Why Should Corporations Consider Amalgamation or Merger?
Allan Madan, CPA, CA
An amalgamation, or merger, involves combining two or more corporations into one entity. Amalgamations are sometimes performed during purchase of a business and also often as part of reorganization. This article discusses the many advantages of amalgamation.
Advantage #1: Synergy
Amalgamation of multiples companies into one entity can result in greater success due to increase in performance and decrease in expenses.
Advantage #2: Tax Benefits
Another significant benefit is loss carry-forwards for tax purposes. If a company involved in the amalgamation has incurred net losses previously, those losses can be used to offset the income of the company that it is amalgamating with. This will result in lower taxes, which is a great advantage.
Advantage #3: Economies of Scale
Amalgamation results in expansion of the business operation, and thus, greater production and distribution. With this growth, the merged company is able to have reduced operating costs.
Advantage #4: Diversification
Amalgamation sometimes happens because companies want to diversify into new business ventures in order to reduce the risk of having too much investment in one industry. Diversification reduces risk since all the eggs are no longer in one basket.
Advantage #5: Greater Access to Financing
Due to its expansion, the amalgamated corporation can have better access to debt and equity financing. As well, it may be able to acquire funds at a lower rate of interest.
Advantage #6: Greater Market Share
Amalgamation of companies results in greater sales and hence, greater market presence. Increase in market share enables a corporation to have increased profitability.
Advantage # 6: Greater Ability to Compete
As a result of the economies of large scale production, the amalgamated company is able to provide superior and cheaper products. This gives the company a competitive edge in the industry. As well, if companies from the same industry amalgamate, then competition within the industry also decreases.
Additional Benefits
A few other benefits of amalgamation are increase in brand value of the corporation, and more rapid growth due to its greater ability to compete.
Disclaimer
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.
ABOUT THE AUTHOR
ALLAN MADAN
CPA, CA
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
If one corporation buys another that is in the same business do you have to set up a third company or can you just merge into the buyers corporation?
Hi Holly,
Thank you for your question.
If one corporation buys another that operates in the same business, you do not necessarily need to set up a third company. There are generally three ways to structure this type of transaction:
1. Share Purchase (Subsidiary Structure)
In this case, the buyer corporation purchases the shares of the target corporation. The target continues to exist as a separate legal entity but is now owned by the buyer. This is relatively simple, and all contracts, licenses, and employees remain with the target company. The buyer, however, assumes all historical liabilities.
2. Amalgamation / Merger
The two corporations can legally merge into one entity, often continuing under the buyer’s name. This creates a single combined company and may qualify for a tax-deferred amalgamation. However, all assets and liabilities of the target are automatically transferred to the merged company.
3. Asset Purchase
Instead of purchasing the shares, the buyer can purchase selected assets (such as equipment, inventory, and customer lists) and transfer them into the buyer corporation. This approach allows you to exclude unwanted liabilities but requires transferring each asset individually and may require third-party consents for contracts and employees.
Setting up a third company (a “Newco”) is only needed if you want to keep the acquired business separate for liability protection, future resale, or for tax reasons (e.g., using a Section 85 rollover).