# Amalgamation: Definition, Pros and Cons, vs. Merger & Acquisition

![Amalgamation](https://www.investopedia.com/thmb/5J-dKqvA81FG_5zgv5FB-GRX0Wk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Amalgamation-893baf0168714cc3b7fd561eb809d562.jpg)

*— Investopedia / Xiaojie Liu*

## What Is an Amalgamation?

An amalgamation is the combination of two or more companies into an entirely new entity. Amalgamations are distinct from acquisitions in that none of the companies involved in the combination survive as legal entities.

Instead, a completely new entity, with the combined assets and liabilities of the former companies, is born.

The term amalgamation has fallen out of popular use in the United States. It has been replaced with terms such as [merger](https://www.investopedia.com/terms/m/merger.asp) and [consolidation](https://www.investopedia.com/terms/c/consolidate.asp), with which it can be synonymous. However, it is still commonly used in certain countries, such as India.

### Key Takeaways

*   Amalgamation combines two or more companies into a new entity.
*   It merges their assets and liabilities.
*   This differs from an acquisition or takeover in that none of the companies involved survive.
*   Amalgamation can help companies increase cash resources, reduce competition, and save on taxes, and more.
*   The practice can also lead to a monopoly if too much competition is eliminated, raise the new entity's debt load to a dangerous level, and cost some employees their jobs.

## How Amalgamations Work

Amalgamations typically happen between two (or more) companies engaged in the same line of business or that share some similarity in their operations.

Usually, the process involves a larger entity, called a "transferee" company, absorbing one or more smaller "[transferor](https://www.investopedia.com/terms/t/transferor.asp)" companies before creating the new entity.

The terms of an amalgamation are finalized by the board of directors of each company involved. The plan is prepared and submitted to regulators for approval.

### In India

In India, for example, that authority resides in the High Court and Securities and Exchange Board of India (SEBI).

Indian tax law defines amalgamation somewhat broadly as "the merger of one or more companies with another company or the merger of two or more companies to form one company."

It refers to the merging companies as "the amalgamating company or companies," while the company they merge with or which is newly formed as a result of the merger is "the amalgamated company."

### In Canada

In Canada, amalgamations must be approved by Corporations Canada and the relevant provincial and territorial governments.

Canada defines amalgamation as "when two or more corporations, known as predecessor corporations, combine their businesses to form a new successor corporation."

Once approved, the new company officially becomes a legal entity and can issue shares of stock in its own name.

## The Pros and Cons of Amalgamations

### Pros

Amalgamation is a way businesses can:

*   Acquire cash resources
*   Reach a broader customer base
*   Reduce or eliminate competition
*   Gain market leverage
*   Save on taxes
*   Achieve [economies of scale](https://www.investopedia.com/terms/e/economiesofscale.asp)

Amalgamation may also increase shareholder value, reduce risk through [diversification](https://www.investopedia.com/terms/d/diversification.asp), and improve managerial effectiveness.

The new company may achieve financial results and levels of growth that would have been more difficult for its separate predecessor companies to achieve.

### Cons

On the other hand, if too much competition is eliminated through amalgamation, a monopoly may result. This can be troublesome for consumers and the marketplace, and bring about government intervention.

Amalgamation may also cost some in the new company's workforce their jobs, because their positions become redundant.

In addition, it can increase debt, possibly to a dangerous level. By combining two or more companies, the new entity assumes the liabilities of all involved.

Pros

*   Can improve competitiveness
    
*   May reduce taxes
    
*   Achieves economies of scale
    
*   May increase shareholder value
    
*   Diversifies the business
    

Cons

*   Can pose risk of monopoly
    
*   May lead to job losses
    
*   Could result in a dangerous debt load
    

## Example of Amalgamation

In April 2022, the telecom giant AT&T and the television entertainment company Discovery, Inc. announced that they had finalized a deal to combine AT&T's WarnerMedia business unit with Discovery.

That month, a new entity known as Warner Bros. Discovery Inc. began trading on the [Nasdaq](https://www.investopedia.com/terms/n/nasdaq.asp) stock exchange under the symbol WBD. WarnerMedia and Discover, Inc. ceased to exist.

> **Fast Fact**
>
> In accounting, amalgamations may also be referred to as consolidations.

## Amalgamation vs. Acquisition

As explained, in a typical amalgamation, two or more companies agree to combine their assets and liabilities and form an entirely new company.

By contrast, in an [acquisition](https://www.investopedia.com/terms/a/acquisition.asp), one company purchases another (usually by buying up enough of its stock) and takes on its assets and liabilities, with no new company being created.

While amalgamations tend to involve voluntary agreements between the different parties, acquisitions can occur without the assent of the acquired company. This is known as a [hostile takeover](https://www.investopedia.com/terms/h/hostiletakeover.asp).

## What Is the Objective of an Amalgamation?

In general, the objective of an amalgamation is to establish a unique entity capable of more effectively competing in the marketplace while also achieving economies of scale. In that respect, it is not all that different from an acquisition and similar strategies to aid corporate growth.

## What Are the Methods of Accounting for Amalgamation?

There are two primary ways to account for an amalgamation in some countries: the [pooling-of-interests method](https://www.investopedia.com/terms/p/poolingofinterests.asp), which uses [book values](https://www.investopedia.com/terms/b/bookvalue.asp), and the purchase method, which uses [fair market values](https://www.investopedia.com/ask/answers/how-are-book-value-and-market-value-different/). In the U.S., the [Financial Accounting Standards Board (FASB)](https://www.investopedia.com/terms/f/fasb.asp) put an end to the use of the pooling-of-interests method in 2001. It required combining companies to use only the purchase method. In 2007, however, the FASB adopted a new standard known as the [purchase acquisition accounting method](https://www.investopedia.com/terms/p/purchaseacquisition.asp).

## What Is an Amalgamation Reserve in Accounting?

In accounting, the amalgamation reserve is the amount of cash available to the new entity after the amalgamation is completed. If this amount is negative, it will be booked as goodwill.

## The Bottom Line

Amalgamations are one of several ways existing companies can join forces and create an entirely new company. While the term is rarely heard in the U.S. today, the practice continues both there and elsewhere around the world.

Amalgamation can also refer to the combining of other types of organizations into a single one, such as nonprofit groups and entities in the public sector, including government agencies and municipalities.

> **Article Sources**
>
> 1.  ClearTax. "[AS 14—Accounting for Amalgamations](https://cleartax.in/s/as-14-accounting-for-amalgamations)."
>     
> 2.  IncomeTaxIndia.gov. "[Definitions](https://incometaxindia.gov.in/Acts/Income-tax%20Act,%201961/1969/102120000002038699.htm)."
>     
> 3.  Government of Canada. "[Amalgamation (Corporations)](https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/changes-your-business/amalgamation.html)."
>     
> 4.  AT&T. "[AT&T and Discovery Close WarnerMedia Transaction](https://about.att.com/story/2022/close-warnermedia-transaction.html)."
>     
> 5.  FASB. "[Summary of Statement No. 141 (Revised 2007): Business Combinations](https://fasb.org/page/PageContent?pageId=/reference-library/superseded-standards/summary-of-statement-no-141-revised-2007.html&bcpath=tff)."
>     
> 6.  IFRS. "[IFRS 3 Business Combinations](https://www.ifrs.org/issued-standards/list-of-standards/ifrs-3-business-combinations/)."
>     
> 7.  International Federation of Accountants (IFAC). "[Introduction to IPSAS](https://www.ifac.org/_flysystem/azure-private/publications/files/7-Introduction-to-IPSASs-Consolidation-NEW-FORMAT_FINAL.pdf)."