UPSC » UPSC CSE Study Materials » Commerce » Absorption of Companies

Absorption of Companies

Absorption of companies is when one company absorbs another company to form a single “existing company”. Only one company survives absorption, while the others lose their identity.

The absorption of an organisation is a type of business transaction in which one company acquires another. The absorbed entity goes through the liquidation procedure. Payment to the absorbed firm could be provided in cash, shares, or even a combination of both. The absorbed company continues to operate as previously; it is just that the employees are working for new management. If the company maintains any fund for its employees, it is taken over by the purchasing company. Absorption can occur for a variety of reasons. One of them is to change the company’s reputation in the market.

Absorption of Companies: A Comprehensive Explanation  

Absorption can be caused by several factors. One of them is that the new company will not have the same market reputation as the old one because of its establishment. As a result, a purchasing firm absorbs an existing company to leverage its strengths to capitalise on market opportunities.

Check out Tips for UPSC Preparation

Consideration of Purchase in the Acquisition of Businesses

Students have difficulty calculating the amount of Purchase Consideration in absorption problems. 

Lump-Sum Amount

When a purchasing entity decides to pay a lump sum payment to the vendor firm, this is referred to as Purchase Consideration.

Net Asset

If the purchasing business does not make the lump sum payment, we must assess the net worth of the assets seized. The asset’s net worth is determined at a mutually agreed-upon amount.

Net Payment

Let’s suppose the absorption includes compensation to the absorbed company’s shareholders, debt holders, and creditors. Then the payment might be made in cash, stock, as well as debentures.

Value of Shares

Suppose the acquiring business purchases the vendor company based on the price per share offered. The Beta business, for instance, has 20,000 shares. Cone approached Beta with a $ 20 per share offer, whose management accepted and signed the absorption agreement.

Visit to know UPSC syllabus pdf download

What is the Difference between Amalgamation and Absorption of Companies?

The merging of two or more companies is the subject of both amalgamation and absorption.

When two or more firms join forces to conduct business together, this is known as amalgamation. In other terms, it’s a merger of one or more firms in which all of the assets and obligations of the merging companies (the ones that are supposed to close down) then become assets and liabilities of the merged company (the one which is not being designated to close down). In terms of ownership, shareholders of the amalgamating firm or companies who own a specific percentage of the shares become shareholders of the merged company. The combined company generally gets a new name and a separate legal life after the merger, with the assets and obligations of both companies. Company amalgamation might take the form of absorption or consolidation.

Absorption is a type of merger in which one company absorbs the other company and is seen as one ‘existing company.’ Only one company survives absorption, while the others lose their identities. Typically, a company that acquires other companies (buyer) remains, whereas the bought company (seller) ceases to exist. The acquired company’s assets, liabilities, and shares are transferred to the acquiring company. As a result, the absorbing company gets all of the dissolving company’s rights and responsibilities. 

A combination of two or more companies is referred to as amalgamation or absorption. Amalgamation can take many different forms, including absorption. The result of a merger is frequently a new legal entity containing the assets and liabilities of the merging companies. The “old” legal entity, which did not alter its legal name but just grew its assets and liabilities by acquiring another corporation, is the consequence of the absorption.

Also see UPSC question paper 2020


In a nutshell, in amalgamation, both companies are dissolved to form a new company; but,  in absorption, only the combined firm is liquidated, and no new company is formed. Here’s an example to help you understand the difference: A Ltd. and B Ltd. merged to form AB Ltd., which is known as amalgamation; however, absorption occurs when A Ltd. takes over the operations of B Ltd., causing B Ltd. to cease to exist and just A Ltd. to exist.


Frequently asked questions

Get answers to the most common queries related to the UPSC Examination Preparation.

What are the characteristics of a company's absorption?

Answer: The cost of a product is calculated using total cost, which includes both variable and fixed manufact...Read full

What is the distinction between merger and absorption?

Answer: Absorption is the action or process of absorbing or being absorbed, wh...Read full

What happens when a company is acquired?

Answer: Absorption occurs when an existing company buys another company that o...Read full

Give examples of absorption of companies.

Answer: In the market, there are three companies: A, B, and C. The C corporation aspires to be a market leader. As a...Read full

How many businesses are liquidated as a result of absorption?

Answer: There are at least three companies involved in Amalgamation, whereas o...Read full