Amalgamation

Surabhi Agarwal

What is an Amalgamation ?

Amalgamation generally takes in two parts :

1.A Merger is when two or more Organisation cease to exist in their own right And their resource , assets and roles are consolidated into a new entity which satisfies the needs of stakeholders .

2.A Takeover is when two or more Organisation cease to exist in their own right And their resource , assets and roles are consolidated into a new entity which satisfies the needs of stakeholders . Often a takeover is when a larger and more powerful body takes control of smaller body.

Definition

According to Accounting Standard 14 , (a) Amalgamation means an amalgamation pursuant to theprovisions of the Companies Act, 1956 or any other statute whichmay be applicable to companies.(b) Transferor company means the company which is amalgamatedinto another company.(c) Transferee company means the company into which a transferorcompany is amalgamated.(d) Reserve means the portion of earnings, receipts or other surplusof an enterprise (whether capital or revenue) appropriated by themanagement for a general or a specific purpose other than aprovision for depreciation or diminution in the value of assets orfor a known liability.

WHY AMALGAMATE?

1. Accelerated growth.2. Enhance profitability through Economies of

Scale & operating Economies.3. Synergy4. Diversification of risk.5. Reduction in tax liability.6. Increased market power.7. Managerial efficiency.

Conti… Market Entry Strategic Maglomania Hubris-spirit More effective allocation of resources. Increased quality or quantity of services Improved government or corporate support

Methods of Amalgamation Pooling of interest method - where all the assets , liabilities

and interest of shareholders are pooled

Purchase Method - Acquisition of one company by

another for a price .

Pooling of interest Assets , Liabilities and reserves of Transferor

company are recorded by the transferee company at their existing carrying amount .

If Transferor and Transferee company have conflicting accounting policies , a uniform set of accounting policies are adopted following the amalgamation.

Purchase Method The Transferee company accounts for

amalgamation – - by incorporating the assets and liabilities

at their existing carrying amount or - by allocation the consideration to

individual identifying assets and liabilities of the transferor company on the basis of their fair value t the time of amalgamation .

Live Examples

Asian Paints-Berger International

Year-2002 Asian Acquired 50.1% controlling stake in Berger International. Deal Rs.57.6 Crores Berger International has no operation in India but formed Berger Paints India Ltd. in Calcutta(subsidiary) Objective:-enter into the South East Asian market, growth. Such as Singapore, Thailand, Myanmar, Bahrain, Malta, UAE, Jamaica, Barbados and Trinidad, and Tobago.

Ranbaxy-Tokyo based Nippon Chemiphar Co. Ltd

2002 Pharmacy market Ranbaxy (RLL) Helps to understand Japanese regulatory framework and market environment. Product advantage

AOL sells call centre to Essar

April 1st 2008 Aegis BPO of Essar takes over to acquire AOL call centre in white field It is estimated at $100 million Payable in cash. Purpose is to enhance its voice and non voice offerings in the technological support space.

HP and Compaq Product line synergy 2002 Deal for $25 billion Exchange ratio

0.6325 in shares of HP for 1 share in Compaq Compaq is good in consumer desk top, better distribution net work HP is global leader in printers and scanners. Purpose- large customer base and elimination of computer overlapping product lines .

ITC with ITC Bhadrachalam Paperboards Ltd.(Tax Benefits)

2001 March End. ITCBPL- is subsidiary of ITC ITCBPL had a accumulated losses of Rs.125 crores. The loss due to high depreciation rate. ITC had a profit of Rs.1000 crores Take over benefits one time to reduce tax of 100 crores.

Godrej Soap Took over Transelektra Domestic products (cultural barriers)

One company may have entrepreneurial and risk taking style of functioning. Other company may have extreme bureaucratic and procedural orientation. Managers at the middle level were sent to various Godrej sites for training so that they could have a first hand experience of systems and practices and such managers were playing as change agents.

Warner Hindustan- Park Davis(Cultural failure)

Warner- task focused and formal organization Park Davis-people driven It had lowered their performances. IBM with Lotus development Corporation AT&T joint venture with Spanish and Swiss Telecom