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