Amalgamation – Definition

Cite this article as:"Amalgamation – Definition," in The Business Professor, updated January 26, 2020, last accessed October 20, 2020,


Amalgamation Definition

Amalgamation is a consolidation of two entities to form a single entity. When two small businesses or companies are combined to form one, amalgamation has occurred. This is a little different from merger and acquisition in which an entity is buried into a bigger entity in the case of acquisition or two entities coming together but retaining the name of a stringer entity.

In amalgamation, the two combined entities survive as a legal entity, hence, the legal entity formed is a combination of the assets and liabilities of both companies. However, in recent times, mergers or consolidation are terms used in place of amalgamation.

A Little More on What is an Amalgamation

Amalgamation is one of the ways of restructuring a corporate entity or companies, it refers to a combination or fusion of two separate to function as an entirely new company.  This is done between two companies that perform similar business operations and compete in the same market and industry. When two similar companies agree to come together to combine their assets and liabilities and expand their reach, amalgamation has occurred.

Amalgamation can also occur in accounting, it is the consolidation of two accounts or accounts of two different entities. In this context, the financial statements of both entities are aggregated to form a consolidated financial statement. Amalgamation often results in the creation of a larger and stronger legal entity. Expansion of business and the ability to reach wider customers is another attribute of amalgamation.

 Types of Amalgamation

There are two major types of amalgamation, one type of like a merger while the other type can be likened to a purchase. In the first type of amalgamation, the assets, liabilities, and shareholders of two companies are pooled together, however, one company is the transferee, while the other is the transferor. Once all assets and liabilities of the transferee have been transferred to the transferor, the transferor continues business in its name and there is no adjustment to book values.

In the latter type of amalgamation, a purchase occurs, in which a stronger company acquires a smaller or target company. The combined company is formed on the basis of purchase.

Below are some important point you should know about amalgamation;

  • Amalgamation refers to a combination of two entities to form a new legal entity. It is also referred to as merger or consolidation.
  • The assets and liabilities of both entities are combined into one, forming an entirely new entity.
  • There are two types of amalgamation, one is similar to a merger while the other is a purchase.
  • In the merger, a smaller company is embedded into a bigger company and the name of the bigger company is retained after assets and liabilities have been merged. In a purchase, an acquirer purchases a target company.
  • Amalgamation leads to the creation of a new entity with more assets, reduced liabilities and a stronger customer base.

Pros and Cons of Amalgamation

The pros of amalgamation are;

  • ¬† ¬† ¬† ¬† Amalgamation can help to reduce or eliminate competition.
  • ¬† ¬† ¬† ¬† It increases cash resources
  • ¬† ¬† ¬† ¬† It reduces taxes on companies
  • ¬† ¬† ¬† ¬† Amalgamation drives business growth, expansion, and financial gain.
  • ¬† ¬† ¬† ¬† It reduces the level of risk and increases shareholders‚Äô value.

The cons of amalgamation are;

  • ¬† ¬† ¬† ¬† It can create a monopoly, especially if the competition is totally cut off in the market.
  • ¬† ¬† ¬† ¬† It can cause a reduction workforce in which many employees lose their jobs.
  • ¬† ¬† ¬† ¬† Amalgamation can lead to an increase in the new entity’s debt load.

Amalgamation Procedure

There are certain procedures that must be followed for an amalgamation to be successful. First, a plan for amalgamation must be submitted to the board of directors of each company. The board must assent to the fusion of both entities before the amalgamation can be finalized. Also, a regulatory body such as the Securities Exchange Commission in the United Stated must receive a plan and also approve the shareholders of the new entity.

¬†Reference for ‚ÄúAmalgamation‚ÄĚ ‚Äļ Resources ‚Äļ Knowledge ‚Äļ Finance ‚Äļ Small Business ‚Äļ Entrepreneurship

Academics research on ‚ÄúAmalgamation‚ÄĚ

Cost inefficiency of municipalities after¬†amalgamation, Nakazawa, K. (2013). Cost inefficiency of municipalities after amalgamation.¬†Procedia Economics and Finance,¬†5, 581-588. This paper focuses on the increase in slack costs due to municipality amalgamation, which is pushed forward in several countries to achieve economies of scale. Employing the stochastic frontier cost function to estimate the inefficiency of local public expenditure due to slack, this study investigated 479 Japanese municipalities that had amalgamated from 2000 to 2005. This work used the technical inefficiency variable ‚ÄúNumber of municipalities that participated in an¬† amalgamation‚ÄĚ and a dummy variable for ‚ÄúThe newly-established-municipality form of amalgamation.‚ÄĚ Results show that these variables have an impact on the cost inefficiency of local public expenditure. The average efficiency scores in the two estimations carried out were 1.145 and 1.100. The estimation results showed that municipality amalgamation produces integration costs (slack) in an administrative organization. The degree of slack depends on the form of amalgamation.

Amalgamation, free-rider behavior, and regulation, Nakazawa, K. (2016). Amalgamation, free-rider behavior, and regulation. International Tax and Public Finance, 23(5), 812-833. Amalgamation incentivizes municipalities to increase public debt because it allows them to subrogate their repayment and interest burden on the entire municipality after amalgamation. Smaller municipalities, in particular, tend to accumulate public debt in order to free-ride. Previous studies have shown this kind of opportunistic behavior in countries where municipalities can issue bonds freely in the market. However, in Japan, municipalities cannot issue bonds freely by regulation. When such regulation controls debt accumulation by the merging municipality, the free-rider effect should be weak. This study examines the relationship between the regulation of local government borrowing and free-rider behavior of Japanese municipalities. The difference-in-difference regression results confirm the existence of a free-rider effect in this regard. Moreover, the debt expenditure ratio, the index of the regulation of local public bond issues, has the same effect that prevents local public debt from increasing for both merging and never-merged municipalities. This fact shows that a merging municipality with a free-rider incentive cannot increase local public debt to excess by using the regulation. Therefore, the average free-rider effect per capita is approximately 7 % of the average local public debt per capita for the end of the pre-treatment period. This result is considerably lower than the effects of the Swedish cases.

SYMPOSIUM ON AMALGAMATION AND FINANCIAL SUSTAINABILITY IN LOCAL GOVERNMENT: PART 2., Dollery, B., & Grant, B. (2013). SYMPOSIUM ON AMALGAMATION AND FINANCIAL SUSTAINABILITY IN LOCAL GOVERNMENT: PART 2. Public Finance & Management, 13(3). Despite the longstanding nature of local government as a topic of academic inquiry, the question of financial sustainability and in particular council amalgamation as a means of improving the operation of municipalities continues to be a salient feature of local government studies writ large. Grounded in the claim that municipal population size bears a strong relationship to financial sustainability, programs of structural reform and in particular council amalgamation continue to be pursued, despite the absence of empirical support for this claim. This Symposium focuses on the effects of amalgamation on the financial sustainability of local government.

The¬†Amalgamation¬†of Manufacturer’s Participant Restriction and Incentive Restriction‚ÄĒA Discussion on Principal-Agent Between Local Government and Distributors [J¬†‚Ķ, Da-an, H. E. (2007). The Amalgamation of Manufacturer’s Participant Restriction and Incentive Restriction‚ÄĒA Discussion on Principal-Agent Between Local Government and Distributors [J].¬†Finance & Trade Economics,¬†11. The analysis on participant restriction and incentive restriction in incentive regulatory theory focuses generally on public utility sectors and pays little attention on the distribution industry. Actually, there is also a problem on manufacturer’s participant restriction and incentive restriction in principal-agent connection of the distribution industry. Based on the brief theoretic comment, this paper discusses the amalgamation of manufacturer’s participant restriction and incentive restriction and offers some training of thought for local government’s principal-agent management.

Industry change and union mergers in British retail¬†finance, Morris, T., Storey, J., Wilkinson, A., & Cressey, P. (2001). Industry change and union mergers in British retail finance.¬†British Journal of Industrial Relations,¬†39(2), 237-256. This paper investigates the reasons for and implications of the recent merger between three of the largest unions in the retail finance sector, creating UNIFI. Recent union mergers have been explained by environmental changes adversely affecting membership and finances. These prompt leaders to consider merger as an appropriate organizational solution. Mergers are successfully concluded when leaders are able to overcome internal resistance and develop acceptable outcomes. We examine whether these factors are sufficient to explain how the merger between the national banking union and two large company‚Äźbased staff unions was concluded, given longstanding institutional rivalry.

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