Business Combination, Merger, Acquisition and Amalgamation and business environment. PPT ppt.pptx

The file contains informations regarding business combinations- Its mening, Causes, types, Importance, Disadvantages, Forms, Merger and acquisition, Business environment and its types

1. Business Combination

2. Meaning A business combination is defined as a method of economic organization by which a common control is exercised over a number of firms which either are operating in competition or independently. It has two main objectives- Elimination of unhealthy competition. Avoidance of wasteful experience in production and distribution through common finance, management, production and marketing policies.

3. Causes of business combination Excessive competitions- elimination of the wastes of excessive competition became an impelling motive to the formation of combinations by the business units. Advantages of large scale organization- the advantages of large scale organization and production have attracted the businessmen towards combinations in various spheres like purchasing, production, marketing financing etc Growth of transport and communication -development of transport and communications increased the intensity of competition not only in national market but also in the international market which was solved by the combination movement.

4. Respect for Bigness : nowadays, the business units of bigger size are more respected and hence businessmen aspire for business units of bigger size resulting in race for combination. Desire for monopoly power : under monopoly, the prices are higher and the business units earn larger profits. There is greater chance of earning more profits if the business combined into one single establishment.

5. Types of Business Combination Combination can be classified into 5 types- Horizontal combination- in this type of combination, combining business units are engaged in the production of the same types of commodity. For eg - two or more cement factories may combine to achieve some common objectives. Vertical combination- in this type of combination, a number of units engaged in successive stages within an industry are brought together. In other words, several independent units which are engaged in the various stages of production are combined into one single establishment. Thus , firms engaged in sugar cultivation, sugarcane crushing, manufacturing of sugar may be join together to form a vertical combination.

6. Lateral Combination- it is the combination of firms producing different types of commodities but being allied in one way or the other. It may be convergent lateral combination and divergent combination. C onvergent lateral combination- here, different industrial units which supply raw materials to a major firm, combine together with the other firms. The best illustration is found in a printing press, which may combine with units engaged in supply of paper, ink, types, cardboard, printing machinery etc. Divergent lateral combination- here, the different combining units get their raw materials from one major firms. Thus the product of one firm becomes the raw material of other firms which have combined with it. Eg - supplying leather to different units engaged in production of shoes, bags, suitcases, belts etc.

7. Diagonal integration- it means that the auxilliary goods or services required for the main process of production are provided inside that very organization. For eg - chocolate makers may themselves make tin foils, cartoons, packets, containers etc. Circular or Mixed Integration - when firms engaged in the manufactures of different products integrate or combine under a central, circular or mixed combination takes place. If a cement factory, a steel mill and a sugar mill combine, we will have a case of circular or mixed combination.

8. Importance of business combination Increase in Capital- The volume of capital may be increased by the formation of a combination. The members combine their resources to conduct large size business. Elimination of Competition- By the formation of combination, unnecessary competition is eliminated, and member firms earn monopoly profit. Saving in Expenses- Administrative production and distribution expenses reduce due to combination. Controls over Production -The combination is very effective in controlling overproduction. It helps to adjust the supply according to the demand Large Scale Marketing -In the market, competition position is strong in bargaining. So it sells the product at a higher price. Experts Services- A combination can acquire the services of experienced specialists. It increases the efficiency of the combination. Research Work- A combination can spend money on research work, which is very important for the business. This research work reduces its cost and increases its profit. Use of Modem Technology -A combination is capable of using the latest inventions and new methods of production as a consequence of a transfer of technology. It will increase profit. Stability - A combination is a more stable form of business as compared to the individuals’ units. The chances of dissolution are also less than others.

9. Disadvantages of Business Combination : Creation of Monopoly -It creates a monopoly that is harmful to the people in the long run. The concentration of wealth -It concentrates the wealth in a few hands and divides society into few classes, such as rich, middle, and poor. Reluctant to be Accepted- The combination is disliked by the people, and it is not acceptable. Changes in Friction -The chances of friction among directors and officers are bright. They quarrel with, each other for their interest No Personal Contact- It is not possible to maintain direct contact between employees, creditors, and shareholders, due to this business may suffer a loss.

10. Forms of business combination Combinations take different forms that have been developed over some time. A. Associations 1. Trade associations. 2. Chambers of commerce. 3. Informal agreements. B. Federations 1. Formal Agreement. 2. Pools. 3.Cartels. C. Consolidations 1. Partial consolidations i . Trust. ii. Holding companies. iii. Community of Interest 2. Complete consolidations i . Mergers. ii. Acquisition. iii. Amalgamations.

11. Associations: Business units combine to attain some purposes without surrendering their autonomy. Trade Associations- Under trade association, business units engaged in a particular trade generally come together and discuss matters for the promotion of their economic and business interest. They are generally formed on ‘territory bases. Such association is organized on a non-profit basis and is essentially educational. Sometimes the association may make representations to the government to safeguard the interests of a trade or an industry. Chamber of Commerce- Chamber of commerce is voluntary associations of persons connected with commerce, trade, and industry. These are formed with the object of promoting and protecting the interests of business and business communities in a region, country, or even in the world as a whole. Informal Agreement - Informal agreements involve the exchange of promise among members regarding restriction of output, fixation of prices, etc. They are also referred to as Gentlemen’s agreement. It is only the moral duty of business units to keeping the promise.

12. Federations: Federations form of combination aims at rendering benefit to member-units for certain specific purposes under an agreement. Of such federations, ‘ Pools’ and ‘Cartels’ are most notable. Pools: It means that the members of the pooling agreement joint together to regulate the demand or supply of a product without surrendering their separate entities. Here, some important factor in the price making process are sought to be controlled through an agreement among a number of firms dealing in the same line of business. Cartel: The object of a cartel is to eliminate competition by forming a federation of producers that pool the output, fixes the price, and sells the product. The profits reaped by cartels are distributed amongst the members – units on a pre-determined basis.

13. Consolidations : The last form of combination is consolidation. This form involves the highest degree of integration. The consolidation may be of two types: Partial Consolidation : Trusts -Trusts may be defined as a form of a business organization through temporary consolidation in which the shareholders of the constituent organizations under a trust agreement transfer a controlling amount of their stock to a board of trustees in exchange for a trusted certificate. Holding Companies- A holding company is a form of business organization that is created to combine industrial units by owning a controlling amount of their share capital. Controlled companies are referred to as subsidiary companies. The subsidiaries are independent and function in their name. But they are effectively managed by the holding company. Community of Interests- A Community of interest may be defined as a form of business organization, in which without any formal central administration, the business policy of several companies is controlled by a group of common stockholders or directors.

14. Complete Consolidation –In complete consolidation, the combining units lose their entity. It is defined as a form of business organization which is established by the outright purchase of the properties of the constituent organizations and the merging of such properties into single business units. Complete consolidation may be of the following types: Merger and acquisition- A merger takes place when; two or more organizations merge, and their operations are absorbed by a new organization. Acquisition refers to the process of acquiring a company at a price called the acquisition price or acquisition premium. The price is paid in terms of cash or acquiring the company’s shares or both. Amalgamation -Amalgamation is an arrangement where two or more companies consolidate their business to form a new firm or become a subsidiary of any one of the companies. For practical purposes, the amalgamation and merger of the terms are used interchangeably.

15. Merger & Acquisition Mergers and acquisitions (M&A) refer to transactions between two companies combining in some form. Although mergers and acquisitions (M&A) are used interchangeably, they come with different legal meanings. In a merger, two companies of similar size combine to form a new single entity. On the other hand, an acquisition is when a larger company acquires a smaller company, thereby absorbing the business of the smaller company. M&A deals can be friendly or hostile, depending on the approval of the target company’s board. In the year 2017,  Vodafone India  and  Idea Cellular  announced that they had received approvals from their respective Boards for a merger. It was the creation of India’s largest telecom company beating  Bharti Airtel  and  Reliance Jio . It was a horizontal merger amongst the two biggest players in the telecom industry. This merger deal was worth  $23 billion .

16. Mergers and Acquisitions (M&A) Transactions – Types 1. Horizontal A horizontal merger happens between two companies that operate in similar industries that may or may not be direct competitors. Eg - Integration of Facebook , whatsapp , Instagram and messenger. 2. Vertical A vertical merger takes place between a company and its supplier or a customer along its  supply chain . The company aims to move up or down along its supply chain, thus consolidating its position in the industry. Eg - if a car manufacturer purchases a tire company. 3. Conglomerate This type of transaction is usually done for  diversification  reasons and is between companies in unrelated industries. Eg - Merger between the Walt Disney and the American Broadcasting Company.

17. Reasons for Mergers and Acquisitions (M&A) Activity Mergers and acquisitions (M&A) can take place for various reasons, such as: 1. Unlocking synergies The common rationale for mergers and acquisitions (M&A) is to create synergies in which the combined company is worth more than the two companies individually. Synergies can be due to cost reduction or higher revenues. Cost synergies are created due to  economies of scale , while revenue synergies are typically created by cross-selling, increasing market share, or higher prices. Of the two, cost synergies can be easily quantified and calculated. 2. Higher growth Inorganic growth through mergers and acquisitions (M&A) is usually a faster way for a company to achieve higher revenues as compared to growing organically. A company can gain by acquiring or merging with a company with the latest capabilities without having to take the risk of developing the same internally. 3. Stronger market power In a  horizontal merger , the resulting entity will attain a higher market share and will gain the power to influence prices. Vertical mergers also lead to higher market power, as the company will be more in control of its supply chain, thus avoiding external shocks in supply. 4. Diversification Companies that operate in cyclical industries feel the need to diversify their cash flows to avoid significant losses during a slowdown in their industry. Acquiring a target in a non-cyclical industry enables a company to diversify and reduce its market risk. 5. Tax benefits Tax benefits  are looked into where one company realizes significant taxable income while another incurs tax loss carry forwards. Acquiring the company with the tax losses enables the acquirer to use the tax losses to lower its tax liability. However, mergers are not usually done just to avoid taxes.

18. Acquisition An acquisition is when one company purchases most or all of another company's shares to gain control of that company. Purchasing more than 50% of a  target firm's  stock and other assets allows the acquirer to make decisions about the newly acquired assets without the approval of the company’s other shareholders. Walmart , which has been running Best Price wholesale cash-and-carry stores in India since 2009, picked up a 77% stake in India’s largest online retailer Flipkart for $16 billion, in the year 2018.

19. Amalgamation An amalgamation is a combination of two or more companies into a new entity. Amalgamation is distinct from a  merger  because neither company involved survives as a legal entity. Instead, a completely new entity is formed to house the combined assets and liabilities of both companies. It creates a new company in which none of the pre-existing companies survive.

20. Difference between Merger and Acquisition Basis of Comparison Mergers Acquisitions Definition Terms Title Size Power It is a process in which more than one companies come forward to work as one. Considered to be friendly and planned. A new name is given. Two or more Companies that consider each other on equal terms usually merge. The power difference between the two companies is almost nil. The acquisition is a process in which one company takes control of another company. Considered to be hostile and sometimes involuntary. The acquired company comes under the name of the acquiring company. Acquiring company is always larger than the acquiring company. The acquiring company gets to dictate terms.

21. Difference between Merger and Acquisition and Amalgamation Basis of Comparison Mergers Acquisitions Amalgamation Required Number of Entities Impact on shares Minimum2 companies are required as only one company will remain after absorbing the target company . Shares of the absorbing company are given to the shareholder of absorbed company. Minimum 2 companies are required wherein one company takes over the shares and assets of another company . The buyer company purchases more than 50% shares of the target company. Minimum 3 companies are required since amalgamation of 2 results in a new entity . Shares of the new entity are given to the shareholders of existing firms. Driver for Consolidation Mergers are usually driven by the absorbing company. Acquisition is driven by the buyer company with or without consent of the acquired company. Amalgamation is initiated by both the companies with equal interest. Size of the Companies Both the companies involved are equal in terms of size. Small to medium size firms are acquired by the larger companies. The sizes of the target companies are comparable.

22. Business Environment The word ‘business environment’ indicates the aggregate total of all people, organizations and other forces that are outside the power of industry but that may affect its production. A business environment is a combination of internal and external factors and forces that significantly influence the operations of a business. The business environment comprises an internal and external environment that directly or indirectly affects business operations. Internal Environment:  It includes all the factors that are well within the control of a company. These factors are relatively predictable and can be worked on by the company to eliminate forces that negatively impact its operations.  External Environment:  It includes factors that exist outside the company’s control. They tend to be unpredictable as a company cannot possibly control or predict a change in them. Their unpredictable nature has the potential to abruptly hinder or even boost a company’s functioning. 

23. Importance of Business Environment (A) It Helps in Identifying Opportunities and Making First Mover Advantage The environment provides numerous opportunities, and it is necessary to identify the opportunities to improve the performance of a business. Early identification gives an opportunity to an enterprise be the first to identify opportunity instead of losing them to competitors. Example:  ‘ Airtel ’ identified the need for fast internet and took first-mover advantage by providing 4G speed to its users followed by Vodafone and Idea. Asian paints lost market share to Nerolac because it failed to match its technology. (B) It Helps the Firm Identify Threats and Early Warning Signals The business environment helps in understanding the threats which are likely to happen in the future. Environmental awareness can help managers identify various threats on time and serve as an early warning signal.  Example:  Patanjali products have become a warning signal to the rest of the FMCG The sector to develop similar products. Similarly, if an Indian firm finds that a foreign multinational is entering the Indian market with new substitutes; it needs to prepare accordingly. Chinese mobile phones have become a threat for Indian mobile phone manufacturers. (C) It Helps in Tapping Useful Resources Business and industry avail the resources (inputs) from the environment and convert them into usable products (outputs) and provide to society. The environment provides various inputs (resources) the like finance, machines, raw materials, power and water, labour , etc. The business enterprise provides outputs such as goods and services to the customers, payment of taxes to the government, to investors and so on. Example:  With the demand for the latest technology, manufacturers will tap the resources from the environment to manufacture LED TVs and Smart TVs rather than collecting resources for colour or Black & White TVs.

24. (D) It Helps in Coping With Rapid Changes The business environment is changing very rapidly, and the industry is getting affected by changing market conditions. Turbulent market environment, less brand loyalty, divisions of markets, changes in fashions, more demanding customers, and global competition are some examples of changing the business environment. Example:  Jack Ma started Alibaba as he could see the potential of interest in E-Commerce. (E) It Helps in Assisting in Planning and Policy Formulation The business environment brings both threats and opportunities to a business. Awareness of business environment helps in deciding future planning or decision making. Example : Multiple entries of Chinese phones like VIVO, Gionee , OPPO, etc. have posed a threat to local players like Micromax , Karbonn , Lava etc. to think afresh how to deal with the situation. (F) It Helps in Improving Performance Environmental studies reveal that the success of any enterprise is closely bound with the changes in the environment. The enterprises which monitor and adopt suitable business practices not only improve their performance but become leaders in the industry also. Example:  Apple has been successful in maintaining its market share due to its proper understanding of the environment and making suitable innovations in its products.

25. Components of Business Environment The business environment can be categorized into two types based on the factors within the control or outside the control of a business. Internal Environment The internal business environment constitutes several internal forces or elements within the control of a business that influences its operations. These include: Value System:  It is the ethical belief that guides the business towards achieving its mission and objective. The value system includes all components that form a business’s regulatory framework –  organisational culture , climate, work processes, management practices and organizational norms. Vision, Mission, and Objectives:  The vision, mission, and objective of a business relate to what it wants to achieve or accomplish in future. It is the reason why the business exists.   Organizational Structure:  It outlines how the activities are directed within the organization to achieve its goals. It includes the rules, roles, and responsibilities, along with how tasks are delegated and how the information flows among the organization’s levels. Human Resources:  Human resources form all the employees and other personnel associated with the business. It forms the most valuable asset of the organization as success or failure depends on it. Physical Resources and Technological Capabilities:  It includes tangible assets and the technical know-how that play an essential role in ascertaining the business’s competitive capability and future growth prospects.

26. External Environment External components are those factors that a business cannot control. These exist beyond a business’ jurisdiction and supervision limit. External components influencing a business environment are further classified into two categories: Micro Environment Macro Environment Micro Environment Micro environment is the business’s immediate external environment that influences its performance as it has a direct bearing on the firm’s regular business operations. It includes factors outside of the business’s control but can be analyzed and worked upon by managing the business to prevent any business losses.  Micro factors include: Customers  comprise the target group of the business. Competitors  are other market players who target a similar target group and provide similar offerings. Media  is the channel the business use to market its offering to the customer. Suppliers  include all the parties that provide the business with the resources it needs to perform its operations. Intermediaries  comprise the parties involved in delivering the offering to the final customers. Partners  are all external entities like advertising agencies, market research organisations , consultants, etc., who conduct business with the organisation and satisfy customer needs. Public  includes any group with actual or potential interest in the business’s operations or a group that affects its ability to serve its customers.

27. Macro Environment: PESTLE The macro environment includes remote environmental factors that influence an organization. The extent of influence a macro element can have on a business is significant as they usually affect the industry as a whole. These factors are classified under PESTLE: P – Political, E – Environmental, S – Social, T – Technological, L – Legal, E – Economical. Political Factors  comprise government policies, political stability, corruption in the system, tax policies, labor laws, and trade restrictions that affect the business or the industry. Economical Factors  relate to the economy of the country. They include economic growth, exchange rate, interest and inflation rates, etc. Social Factors  comprise the demographics of the country. They include population growth rate, age distribution, career attitudes, health consciousness, etc. Technological Factors  pertain to innovation in technology that affects the operations of the business. This refers to automation, research and development activities, technological awareness, etc. Legal Factors  are laws that affect business operations. They include business-specific, industry-specific, and even state-specific laws. Environmental Factors  comprise of all those that influence or are determined by the environment a business operates in. It includes the weather, climate, environmental policies, and even pressure from NGOs to care for the environment.

28. Emerging Trends in business of 21 st century Many business owners tend to overlook the latest emerging trends in it, which ultimately impacts negatively. The business sector requires people to stay up to date with emerging trends in business. It is mainly because this sector changes quickly (the way business is being conducted), and hence to stay at the top of a game, one need to be aware of the emerging trends in it. E-Commerce - E-commerce has been one of the best ways in recent years to take a business online and open the market to the whole world. It essentially means buying and selling goods over the internet. A company can deliver its products right to the doorsteps of the customer and will inevitably boost its conversion rates and the number of sales. There are currently several emerging trends in the e-commerce industry such as Amazon, eBay, etc. Whether a company have its business online or want to set it up online, they must be aware of the emerging trends in e-commerce.   The other names of e-commerce are electronic commerce and internet commerce. E-commerce is the buying and selling of goods and services through the internet. The latest examples of e-commerce websites are Amazon, Myntra , Ajio , Flipkart , Zivame , Meesho etc. 

29. Network Marketing - Network marketing is one of the best emerging trends in the business environment. It is essentially a medium used by manufacturers to increase their sales. In this method, manufacturers rely on their distributors and their sub-distributors to form an efficient chain or network of delivering products to the customers. This chain of distributors will enable a company to reach a huge number of customers and increase its products' sales.  Network marketing is a business concept that relies on independent agents selling to other people, generally from their homes. For e.g.- Amway, Oriflame, Modicare-Modicare was India’s first network marketing company. Network marketing is generally used in business structures that need multi-level marketing because these manufacturers have a large number of products and services and involve a large number of distributors and sub-distributors.  Business Process Outsourcing- Business process outsourcing or BPO has been one of the fastest emerging trends in the business sector. It is a huge industry now and also has a significant impact on our global economy. Huge businesses tend to outsource their business process job to third parties from different countries which helps them cut down their costs and increase profit margins. Overall a company can outsource a certain task of its company or business to another company at a low cost.

30. A business strategy where one company hires another company for a particular task to perform that means they are outsourcing a certain job of their company and this is known as business process outsourcing or popularly known as BPO. It is necessary and essential to outsource the non-core activities of the company so that they can focus more on the core activities for making it more productive. Companies outsource only non-core activities and do not outsource the core activities. BPO makes a company more flexible and more focused on its main goal or its main activities. It is also very cost-effective.  Knowledge Process Outsourcing- Knowledge process outsourcing or KPO essentially means outsourcing different business tasks related to information such as analysis, consultancy, research, or high-level tasks. Businesses who do not have the human workforce to conduct such tasks efficiently tend to outsource them to other companies. These KPO companies are mainly there to help these companies complete such tasks, and they have a dedicated workforce precisely for that purpose.  Knowledge process outsourcing is just like business process outsourcing but in KPO, knowledge-based tasks are being outsourced like analysis, researching, a consultancy. Knowledge process outsourcing can be done either by any other company or by the subsidiary of the same organization. The most famous companies providing knowledge process outsourcing are TCS, Wipro, WNS global, etc. The advantages of knowledge process outsourcing (KPO) are - they are cost-effective, they can access the best talents, resources are being utilised in a better way.