modifications to book values are not required, and the company's operations can continue after the merger is completed. The shareholders' stock is retained, but it is transferred to the new business.
Purchase Method
The second sort of amalgamation is the buy method, which operates in a somewhat different manner in terms of accounting and structure. The amalgamation prerequisites for a merger are not met when using the purchase method. When one company buys another, the shareholders of the acquired company do not retain proportionate equity in the newly formed company. The acquired company's operations do not continue as they would under the merger process.
If the acquisition price exceeds the net asset value, the difference should be reported as goodwill on the financial accounts. Capital reserves should be documented if the acquisition price is less than the net asset value.
The Procedure of Amalgamation
- The boards of directors of the companies that will merge determine the final terms of the amalgamation.
- A plan for amalgamation is created and submitted to the relevant High Court for approval.
- Following receipt of permission from SEBI, the shareholders of the constituent firms must approve.
- The shareholders of the transferor company receive shares in the newly established company.
- The transferee company subsequently assumes ownership of all the assets and liabilities after liquidating the transferor company.
Benefits of Amalgamation
- There are chances of increased competition with amalgamation.
- Amalgamation can significantly lower tax
- It can increase scale economies
- Possibility of raising shareholder value
- It helps diversify the company
Drawbacks of Amalgamation
- Amalgamations could result in the abolition of healthy competition.
- There could be employee layoffs.
- There can be more debt to repay.
- Combining businesses risk creating a monopoly, which is not always advantageous.
- The former business's reputation and identity might be destroyed.
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Examples of Amalgamation
- A new firm called Maruti Suzuki (India) Limited was created by the amalgamation of Suzuki, based in Japan, with Maruti Motors, an Indian corporation.
- Gujarat Gas Ltd (GGL) was formed through the amalgamation of GSPC Gas and Gujarat Gas Company Ltd (GGCL).
- Tata AIG Life Insurance was created by the amalgamation of Satyam Computers, Tech Mahindra Ltd., Tata Sons, and the AIA group of Hongkong.
What is Merger?
Simply put, a merger combines two or more existing businesses into one. By transferring its business, the transferor company integrates its identity with the transmitting company (assets and liabilities). The transferor company's shareholders exchange their shares for shares in the combined business.
Mergers can take three different forms. A merger between two or more businesses in the same market and at the same step of the production chain is referred to as a "horizontal merger." A "conglomerate merger" combines two or more completely unrelated businesses to diversify, as opposed to a "vertical merger," which is a merger between businesses at distinct stages or levels of the production chain. There are other mergers as well.
A merger unites two or more businesses to form a new organisation. A merger and an amalgamation are different because neither business exists as a separate legal entity. Instead, a brand-new organisation is created to hold the merged assets and obligations of the two businesses.
Types of Mergers
Mergers can be of many types. They are as follows-
Horizontal Mergers
When two businesses merge and operate at the same level of the supply chain, they are nearly always competitors. A horizontal merger is a name given to this kind of merger. The merger is typically done to boost market share, clientele, and market clout.
Conglomerate Merger
In the case the current business is not successful, this merger takes place to diversify and spread risk.
Vertical Merger
Vertical mergers occur when the merged firms operate in the same industry but at different levels of the supply chain. Getting economies of scale is the primary purpose of this type of merger.
Congeneric Merger
It is a merger where two businesses join forces to operate in the same industry or market but do not sell the same goods. Since these businesses have similar distribution networks, production processes, or overlapping technologies, among other factors, mergers between these businesses typically increase market share and expand product lines.
Triangular or Reverse Merger
A merger in which a profitable company merges with a struggling one or a parent corporation joins forces with a subsidiary. It is also known as a triangular merger.
Business Takeover
Either directly or indirectly, a business takeover is a corporate tactic to acquire the target company's management. Gaining control over the target company's board of directors will enable the acquirer to make decisions more effectively.
There are two different kinds of takeovers: amicable and hostile. In a friendly takeover, the acquirer initially approaches the target company's management or promoters to negotiate the purchase of its shares. Friendly takeover benefits both the acquiring company and the company being acquired. However, a "hostile takeover" goes against the management of the target company's wishes. Without approval from the current promoters or management, the acquirer makes a direct offer to the target company's shareholders.
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Amalgamation vs Merger
|
Parameter |
Amalgamation |
Merger |
|
Definition |
It is a merger procedure where two or more businesses come together to create a new firm. Also, not every merger results in an amalgamation. |
A new or existing company is formed by the combination of two or more businesses, absorbing the other target businesses. The process of combining several firms into one corporate entity is known as a merger. The merger includes all amalgamations. |
|
Number of entities required |
As a merger of two firms creates a new entity, a minimum of three companies are needed. |
As only one absorbing firm will live after absorbing the target company, a minimum of two entities is required. |
|
Firm size |
Comparable to target companies is involved in the process. |
The absorbing company's size is comparatively more significant than its own. |
|
Resultant entity |
Companies that already exist become irrelevant, creating a new company. |
The target company for a merger may be absorbed by an existing company while maintaining its identity. |
|
The outcome for Shareholders |
The new entity gains the ownership of all the existing entities' shareholders. |
The absorbing entity's stockholders keep their ownership. However, ownership of the absorbing corporation passes to the shareholders of the absorbed entity. |
|
The outcome for Shares |
The shareholders of the existing entities receive shares of the new entity created throughout the procedure. |
Shareholders of the absorbed company receive shares of the acquiring company. |
|
Consolidation Driver |
Both companies involved in the merger procedure start the process. |
Most mergers are initiated by the absorbing firm. |
|
Accounting Method |
The newly established entity's balance sheet contains and transfers the assets and liabilities of the preexisting firms. |
The absorbed or acquired company's assets and liabilities are consolidated. |
|
Examples |
The new company, known as ArcelorMittal, was created through the merger of two organisations, Mittal Steel and Arcelor. In the process, Mittal Steel and Arcelor Group both lost their identities. |
Tata Steel is the product of the merger of two organizations, UK-based Corus Group and Tata Steel. In the process, Corus Group lost its identity. |
Corporate restructuring can help an organisation's value be restored, preserved, or even increased. Restructuring is necessary, for instance, when a company is experiencing a slump and lose money. It can be done via various techniques, including mergers, amalgamations, takeovers, etc. The restructuring process through mergers and amalgamations is typical in industrialised and free-economy nations. The above procedures act as a suitable corporate restructuring technique to effect positive transformation and create a competitive business environment.
Conclusion
Corporate restructuring is altering one or more firm capital structure components. There are numerous ways to complete the corporate restructuring process. These strategies consist of mergers, amalgamation, takeovers, etc. Read the article below to read about these strategies in detail.
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