SRM ONLINE EDUCATION

MBA

MERGERS, ACQUISITIONS AND CORPORATE VALUATION

Categories of Merger

2. Absorption

Categories of Merger

A merger is said to occur when two or more companies combine into one company. Mergers
may take any one of the following forms.

• Amalgamation

• Absorption

• Combination

• Acquisition

• Takeover

• Demerger

Absorption is the process in which the one dominant company takes control over the weaker
company. These are two business strategies adopted by the companies to expand itself and
take a competitive position in the market. But, here one should know that Amalgamation can
occur in two ways i.e. in the form of merger or the form of absorption.

Definition of Absorption

The process in which one company acquires the business of another company is known as
Absorption.

In this process, a smaller existing company is overpowered by an existing larger company.

No new company is established in absorption.

There are two companies involved in this process, i.e. the company who takes over the
business of the other company is known as Absorbing Company, and the company whose
business is taken over is known as Absorbed Company.
AS – 14, Accounting for Amalgamation, governs the absorption of companies.

In this process, the weaker company looses its identity by merging itself with the stronger
company.

The transferee company exercises control over the transferor company.

The two companies differ in their size, structure, financial condition and operations.

The companies either mutually take the decision of absorption, or it can be a hostile takeover.

Conclusion

In a nutshell, in Amalgamation, the two companies are liquidated to form a new company,
but in Absorption, only the merged company goes into liquidation, but there is no formation
of a new company.

Here is an example which will clarify the difference, i.e. A Ltd. and B Ltd. joined to form AB
Ltd., it is known as an amalgamation, whereas A Ltd takes over the business of B Ltd., so B
Ltd. loses its existence, and only A Ltd. exists, it is known as absorption.