Major types of amalgamation. Advantages and disadvantages

In business, it often refers to the mergers and acquisitions of many smaller companies into much larger ones.

Very often, the two expressions "merger" and "amalgamation" are taken as same. But there is a very minor difference. Merger is combination of two or more companies which can be done either by way of amalgamation or by way of absorption. Amalgamation is the process where two or more companies dissolve their identity to form a new entity.

Horizontal merger. A merger occurring between companies in the same industry. Horizontal merger is a business consolidation that occurs between firms who operate in the same space, often as competitors offering the same good or service. Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry.

Vertical merger. A merger between two companies producing different goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations. Most often the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one.

Market-extension merger – the merger between two companies who sold the same products to different markets.

Product-extension merger – the merger of two companies that sell separate but related products in the same market.

Conglomeration – the merger of two companies that do not have any business areas in common.

Advantages:

• Economy of scale: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations

• Increased market share

• Cross-selling

• Synergy

• Reduce competition

• Increase Brand Value

• Help entering in a new market

• amalgamation of the competitive advantages of both firms.

• new customers

Disadvantages:

• Difficulties Coordinating Operations - decisions are more difficult to make and causing disruption in running of the business.

• Decreased Flexibility

• Inefficiencies from Contrasting Corporate Cultures

• Information Breakdown

Cash flows. Debt financing vs equity financing

Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.

The (total) net cash flow of a company over a period (typically a quarter or a full year) is equal to the change in cash balance over this period: positive if the cash balance increases (more cash becomes available), negative if the cash balance decreases. The total net cash flow is the sum of cash flows that are classified in three areas:

Operational cash flows: Cash received or expended as a result of the company's internal business activities.

Investment cash flows: Cash received from the sale of long-life assets, or spent on capital expenditure (investments, acquisitions and long-life assets).

Financing cash flows: Cash received from the issue of debt and equity, or paid out as dividends, share repurchases or debt repayments.

Debt vs. equity financing is one of the most important decisions facing managers who need capital to fund their business operations. Debt and equity are the two main sources of capital available to businesses, and each offers both advantages and disadvantages.

Debt financing takes the form of loans that must be repaid over time, usually with interest. Businesses can borrow money over the short term (less than one year) or long term (more than one year). The main sources of debt financing are banks and government agencies

Equity financing takes the form of money obtained from investors in exchange for an ownership share in the business. Equity financing often means issuing additional shares of common stock to an investor.

Advantages to debt financing:

• The bank or lending institution (such as the Small Business Administration) has no say in the way you run your company and does not have any ownership in your business.

• The business relationship ends once the money is paid back.

• The interest on the loan is tax deductible.

• Loans can be short term or long term.

• Principal and interest are known figures you can plan in a budget (provided that you don't take a variable rate loan).

Disadvantages to debt financing:

• Money must paid back within a fixed amount of time.

• If you rely too much on debt and have cash flow problems, you will have trouble paying the loan back.

• If you carry too much debt you will be seen as "high risk" by potential investors – which will limit your ability to raise capital by equity financing in the future.

• Debt financing can leave the business vulnerable during hard times when sales take a dip.

• Debt can make it difficult for a business to grow because of the high cost of repaying the loan.

• Assets of the business can be held as collateral to the lender. And the owner of the company is often required to personally guarantee repayment of the loan.

Advantages to equity financing:

• It's less risky than a loan because you don't have to pay it back, and it's a good option if you can't afford to take on debt.

• You tap into the investor's network, which may add more credibility to your business.

• Investors take a long-term view, and most don't expect a return on their investment immediately.

• You won't have to channel profits into loan repayment.

• You'll have more cash on hand for expanding the business.

• There's no requirement to pay back the investment if the business fails.

Disadvantages to equity financing:

• It may require returns that could be more than the rate you would pay for a bank loan.

• The investor will require some ownership of your company and a percentage of the profits. You may not want to give up this kind of control.

• You will have to consult with investors before making big (or even routine) decisions -- and you may disagree with your investors.

• In the case of irreconcilable disagreements with investors, you may need to cash in your portion of the business and allow the investors to run the company without you.

• It takes time and effort to find the right investor for your company.

Most businesses opt for a blend of both equity and debt financing to meet their needs when expanding a business. The two forms of financing together can work well to reduce the downsides of each. The right ratio will vary according to your type of business, cash flow, profits and the amount of money you need to expand your business.