Business Combination Manish Kumar Assistant Professor Business Combination

Business Combination Manish Kumar Assistant Professor

Business Combination • If a company or a partnership is described as a simple association of persons formed for definite purposes, the combinations could well be called compound association of persons. • To Combine is simply to become one of the parts of a whole and a combination is merely a union of persons, to make a whole or group for the prosecution of some common purposes.

Causes of business combination • • • Destructive competition Joint stock enterprises Individual ability Business cycles Government pressure Economies of scale Control of market Lust for power Protective tariffs

Benefits of Business Combinations • • To provide benefit of the formation of joint stock companies. To provide possibilities of new business. To fulfil dream of business man To ensure efficient management To face the marketing problem of international market. To use possible modern technology To ensure benefits from foreign intelligence.

Types of combination Lateral Vertic al Horizontal

Horizontal combinations • Horizontal or parallel combination is one in which the units combined carry on the same trade or pursue the same productive activity.

Advantages of horizontal combination • Large scale production in management, marketing and finance. • It can secure the services of experts whom one concern by itself cannot • • • appoint. Research sharing. Absence of competition. Safeguard their legitimate trade interests. Exert combined influence and may even dictate terms to the producers of raw material and other articles required by them. It can also offer a united front to safeguard their legitimate trade interests.

Disadvantages of Horizontal combination • It may not be assured of a regular supply of raw material and other products required by it from other sources • There is no guarantee of market of its product. • It may have a trial of strength in regard to dictation of terms to producers of raw materials and other artciles

Vertical Combination • It is also known as sequence or industry or process integration. It arises as a result of integration of those business enterprises which are engaged in different stage of production of a product.

Advantages of vertical combination • It rings about economies of storage, selling, buying and transportation • It secures certain technical economies by linking up successive stages of production • It protects itself against unfavourable reaction of different independent firms and this safeguards its interest by being free from any controlling force. • It eliminates middleman’s profit, reduces the costs of marketing and advertisement, lessens the chances of overproduction, provides opportunities for expansion and thus increases its total output at a lower cost per unit • It may become such a self-contained economic unit and carry business in such a way that it may remain unfaceted by cycles of depression and prosperity, and give a constantly regular dividend

Disadvantages of vertical combination • It puts serious strain on the management and financial aspects of the business and it is frequently obstructed by lack of capital, lack of a thorough knowledge of the technique at its different stages of production and marketing. • It has the possibility of suffering a great shock if any dislocation occurs in any stage or process of its productive chain. The whole economy in that case becomes almost out of gear. • It cannot avoid competition with other firms working on the same plane. • It can seldom obtain the economies of large-scale operations, because it does not directly lead to concentration of the combining units the productive activity of which is different in nature.

Lateral combination • The term lateral integration was intended to describe horizontal integration between firms making different products but where there was some connection either in production techniques or the finished product itself. Hence, an entertainment corporation may wish to go into the travel and hotel industry.

Types of lateral combination Converge nt Divergent Diagonal Circular

Convergent lateral combination • Convergent lateral combination is brought about when various firms joint with a major firm to supply its requirements of raw materials or basic materials. Thus, the different types of products manufactured by the combining units become the raw materials of a single firm which can be regarded as the centre of nucleus of a combination of this kind. • Example Paper Mill

Divergent Lateral Combination • Divergent lateral integration or combination takes place a major firm supplies its product to the other combining firms which use it as their raw material. Thus, the product of one firm becomes the raw material of many other firms. This will happen where a number of products can be manufactured from a material produced by a firm. • Example Steel Mill

Diagonal Combination • It means integration of a main activity or process with ancillary activities and services. Diagonal integration takes place when a unit providing essential auxiliary goods and services to an industry is combined with a unit operating in the main line of production. In such a case the goods and services required for the main process of production will be provided inside the organisation itself.

Circular Integration • When a firms belongings to different industries and producing altogether different products together under the banner of a central agency, it is referred to as a mixed or circular combination. None of the features of the other types of combinations are found in this type.

Forms of business combination Associations Federations Consolidatio ns

Associations • These are voluntary organizations of traders and businessmen formed to protect and promote their common interests through collective efforts. • They act as self-regulators of trading policies and practices. They act as spokesperson of commercial interests in representation to the government on all vital matters affecting trade.

Types of Associations • Trade Associations: Trade association may be defined as voluntary organization for mutual protection or advantage of independent enterprise producing or distributing similar goods and services. It is an organization formed to promote the mutual interests of individuals or companies engaged in the same kind of business. • Chamber of commerce: It is an association of merchants, financiers, manufacturers and others engaged in business in a particular locality or region for promoting the general commercial interests of all members.

Federations • It means association of firms engaged in the same business with a formalized agreement to follow certain policies in common so as to reduce the intensity of wasteful competition in the respective business line. It is, in other words, an alliance of competing firms into a federal framework.

Types of federation • Pools: it is a horizontal type of combination intended to regulate the market price by collective agreement on factors that influences the price. It is a federal union of competing units handling the same business created and operated in accordance with a specific agreement for mutual benefit. • Cartels: A cartel is an association of independent firms agreeing amongst themselves to regulate their output, decide the market, centralize the sales and determine common pricing policies that would be of maximum benefit to all the members. Its members are engaged in the same types of business and nece it is formed primarily to root-out or limit the inter-firm competition in the particular line of business.

Consolidation Partial Consolidatio n Complete COnsolidation

Partial Consolidation • It means coming together of firms under formalised common ownership and control while retaining their separate entity. Trust Holding Companie s Communit y of interest

Complete Consolidation • It occurs when two or more concerns combine to transfer their assets and liabilities to new company or when one company absorbs another’s concern by outright purchase of its business. Complete consolidation thus means end of separate identity of constituent units and their amalgamation into a single unit. Merger Amalgamati on

Merger • It means formation of a new company to take over the assets and liabilities of two or more existing companies. All the constituents companies lose their separate identity and their members get allotment of shares in the new company.

Reason for merger • • • Economies of scale Operating economies Synergy Growth Diversification Utilization of tax shield Increase in value Elimination of competition Better financial plannning

Types of Merger • Horizontal merger: It takes place when there is a combination of two or more organizations in the same business, or of organizations engaged in certain aspects of the production or marketing process. • Vertical Merger: It takes place when there is a combination of tow or more organizations, not necessarily in the same business, which create complementary, either in terms of customer functions, customer groups, or the alternative technologies used.

Types of Merger • Concentric Mergers: Concentric mergers take place when there is a combination of two or more organizations unrelated to each other, either in terms of customer functions, customer groups, or alternative technologies used. • Conglomerate Mergers: It takes place when there is a combination of two or more organizations unrelated to each other, either in terms of customer functions, customer groups, or alternative technologies used. • Reverse Mergers: It is also known as back door listing is a financial transaction that results in a privately held company becoming a publicly held company without going the traditional route of filling a prospectus and undertaking an initial public offering.

Important issues in merger Strategic issues Financial issues Manageri al issues Legal issues

Strategic issues • It relate to the commonality of strategic interests between the buyers and the seller firms. • It is important to consider the extent to which a merger may lead to positive synergistic effects. • For this, the strategic advantages and distinctive competencies of the merging firms have to be analysed. • Besides these, there has to be a match between the objectives of the firms.

Financial issues • Financial issues relate to the valuation of the seller firm and the sources of financing for mergers to take place. • Valuation involves assessing the value of the seller firm. • The other major financial consideration is the source of financing.

Managerial issues • Managerial issues in mergers relate to problems of managing firms after the merger has taken place. • It is important to note that the perception of how the management will take place after a merger also matters and affects the process of the merger itself.

Legal issues • Legal issues in mergers relate to the provisions made in law for the purpose of mergers. In India, the provision relating to mergers and amalgamation, and other schemes

ADVANTAGES OF MERGER • • Economies of scale International competition Mergers may allow greater investment in R & D Greater efficiency

Disadvantages of Merger • • • Integration difficulties Inadequate evaluation of target Large debt burden Inability to achieve synergy Too much diversification Too large

Acquisition and takeover • In this one company absorbs another company or companies. The absorbing company takes over the assets of the absorbed company and often assumes its liabilities. The identity of the absorbed company is lost since its assets from the property of the absorbing company. The shareholders of the absorbed company are compensated in form of cash, shares in the absorbing company, etc. takeover is a hostile activity where the acquisition is a friendly takeover.

Reasons for acquisition • • Increased market power Overcoming entry barriers Cost of new products development and increased speed to market Adequate and easy terms working capital Access to resourceful management Re-shaping the firm’s competitive scope Learning and developing new capabilities

Types of acquisition Friendly Acquisitio n Reverse Acquisitio n Back Flip Acquisitio n Hostile Acquisitio n

Advantages of acquisition • • • Assets Acquisitions Gain experience and assets Excite the shareholders Reducing costs and overheads Accessing funds or valuable assets for new development

Disadvantages of acquisition • • • Cost Employee retention Productivity Letter of intent Duplication

Merger Acquisition Merger is considered to be a process when two or more companies come together to expand their business operations. An acquisition occurs when one company or corporation takes control of another company and rules all its business operations. Terms They are considered as amicable. They are considered as hostile. Stocks New stocks are issued. No new stocks are issued. Companies The companies of same size join hands together. The larger companies acquire smaller companies. Power Both the companies are treated as equal. The company that is stronger gets the power. Challenges The two companies of same size combine to increase their strength and The two companies of different sizes financial gains along with breaking the come together to combat the trade barriers. challenges of downturn. Definition

Problems in Business Combination • • • Slow industrial progress Evils of large-scale business Disadvantages of rationalization Uneven distribution of income Difficult entrance of new businessman Exploitation of consumers Weak managerial control Lack of responsibility and initiative Increased risk