The Benefits of Amalgamation - Example

Implications of Amalgamation Course Code and Name Professor’s Name University Name City, State Date of Submission Implications of Amalgamation Introduction Amalgamation is the combination of two or more companies to become one entity. They either unite or blend or combine (Fletcher, 1922). It involves combination of assets and liabilities. The shareholders’ liabilities can also be transferred during the process of amalgamation. Amalgamation has become common in today’s business trends. Companies come together to form a stronger, stable and large company (Eksteen, 1997). It leads to the growth and expansion of newly formed company. The rules of amalgamation are stated by the Company’s act of 1956 (Wesley, 1994). When Eastshire Fire and Rescue Services come together with the adjacent fire station for amalgamation, there are various implications. According to the rules of amalgamation both companies lose their legal status they had before (Eksteen, 1997). They are re-established again, where they become jointly held with a new name or one of their names as agreed. The company formed is new and separate from initial companies with unique identity, name, logo, and existence. This paper reports on the financial implications of amalgamation between Eastshire Fire and Rescue Services an adjacent fire station company. Amalgamation has both pros and cons. During the process, the companies come together with a mind of adding value to themselves in order to become more competitive or for expansion reasons. The Benefits of Amalgamation Economies of Scale Amalgamation brings about economies of scale. This means that there average cost decreases as the quantity increases (Wesley, 1994). The newly formed company is able to provide more services at a lower cost. Combination of the two fire stations is an advantage to the stations as they will provide the services together. Their combination will boost their capacity in the provision of the services to the society significantly. There will be increased provision of the services and they will be efficiently being provided. This is the benefits of the economies of scale that the newly formed company enjoys (Wesley, 1994). The fire station runs under lower cost than it is with the individual company. This is because the administrative cost is cut down as a result of amalgamation. The administrative cost is usually very high for each constituent company. This saves the company for the newly formed company and it increases the profit margin (Eksteen, 1997). The financial stability of the fire station is enhanced. Economies of scale also ensure that there is an increased production level with the fusion of the Eastshire Fire and Rescue Services and another fire station. The company that is formed after fusion is bigger and has a higher capacity. It is able to provide more services as it has grown bigger and stronger. This is a financial benefit to the company as the company can be able to generate more revenue through the sale of the increased products or services (Winchester, 2002). The constituent companies are valued whether they have liabilities and also the share of each shareholder. During amalgamation process, the financial obligations that the company may have are transferred to the newly formed company. The newly formed company is able to coup up with the new liabilities because it enjoys the economies of scale. This is because the company has combined with another company and hence it has increased its net worth (Eksteen, 1997).. The company has a capacity to pay for the liabilities that have come along with the combining companies. Economies of scale allow big companies to have wider geographical reach. Small companies are attimes limited by the size (Winchester, 2002). The amalgamating of the two fire stations boosts the muscles of individual company and the amalgamated company can be able to produce more goods or services at an ease. Amalgamation increases the market size for.The company. The amalgamated fire station can access wider market hence it can sell its services and is able to get more revenue. Diversification Amalgamation is a form of risk diversification. Two or more companies come together and the risk involved as individual company is shared out when the companies combine. Diversification is a form of risk reduction through financial decisions. The two fire station companies can diversify the risk of bankruptcy through amalgamating the two companies. When the companies might be facing financial problems, it might be prudent for the companies to come together and amalgamate so that they might not be dissolved due to bankruptcy. Diversification can also be viewed in terms of avoidance of competition among the competing companies that produce similar products (Winchester, 2002).. The Eastshire Fire and Rescue service and the adjacent company may decide to become price setters when they amalgamate. Their combination makes the fire stations behave like a monopolist hence price setter. The existing companies may be weak due to the inability to have a market. The amalgamation creates a market for the newly formed company and also expands that market. This creates financial soundness to the companies that are involved because they can embrace this market and sell their services in this extensive market. Profits Maximization The main objective of any business is the maximization of profits that results from the business which is undertaken. When the two fire station companies amalgamate they have an objective of increasing their net value. The net value is expressed through the profits that the firm acquires from the amalgamation (Eksteen, 1997). Through the amalgamation the firm is able to produce more outputs with efficiency and the market also expands. The shareholders therefore are able to earn good share out of the profits that are being made. The financial scope of the newly formed company is bigger than the scope of the constituent companies. The earnings per share would also improve when the two fire stations combine through amalgamation. The firms would increase their value and in the eyes of the public because they have become one big company. The company will manifest greater strength that the constituent companies that were there in place during initial stages did not have. The profits that are being earned corresponds the increase in EPS. The shareholders who are the owners of the company will enjoy these benefits as they will be paid the dividends. Avoidance of Duplication of Products or Services One of advantage of amalgamation is the avoidance of duplicating products or services that one company offers. The Eastshire Fire and Rescue service and the adjacent fire station offer same services. The amalgamation brings these two companies together as they are producing same service to people. The products that are being manufactured are not duplicated in any way. This is because they are being produced by one company. The services that the two fire stations offer are standardized and hence the customers would not prefer the services of one company to another. The standardized services ensure that the competition is reduced significantly. The prices are also standardized (Eksteen, 1997). The newly formed company will there benefit because it will not reduce prices in order to enhance its competitiveness in the industry. The company is able to get more revenues due to the standardization of services and prices. Economies of Scope Economies of scope are the economic advantage that comes about when a single company provides goods and services. It ensures that the newly formed company as a result of amalgamation provides goods or services at a lower cost than individual company. The lower cost can be explained by the fact that single organization contribute to fixed inputs or overheads which include electricity and administrative costs (Eksteen, 1997).. These costs are catered for once when the companies amalgamate. The Eastshire Fire and Rescue Services combining with another company Fire station will enjoy the benefit of economies of scope by combining to form one company. The Economies of scope ensures that the newly formed company manages its finances properly. The overhead costs are efficiently catered for by one the newly formed company after amalgamation (Winchester, 2002). The economies of scope save the company money as services are offered simultaneously. Workforce When the two fire station companies merge, the workforce is usually reduced. The two companies come together to become one major company (Chesnutt, 1999). Due to the companies being a substitute to the other, they operate in almost similar manner. They will share many structures together. With coming together of these two companies various operational structures will be merged. This means that there is workforce that will be combined. This is an advantage to the company. The company is able to reduce its operating costs due to amalgamation. The cost there fore comes down unlike when the two fire stations are individual companies. Source of Finance Small companies are usually faced with problem of financing their daily activities. Inorder to have an opportunity to access funds the companies amalgamate. With the amalgamation of the two fire stations, the two companies can be able to access debt and equity financing easily as compared to single companies that do not have any relationship. Due to availability of the sources of funds the company is able to expand itself hence it grows. Tax Advantage When the firms come together as one during the amalgamation process, they benefit from tax advantage. The two fire stations will benefit from the amalgamation as they will pay less tax than when it is a single separate company (Eksteen, 1997). When the firms amalgamate the shareholders liability is also transferred. This gives the formed company an advantage as the newly formed company is exempted tax due the liability. This financial implication can help the company to take advantage of this aspect of tax advantage. The company saves a lot of money through the following. This money that it saves can be used in investment (Winchester, 2002). Although the amalgamating these two companies looks very lucrative, there are various challenges that the amalgamation face. These cons are discussed below; Diseconomies of Scale Diseconomies of scale affect the combining fire stations adversely. It results from the companies merging to form one big company. This increases the cost of coordination in the big company that leads to an increase in cost per unit of the product or service that is provided. When the Eastshire Fire and Rescue service and the adjacent fire station combine they form one big company. The administration cost and overhead costs although they have been reduced, the cost of coordinating the larger fire station may be very high because the company is producing goods in large quantity. This can become a challenge to the company and the cost can be translated to the consumers (Winchester, 2002). The Consumer Perceptions When Eastshire Fire and Rescue Services amalgamate with the adjacent fire station company, it is important to consider the consumer perception of both companies involved in the amalgamation. When a company that has poor track record combines with another company that is clean and has good name in the public domain, the public tends to lose faith with the company formed after amalgamation. The newly formed company loses a lot of revenue due to loss of faith of the customers (Eksteen, 1997). The two fire stations should consider how the counterpart had been performing initially. The process of valuation of the company is important. It will review whether the company trend over the years. The EPS in each constituent company is also an important aspect during the valuation process. It identifies what each shareholder earns in relation to the shares that they have (Winchester, 2002). Joblessness Amalgamation can lead to joblessness to the employees that had been employed in any of the company that is involved in amalgamation. The employees of Eastshire Fire and Rescue service and the adjacent fire company will suffer the workers layoff. This is because the firm has amalgamated. The similar activities of the company will be combined and managed by fewer people than constituent company (Winchester, 2002). These can lead to loss of certain group of people that had certain skills that could have been used for the development of the firm. Conflict The process of amalgamation involves bringing two separate companies into one single company. The two fire stations coming together might create a rift between themselves. This is because each of the company has its own objectives that it seeks to achieve. The objectives may conflict between the companies. It therefore becomes hard for the two combining firms to carry out the business as one. The major company tends to consume the small companies due to their size and influence. The financial implication of the conflicting objectives in the fire station is adverse. Due to their inability to work together, the company ends up making losses during their operation activities (Chesnutt, 1999). The conflict may also lead the company to a situation in which they spend lot of money in search to reaching a common ground when making important agreements between themselves. Loss of identity The Eastshire Fire and Rescue Service and the adjacent fire station lose their legal identity when they amalgamate. This is because the single companies combine together to form one company that is separate from the constituent companies (Winchester, 2002). The newly formed fire station will be governed by its own laws. The initial companies lose their identity and name and they become one. Conclusion Eastshire Fire and Rescue Service and the adjacent company amalgamating have both benefits and risks. The coming together makes the newly formed firm to become stronger than single constituent single company. The fire stations combine their skills, assets and liabilities. There various financial implications that are involved with the amalgamation of the two fire stations. The economies of scale ensures that the newly formed firm provides an efficient services as the firm has been formed as a result of two firms coming together. The company also provides more services as the newly formed firm has been boosted when the two firms amalgamate. Economies also enhances that when the two fire stations amalgamate, the market will also increase as the firm has the capacity to provide the services. The administrative cost and other overhead costs are combined when the fire stations come together as one company (Chesnutt, 1999). These costs significantly reduce the cost that is used in running the separate companies. It makes the resultant fire station less costly. This is a financial advantage to the company as the companies can be able to reduce their operation costs. The coming together of these two fire stations will reduce the competition in the industries. The services that these fire stations provide are close substitutes to each other. With combination of the two firms also the duplication of goods and services is reduced. The firms therefore, are able to enhance their financial stability because they have standardized products and services. Diversification of risk is also enhanced through the amalgamation of the two fire stations. Through the combination of the two fire stations they are able to diversify themselves so that they avoid going bankrupt (Chesnutt, 1999). They will also ensure that they will be able to access funds with ease unlike when it is a single firm. Amalgamating the two companies is also faced with various challenges that may affect financial position of the company (Wesley, 1994). It brings about the diseconomies of scale. This affects the newly formed company. The companies combine to become one big company after the amalgamation. The company might not have the capacity to run the newly big company that is being formed. This can be a challenge that might lead to escalating prices of the services that are being offered. The consumer perception of a certain company might dilute the goodwill that a certain company has to the public. This adversely affects the financial stability of the newly formed firm. The firm might lose its customers and the sale of the services becomes affected too. References List WESLEY, F., RAGIN, H., DENSON, K., MADSEN, P., DOLPHIN, D., & COX, B. (1994).Amalgamation.Köln, Minor Music. FLETCHER, J. S. (1922). The Rayner-Slade amalgamation. New York, A.A. Knopf. WINCHESTER, J. A., PHARAOH, T., & VERNIERS, J. (2002).Palaeozoic amalgamation of Central Europe. London, Geological Society. EKSTEEN, F. R. L. N. (1997). New business economics. Grade 12 : interim syllabus 1995. Cape Town, Nasou. CHESNUTT, C. W., MCELRATH, J. R., LEITZ, R. C., & CRISLER, J. S. (1999). Charles W. Chesnutt: essays and speeches. Stanford, Calif, Stanford University Press. Read More