The main difference between amalgamation and absorption is, when two companies come together and build up a new company then that is called amalgamation whereas if a company takes over another company and make it a new company then that is called absorption. It means when two companies want to expand their business and they don’t have enough resources to build up and expand it.
Then these two will mix up as their wish and will make a new company. In this case, if the company gets profit then both of them which had mixed up will get equal profit. But this doesn’t occur in the case of absorption. In case of absorption of any company facing financial problems and they don’t want to wind up their company then another company will take that company under their control.
But in this case, the company that is under the control of another one will not get equal profit. They will get a fixed amount at which he signs the agreement with that company.
To differentiate between amalgamation and absorption in detail, at first you have to know more about amalgamation and absorption. So let’s discuss amalgamation and absorption in detail.
What is amalgamation?
In case of amalgamation if any two companies want to expand their business but they don’t have enough resources to expand that then both of them will mix up and will build up a new company. And in this new company both of the company owners will have equal shares.
If the company gets profit then that profit will equally distribute between these two. Both of them will have equal responsibility regarding that company. Both will have responsibility if the company gets profit or loss. And because of this, there are some of the objectives of amalgamation which is as follows:-
Objectives of amalgamation
• Increase cash resources
As both of the companies come together to build up a new company so their cash will increase because now both of them have become a single one. So both of them will spend their money on that new company. And the result will be that their cash resources will increase. And they will be able to spend more capital to increase their manufacturing of goods. And they will able to supply more and more amount of goods. This will also help them to try new things with their company. Because now they will have as much that they can try a new product with their company.
• Managerial effectiveness
As two companies mix up and make a new company so there will be two minds of the company. And both of them have different qualities. It can happen that one of them will have to capable of taking good decision for their company whereas other will have good in investing capital with a sharp mind.
This means if they both meet then that will be very beneficial for their company that one will give suggestions to take any risky decision while other will give suggestions where to invest capital which will give more profit.
• Eliminate competition
If earlier there was a competition between both of the companies, which we’re making a loss for one of the company. And when both will come together then that competition will end. And will try to make their company as good as possible. Because of the competition will end up and when both will come together then both will try to give their best.
Because now this is not the only responsibility of a single owner of the company to make their company better. It’s now responsible for both of them because now both of them are the owner of the company and will have to give their best to get more profit in business.
• Increase shareholder value
As if both will come together then they will be able to sell more and more products because now the resources increased, capital increased which will help them to increase the value of shares in the market. And as more products of the company will increase their value of shares will also increase. And if their value of shares will increase then the company will start to increase the value of shares more to become more successful.
• Resources and development increase
When both of the companies mix up and will build up a new company then the resources will increase. Because earlier both of them was a separate company and now they both mixed up and become a new company. And when after becoming a new company their resources have increased. And if their resources have increased then their development will also increase because now they are capable of manufacturing more and more products to sell in the market. Which will become very beneficial for them.
• To achieve growth and gain financially
As above discussed that when they both mix up and become a new company then their resources increase. And because of their mix up, they will have to achieve growth and gain financially. Because now both companies will invest their capital in that single company which will obviously increase their growth financially. It means in most cases this amalgamation is very beneficial for those two companies which became now single companies.
Types of amalgamation
1. Amalgamation in the nature of merger
2. Amalgamation in nature of the purchase
1. Amalgamation in the nature of merger
In the case of the nature of merger assets, liabilities and shareholders combined. And the method of accounting treatment used in this amalgamation is the pooling of interest method.
2. Amalgamation in the nature of the purchase
In the case of the nature of the purchase, it has become like the purchase of the business. Means it won’t as the same as before. Shareholders won’t have that right which he had earlier. Now it will totally change. And the method which is used for accounting treatment is the purchase method.
What is absorption?
When one company takes over another company and build up a new company then that is called absorption. Absorption occurs in case if a small company facing financial problems or any resource problems then that company has been taking over by a big company and then both companies have merged and made a new company.
But here the name of the small company doesn’t exist, here only the name of big company exists because the big company has taken over the small company or in simple words the big company has purchased the small company and mixed up to make a big company where the name of a big company will appear. There has no sign of a small company will appear. There are some of the features of absorption of the company which are as follows:-
Features of absorption
• In the case of absorption a big company takes over a small company and build up a company where the name of the big company appears.
• Both of the companies, small and the big one have in the same line of business.
• In absorption larger company purchase the smaller one that’s facing financial problems.
So these are the features of absorption. From the above discussion about absorption, it is clear that in the case of absorption bigger company takes over the smaller company and build up a company in the name of the bigger one. There has no existence of a smaller company when it merged with the bigger company.
• In case of amalgamation two companies mixed up and build up a new company in which both of them has equal shares while in absorption a bigger company takes over the smaller company that is facing financial problems.
• There is no new company is formed in case of absorption of the company, only the name of the bigger company appears and there is no existence of smaller-company while in case of amalgamation a new company build up in which have equal responsibility for that new company.
• When amalgamation of companies occur then smaller companies are involved while in the case of absorption bigger company involve which takes over the smaller company.
• In case of absorption bigger company dominates the smaller company while in case of amalgamation no one company dominate any one of the company.
So these are the major difference between amalgamation and absorption wherein the case of amalgamation two smaller companies mixed up and build up a new company while in the case of absorption bigger company takes over the smaller company.