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Corporate restructuring in the form of amalgamations have become very popular in the economic environment of the world. Amalgamations gained momentum in the Indian economy following economic liberation in 1991. Earlier amalgamations were considered to be a hostile business strategy, but today the Indian business house accepts its willingly as a measure to grow at an accelerated pace.
Amalgamations help in diversification of business. If a company wants to enter into a new line of business, it will easier and economical to amalgamate with another company that is already matured in the business rather than setting up the whole new venture from the scratch.
They also help companies reap the benefits of economics of scale, utilize tax shields, lower their financing costs, and gain managerial effectiveness. The success mantra for amalgamations depends upon its ability to create value. In other words, all amalgamations that do not maximize shareholders’ wealth fail in the long run.
Amalgamations also provide certain strategic benefits to the companies. Firstly, two amalgamating companies can prevent a competitor from becoming a market leader. Secondly, it prevents the company, existing in a saturated market, from creating additional productive capacity thereby reducing the expansion cost. Thirdly, it also leads to knowledge exchange between the companies. For example, one company may have an innovative product but it may not have the strong marketing base of another large company. Therefore, amalgamating these two companies will provide the benefit of the new product and the large customer base to both of them.
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