The document discusses absorption of companies, which is when an existing company purchases another company doing similar business. After the purchase, the vendor company ceases to exist. It provides examples and discusses the objectives, methods, accounts, and journal entries involved in an absorption. It also compares absorption to amalgamation and provides a conclusion on absorption being a way for a company to take over another entity and use the acquired company's reputation and strengths.
2. ABSORPTION OF COMPANY
When an existing company purchases another companies doing similar
business in lieu of a consideration agreed upon between the companies, it
is known as absorption. After this purchase the existence of the vendor
company comes to an end.
For example : There are three companies in the market A,B and C. C
company wants to become powerful in the market. So, C company offers
A and B companies to sell their business to it. A and B companies accepts
and close their business after getting purchase price from C company
3. Real Examples of absorption
. The real life examples of amalgamation is: Tata Tea of Tetley
Tea & Tata Steel of Corus Steel
4. If there remains a competition between two companies and one
company purchases another company, the competition comes to an
end.
It creates Economy in the working of both the companies
Uniform polices can be made
Marketing of products can be made economically and conveniently
Object or Merits of Absorption
5. Demerits of absorption
Managerial problem: By absorption the size of the business is
increased. Under such conditions it becomes difficult to manage a
large concern efficiently due to limited managerial capacity of the
managers.
Non- Co-operation: By absorption of companies, the management of
both companies work together, therefore unless they have co-
operative attitude there may be difference of opinion which may
create non-corporation between them. It can retard the growth of
the business.
Increase in price: The monopoly achieved through absorption is not
always healthy for the market. It may result in charging higher
prices from the customer because of having control over Market.
6. Control over supply: The purchaser company may create problems
for the customer by creating artificial scarcity of supply in the
market. It may create problems to the consumer.
Over capitalization: By absorption, the total capital increase while
most of the expenditure are reduced, it may not be possible to
utilize all the funds. Therefore problems of over capitalization
can be created which is difficult to control.
7. Methods of Absorption
1) Existing company purchases the business of a company doing
similar business.
2) Winding-up of Vendor Company takes place
3) Purchasing Company takes over the assets of the vendor company
as per the agreement between them.
4) The liabilities of the vendor company are either taken over by
the purchasing company or are by the vendor company
5) Purchase price is determined according to the agreement entered
into between the purchasing and vendor companies.
6) Purchase price can be paid by shares, debentures and cash.
8. Main Accounts prepared in the book of
Vendor Company:
These 4 main accounts are prepared in the books of Vendor
Company:
1) Realisation Account.
2) Purchase Company Account
3) Bank Account
4) Shareholder's Account
9. Purchase Consideration in Absorption of Companies
Lump Sum Amount : In this, the purchaser agrees to pay the vendor company, a
lump sum amount, and then this will be taken as Purchase Consideration.
Net Asset : In this case lump sum payment is not made by the purchasing company,
instead they calculate the net worth of assets taken.
Net Payment: If the absorption involves payments to shareholders, debenture
holders and creditors of the absorbed company, it is called Net Payment method. The
payment can be in the form of cash, shares and debentures.
Value of Shares In this method the purchasing company is buying the vendor
company on the basis of the value offered per share. For example, ABC company has
10,000 shares. The company XYZ approached ABC Co. and offered Rs.100 per share which
the management has approved and signed the absorption agreement. Purchase
consideration = 10,000 x 100 = Rs. 10,00,000
10. Difference BetweenAmalgamation and Absorption of Company.
Amalgamation :
Amalgamation is when two or more companies merge. It is the
conversion of two companies and two balance sheets into one
company and one (combined) balance sheet. In amalgamation, the
identity of both the companies exist and survive. It is the pooling
of assets and liabilities and interest of two companies. It usually
consists of two companies of same size and stature.
Example: 1) Maruti motors(India) and Suzuki(Japan) were
amalgamated to form Maruti Suzuki.
11. Difference BetweenAmalgamation and Absorptionof Company.
Absorption
Absorption refers to takeover. In absorption, one company is taken
over by another and hence it loses its own core identity. The
identity of absorbing company only sustains. Here, it's not pooling
of interest. It is the dominance of absorbing company. Here, it is the
taking of a small company by a comparatively bigger business
company.
Example: : 1)Takeover of Myntra by Flipkart. 2) hutch + Vodafone =
Vodafone
16. Conclusion
Absorption is a way of business arrangement in which an
existing company takes over the business of another entity.
The entity who gets absorbed goes into the liquidation
process. The payment for such absorption to the old entity
can be made either in cash or shares or mixture of both.
There are so many reasons of absorption. One of them is that
due to the formation of the new company, it will not get the
reputation in the market as the old one. So, that is why,
purchasing company absorbs an existing company to using its
strength to exploit the opportunities exists in the market.
