The Key Differences Between Amalgamation and Absorption
When it comes to restructuring a company, there are two common strategies that organizations often choose from: amalgamation and absorption. Although they share a few similarities, there are some significant differences between these two methods. In this article, we will explore the key differences between amalgamation and absorption and how they impact businesses.
Defining Amalgamation
Amalgamation refers to the process in which two or more companies combine their operations to form a new entity. In other words, when companies decide to amalgamate, they dissolve their current structures and create an entirely new company. This approach is typically adopted when both organizations have complementary strengths that can be leveraged to create a more robust and efficient enterprise.
Understanding Absorption
On the other hand, absorption refers to the process where one company takes over another and assumes its assets and liabilities. The company that is being absorbed usually ceases to exist, and its operations become a part of the acquiring company’s business structure. The acquiring company often takes control of the absorbed organization’s resources to expand its market share, eliminate competition or acquire specialized capabilities.
The Key Differences
One of the key differences between amalgamation and absorption is the fact that they lead to different legal and operational outcomes. In amalgamation, both companies dissolve their existing structures and come together to form an entirely new entity. As a result, the shareholders of both organizations need to approve the proposal, and the new organization needs to be registered as a separate company with its own set of articles and memorandum of association.
On the other hand, absorption typically leads to one company acquiring the assets and liabilities of another. In this case, the acquiring company assumes control of the absorbed company’s business operations without creating a new entity. Instead, it assumes the legal responsibilities of the absorbed organization and may choose to integrate their assets, workforce, and resources into its existing structure.
Another significant difference between the two approaches is the fact that amalgamation is typically associated with mergers, where two equally strong companies come together to form a new entity. Absorption, on the other hand, is more closely associated with acquisitions, where a larger company takes over a smaller one.
Conclusion
In conclusion, Amalgamation and Absorption are two common strategies that businesses use in restructuring their operations. Although both methods have some similarities, they are fundamentally different in their approach, legal requirements, and operational outcomes. While amalgamation involves creating a new entity where both companies dissolve their existing structures; absorption involves one company taking over the assets and liabilities of another. By understanding the differences between these two strategies, businesses can make more informed decisions about which option is best for their specific needs.
Table difference between amalgamation and absorption
| Parameter | Amalgamation | Absorption |
|---|---|---|
| Definition | The merging of two or more companies into a single entity. | The process by which a company takes over the ownership and control of another company. |
| Legal Status | A new company is formed with a new legal status. | The absorbed company ceases to exist and is merged into the acquiring company. |
| Equity Shares | Equity shares of the merged companies are surrendered and new equity shares are issued to shareholders of the amalgamated company. | Equity shares of the absorbed company are cancelled and the shareholders are compensated with cash or shares of the acquiring company. |
| Assets and Liabilities | The assets and liabilities of all the companies involved are combined and revalued. | The assets and liabilities of the absorbed company are transferred to the acquiring company at their book value. |
| Control | A new management structure is created with equal representation from all companies involved. | The absorbing company assumes control of the absorbed company. |