What is assimilation
“Assimilation” is formed from the word “assimilate". In English, it means to absorb and refers to the process of incorporating something new into an existing system. When it comes to finance, the meaning of assimilation remains the same as in general English, but it is only the context that changes. Let us have a look at the assimilation definition.
Assimilation refers to the process of integrating new assets, liabilities, operations, or entities into an existing financial structure. It involves merging distinct financial elements to facilitate:
- Efficiency
- Synergy, and
- Alignment of goals
The primary goal of assimilation is to optimise financial resources and enhance overall performance.
The different cases of assimilation
In corporate finance, assimilation represents the following business processes:
- Mergers
- Acquisitions
- Organisational restructuring
- Purchase of shares from underwriters, and
- Changes in the price of assets or securities
Let us understand each of them in detail.
What is a merger
When two companies merge, they assimilate their respective assets, liabilities, and operations to form a unified entity. For example, in a horizontal merger between two competing firms, assimilation involves:
- Combining product lines
- Consolidating facilities, and
- Integrating management teams
Mostly companies merge to realise cost savings and market synergies.
Real case study
Effective July 1, 2023, HDFC Ltd., India's premier housing finance company, merged into HDFC Bank, India's leading private sector bank. The merger aimed to create a financial services conglomerate offering a full suite of services.
Assimilation of share capital occurred as owing to the merger HDFC Bank issued 42 new equity shares for every 25 equity shares held by shareholders in HDFC Ltd. The merger was done to bring together synergies such as:
- Increased scale
- Comprehensive product offerings
- Balance sheet resiliency, and
- Operational efficiencies
What is an acquisition
In an acquisition, the acquiring company assimilates the acquired company's assets, liabilities, and operations into its existing structure. For example, when a technology company acquires a startup, assimilation involves integrating the startup's:
- Innovative technology
- The talent pool, and
- Customer base
Acquisition eliminates business competition, expands the workforce, and drives growth.
Real case study
- Recently, Reliance Industries Limited (RIL) acquired Viacom18 Media.
- RIL agreed to purchase Paramount Global's 13.01% stake in Viacom18 Media for approximately Rs. 4,286 crore.
- This purchase increased its equity stake in Viacom18 to 70.49% on a fully diluted basis.
Keynote
In both mergers and acquisitions, assimilation occurs when two or more companies combine their:
- Assets
- Liabilities, and
- Operations
By the end of the process, both entities become a single entity. Beyond finance, assimilation also leads to the blending of:
- Business strategies
- Management systems, and
- Financial practices
What is organisational restructuring
During organisational restructuring, assimilation occurs when companies realign or merge their business units. This is usually done to:
- Streamline processes, and
- Consolidate financial resources
For example, a conglomerate assimilates its various subsidiaries by:
- Centralising decision-making authority and
- Standardising financial reporting practices
Real case study
Currently, Nokia is undergoing organisational restructuring in India. The restructuring is a response to decreased demand for Nokia's technology, particularly in the 5G sector.
Nokia's restructuring plan involves streamlining its operations into three main groups focusing on:
- Mobile networks
- Cloud and
- Network services, and infrastructure.
The primary goal of this restructuring is to focus on key business areas and boost operational effectiveness.
How purchasing of shares from underwriters leads to assimilation
The minimum subscription for a share issue in India, as per the Companies Act and SEBI guidelines, is set at 90% of the issue size.
This means that a company must receive at least 90% before the closure date to ensure the validity of the IPO. Failure to meet this minimum subscription requirement leads to:
- Cancellation of the IPO and
- Refund of the entire application money received from the applicants within 15 days from the closure of the issue
To avoid such instances, companies usually hire an underwriting agent or firm on a commission basis. In case the public fails to subscribe at least 90% of the issue size, the appointed underwriter makes for the shortfall. It purchases the unsubscribed shares and helps companies to remain legally compliant.
Post-subscription, underwriters usually sell the acquired shares to the general public. Assimilation occurs when the public absorbs these newly issued shares after underwriters have acquired them.
How changes in the price of assets or securities lead to assimilation
Assimilation also occurs when the effect of new information or events is reflected in the pricing of financial assets or securities. Essentially, it is the market's way of adjusting to new information by reflecting it in the prices of stocks, bonds, or currencies.
For example,
- The share price of a company increases after the release of positive earnings results.
- Conversely, upon the release of negative earnings results, the market price of the share falls.
When can assimilation fail
Achieving synergies is tough. Below are some major factors that often lead to unsuccessful integration and influence the effectiveness of assimilation:
Cultural factors
- Differences in corporate culture and values commonly impact the assimilation process.
- Misalignment of corporate cultures leads to:
- Resistance
- Communication breakdowns, and
- Employee disengagement
- Organisational structures
- Sometimes different corporates carry huge variances in organisational structures and management styles.
- This variation often disrupts existing operations and leads to:
- Productivity losses
- Missed opportunities
- Improper planning, and
- Operational disruptions
- Legal and regulatory frameworks
- Legal compliance is paramount during assimilation.
- Companies involved in assimilation must comprehensively understand the legal framework, especially governing mergers, acquisitions, and corporate restructuring.
- Financial uncertainties
- It has also been observed that assimilation introduces financial uncertainties, which often leads to poor post-merger performance.
Why you as an investor should track assimilation events
By staying informed about assimilation events, you can identify opportunities and execute profitable trades. Let us see how it helps:
| Advantages | Explanation | Investor benefits |
| Improves predictive power | Assimilation events often have a significant impact on the share prices of the involved companies. For instance, When one company buys another, the prices of both companies' shares change. This change depends on things like:How good the deal is for each company?How well can they work together after the merger? AndHow investors feel about the whole thing. | By tracking assimilation events you can predict share prices and respond accordingly. |
| Offers the opportunity to profit | Assimilation events create opportunities for profit if investors can accurately predict their impact on stock prices. | If you can anticipate that the merger will create value for the acquiring company, then you can:Invest in its shares before the deal is finalised andBenefit from the subsequent price increase |
Conclusion
In finance, assimilation is a broad term, which encompasses several key corporate events, such as mergers, acquisitions, organisational restructuring, changes in asset prices, and the purchase of shares from underwriters.
Assimilation leads to the amalgamation of assets, liabilities, and operations to achieve synergy and increase operational efficiency. As an investor, staying informed of key assimilation events can help identify profitable investment opportunities.
