Chapter: Amalgamation

Q: 1. What is Amalgamation?

Amalgamation is an event or transaction in which two or more companies, or their net assets, are
brought under common control in a single legal entity. The concept of control relates to the
ability to dictate operating and financial policies.

The shareholders of the transferor company are allotted shares in the transferee company. The
shareholders have a continuing interest in the risks and benefits of the transferee company. The
substance of amalgamation is that the businesses of the transferor and the transferee companies
continue to be run as before, though under a single corporate name.

It should be noted that amalgamation includes absorption and external reconstruction.

Q: 2. Forms of Amalgamation

Companies have always tried to grow through the development of new products and expansion
of existing products in the new potential markets. In many cases, however, the desired growth
can be achieved through amalgamation (Merger and Acquisition).

Amalgamation may take one of the following forms, as illustrated below:

a) Merger: In this case both the combining companies are dissolved and assets and liabilities of
both companies are transferred to a newly created company. The operations of the previously
separate companies are carried on as a single legal entity.

b) Acquisition: In this case only one of the combining companies survives and other loses its
separate identity. The assets and liabilities of the acquired company are transferred to the
acquiring company.

Q: 3. Common Ways of Amalgamation

There are generally three common ways in which companies can amalgamate together to gain
advantage in their market. They are as under:

Horizontal: It is an amalgamation that takes place between two companies in the same line of
business. For example, when a tea company amalgamates with another tea company. The main
purpose of horizontal amalgamation is the acquisition of a competitor, by either companies, in
the same line of business, which increases the market share and reduce competition in one
stroke.
Vertical: It is an amalgamation that takes place when a company amalgamates with a supplier or
a customer. Both strengthen the amalgamated company's competitive position and may enable it
to diversify.

Conglomerate: Conglomerate is a diversified group of companies. In a conglomerate

amalgamation, the amalgamating companies are in totally unrelated lines of business. The main
purpose of conglomeration is diversification of risks.

Q: 4. Definition of Transferor Company and Transferee Company

Transferor Company: Transferor Company means the company which is amalgamated into
another company.

Transferee Company: Transferee Company means the company into which a transferor
company is amalgamated.

Q: 5. Types of Amalgamation

There are two types of amalgamation:

1. Amalgamation in the nature of merger

2. Amalgamation in the nature of purchase

Amalgamation in the nature of merger

According to AS-14 on Accounting for Amalgamation, the following conditions must be

satisfied for an amalgamation in the nature of merger:

A. After amalgamation, all the assets and liabilities of the transferor company becomes the assets
and liabilities of the transferee company.

B. Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company become the equity shareholders of the transferee company by virtue of amalgamation.

C. The business of the transferor company is intended to be carried on after the amalgamation by
the transferee company.
D. Purchase consideration should be discharged only by issue of equity shares in the transferee
company except that cash may be paid in respect of any fractional shares.

E. No adjustments are required to be made in the book values of the assets and liabilities of the
transferor company, when they are incorporated in the financial statements of the transferee
company. If any one of the condition is not satisfied in a process of amalgamation, it will not be
considered as amalgamation in the nature of merger.

Amalgamation in the nature of purchase:

An amalgamation will be treated as “Amalgamation in the nature of purchase” if any of the

above mentioned conditions is not satisfied.

Q: 6. Computation of Purchase Consideration

For computing purchase consideration, generally two methods are used:

1. Purchase Consideration using net asset method: Total of assets taken over and this
should be at fair values minus liabilities that are taken over at the agreed amounts.

Particulars Tk.
Agreed value of assets taken over XXX
Less: Agreed value of liabilities taken over XXX
Purchase Consideration XXX
Agreed value means the amount at which the transfer or company has agreed to sell and
the transferee company has agreed to take over a particular asset or liability.

2. Purchase consideration using payments method: Total of consideration paid to both

equity and preference shareholders in various forms.

Example: A. Ltd takes over B. Ltd and for that it agreed to pay Tk 5,00,000 in cash.
4,00,000 equity shares of Tk 10 each fully paid up at an agreed value of Tk 15 per share.
The Purchase consideration will be calculated as follows:

Particulars Tk
Cash 5,00,000
4,00,000 equity shares of Tk 10 fully paid up at Tk 15 per share 60,00,000
Purchase Consideration 65,00,000

Points to be remember:

a) Only payment to shareholders is to be taken into consideration

b) Consideration for debenture holders will not be included in the purchase consideration

c) Liquidation expenses or payment for cost of absorption are not included in the purchase
consideration.