Amalgamation of Companies

Amalgamation of Companies

• For the purpose of enjoying the economies of scale and to reduce the cut throat competition ,two or more than two joint companies may combine their undertakings and become one joint stock company.

Definitions

• Amalgamation:- • When two or more companies same in all

respects go into liquidation and the new company is formed to take over their business is called amalgamation.

• Absorption:-• No new company is formed , whereas an

existing company purchases another existing company, it is called absorption

Traditional Concept

• 1. Amalgamation• 2.Absorption• 3.Reconstruction• Internal Reconstruction• External Reconstruction

Modern Concept

• In the nature of Merger• In the nature of Purchase

Objectives of Amalgamation

• To have better control, increase in market share and area of operations

• To eliminate the cut throat competition• To enjoy the economies of large scale

production• To utilise the services of professional experts• Availability of funds for the future

investment plans• All other advantages of combination

Reconstruction

• The objective is not to bring about a combination of companies but merely to recognize a company which has suffered a huge losses which are to be written off.

Types of Reconstruction

• External Reconstruction• Existing company is wound up by selling its

business to newly formed company which is generally similar named or owned by the same shareholders.

Objectives of External Reconstruction

• To bring down the value of assets to the real worth by writing off the accumulated losses of the past year

• To offer the shareholders the shares representing real worth of the company

• To provide the security to the company for the future losses

• Raising the fresh capital by issuing new shares• Changing altogether the memorandum of

association of the company

Internal Reconstruction

• Rearrangement and reduction of share capital is done.

• The share capital is reduced to its real worth and the same amount is used to eliminate the accumulated losses ,fictitious assets and to write down the overvalued assets of the company.

Objectives of Internal Reconstruction

• To eliminate the fictitious assets of the company

• To reduce the share capital of the company• Creating confidence among shareholders by

providing them fair return on their true investment

• To present the true and fair view of the company

Purchase Consideration

• It is the amount which is paid by the transferee company for the purchase of the business of the transferor company.

Methods for calculation

• 1.Lump sum payment method• 2.Net asset method• 3.Net payment method• 4.Intrinsic worth method