business combinations.pdf

Business Combination Include Mergers, acquisition, Joint Ventures etc.

1. Business Combination
Manish Kumar
Assistant Professor

2. Business Combination
•Ifacompanyorapartnershipisdescribedasasimpleassociationofpersons
formedfordefinitepurposes,thecombinationscouldwellbecalled
compoundassociationofpersons.
•ToCombineissimplytobecomeoneofthepartsofawholeanda
combinationismerelyaunionofpersons,tomakeawholeorgroupforthe
prosecutionofsomecommonpurposes.

3. 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

4. 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.

5. Types of combination
Horizontal
Vertical
Lateral

6. Horizontal combinations
•Horizontalorparallelcombinationisoneinwhichtheunitscombinedcarry
onthesametradeorpursuethesameproductiveactivity.

7. Advantages of horizontal combination
•Largescaleproductioninmanagement,marketingandfinance.
•Itcansecuretheservicesofexpertswhomoneconcernbyitselfcannotappoint.
•Researchsharing.
•Absenceofcompetition.
•Safeguardtheirlegitimatetradeinterests.
•Exertcombinedinfluenceandmayevendictatetermstotheproducersofraw
materialandotherarticlesrequiredbythem.
•Itcanalsoofferaunitedfronttosafeguardtheirlegitimatetradeinterests.

8. 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

9. Vertical Combination
•Itisalsoknownassequenceorindustryorprocessintegration.Itarisesasa
resultofintegrationofthosebusinessenterpriseswhichareengagedin
differentstageofproductionofaproduct.

10. Advantages of vertical combination
•Itringsabouteconomiesofstorage,selling,buyingandtransportation
•Itsecurescertaintechnicaleconomiesbylinkingupsuccessivestagesofproduction
•Itprotectsitselfagainstunfavourablereactionofdifferentindependentfirmsandthis
safeguardsitsinterestbybeingfreefromanycontrollingforce.
•Iteliminatesmiddleman’sprofit,reducesthecostsofmarketingandadvertisement,lessens
thechancesofoverproduction,providesopportunitiesforexpansionandthusincreasesits
totaloutputatalowercostperunit
•Itmaybecomesuchaself-containedeconomicunitandcarrybusinessinsuchawaythatit
mayremainunfacetedbycyclesofdepressionandprosperity,andgiveaconstantlyregular
dividend

11. Disadvantages of vertical combination
•Itputsseriousstrainonthemanagementandfinancialaspectsofthebusinessandit
isfrequentlyobstructedbylackofcapital,lackofathoroughknowledgeofthe
techniqueatitsdifferentstagesofproductionandmarketing.
•Ithasthepossibilityofsufferingagreatshockifanydislocationoccursinanystage
orprocessofitsproductivechain.Thewholeeconomyinthatcasebecomesalmost
outofgear.
•Itcannotavoidcompetitionwithotherfirmsworkingonthesameplane.
•Itcanseldomobtaintheeconomiesoflarge-scaleoperations,becauseitdoesnot
directlyleadtoconcentrationofthecombiningunitstheproductiveactivityof
whichisdifferentinnature.

12. Lateral combination
•Thetermlateralintegrationwasintendedtodescribehorizontalintegration
betweenfirmsmakingdifferentproductsbutwheretherewassome
connectioneitherinproductiontechniquesorthefinishedproductitself.
Hence,anentertainmentcorporationmaywishtogointothetraveland
hotelindustry.

13. Types of lateral combination
CircularDiagonalDivergentConvergent

14. Convergent lateral combination
•Convergentlateralcombinationisbroughtaboutwhenvariousfirmsjoint
withamajorfirmtosupplyitsrequirementsofrawmaterialsorbasic
materials.Thus,thedifferenttypesofproductsmanufacturedbythe
combiningunitsbecometherawmaterialsofasinglefirmwhichcanbe
regardedasthecentreofnucleusofacombinationofthiskind.
•ExamplePaperMill

15. 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

16. Diagonal Combination
•Itmeansintegrationofamainactivityorprocesswithancillaryactivitiesand
services.Diagonalintegrationtakesplacewhenaunitprovidingessential
auxiliarygoodsandservicestoanindustryiscombinedwithaunitoperating
inthemainlineofproduction.Insuchacasethegoodsandservices
requiredforthemainprocessofproductionwillbeprovidedinsidethe
organisationitself.

17. Circular Integration
•Whenafirmsbelongingstodifferentindustriesandproducingaltogether
differentproductstogetherunderthebannerofacentralagency,itis
referredtoasamixedorcircularcombination.Noneofthefeaturesofthe
othertypesofcombinationsarefoundinthistype.

18. Forms of business combination
ConsolidationsFederationsAssociations

19. Associations
•Thesearevoluntaryorganizationsoftradersandbusinessmenformedto
protectandpromotetheircommonintereststhroughcollectiveefforts.
•Theyactasself-regulatorsoftradingpoliciesandpractices.Theyactas
spokespersonofcommercialinterestsinrepresentationtothegovernment
onallvitalmattersaffectingtrade.

20. Types of Associations
•TradeAssociations:Tradeassociationmaybedefinedasvoluntary
organizationformutualprotectionoradvantageofindependententerprise
producingordistributingsimilargoodsandservices.Itisanorganization
formedtopromotethemutualinterestsofindividualsorcompaniesengaged
inthesamekindofbusiness.
•Chamberofcommerce:Itisanassociationofmerchants,financiers,
manufacturersandothersengagedinbusinessinaparticularlocalityor
regionforpromotingthegeneralcommercialinterestsofallmembers.

21. Federations
•Itmeansassociationoffirmsengagedinthesamebusinesswitha
formalizedagreementtofollowcertainpoliciesincommonsoastoreduce
theintensityofwastefulcompetitionintherespectivebusinessline.Itis,in
otherwords,anallianceofcompetingfirmsintoafederalframework.

22. Types of federation
•Pools:itisahorizontaltypeofcombinationintendedtoregulatethemarketprice
bycollectiveagreementonfactorsthatinfluencestheprice.Itisafederalunionof
competingunitshandlingthesamebusinesscreatedandoperatedinaccordance
withaspecificagreementformutualbenefit.
•Cartels:Acartelisanassociationofindependentfirmsagreeingamongst
themselvestoregulatetheiroutput,decidethemarket,centralizethesalesand
determinecommonpricingpoliciesthatwouldbeofmaximumbenefittoallthe
members.Itsmembersareengagedinthesametypesofbusinessandneceitis
formedprimarilytoroot-outorlimittheinter-firmcompetitionintheparticularline
ofbusiness.

23. Consolidation
Partial
ConsolidationComplete
COnsolidation

24. Partial Consolidation
•It means coming together of firms under formalised common ownership
and control while retaining their separate entity.
Community
of interest
Holding
Companies
Trust

25. Complete Consolidation
•Itoccurswhentwoormoreconcernscombinetotransfertheirassetsand
liabilitiestonewcompanyorwhenonecompanyabsorbsanother’sconcern
byoutrightpurchaseofitsbusiness.Completeconsolidationthusmeansend
ofseparateidentityofconstituentunitsandtheiramalgamationintoasingle
unit.
Merger Amalgamation

26. 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.

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

28. Types of Merger
•Horizontalmerger:Ittakesplacewhenthereisacombinationoftwoor
moreorganizationsinthesamebusiness,oroforganizationsengagedin
certainaspectsoftheproductionormarketingprocess.
•VerticalMerger:Ittakesplacewhenthereisacombinationoftowormore
organizations,notnecessarilyinthesamebusiness,whichcreate
complementary,eitherintermsofcustomerfunctions,customergroups,or
thealternativetechnologiesused.

29. Types of Merger
•ConcentricMergers:Concentricmergerstakeplacewhenthereisacombinationof
twoormoreorganizationsunrelatedtoeachother,eitherintermsofcustomer
functions,customergroups,oralternativetechnologiesused.
•ConglomerateMergers:Ittakesplacewhenthereisacombinationoftwoormore
organizationsunrelatedtoeachother,eitherintermsofcustomerfunctions,
customergroups,oralternativetechnologiesused.
•ReverseMergers:Itisalsoknownasbackdoorlistingisafinancialtransactionthat
resultsinaprivatelyheldcompanybecomingapubliclyheldcompanywithout
goingthetraditionalrouteoffillingaprospectusandundertakinganinitialpublic
offering.

30. Important issues in merger
Strategic
issues
Financial
issues
Managerial
issues
Legal
issues

31. Strategic issues
•Itrelatetothecommonalityofstrategicinterestsbetweenthebuyersandthe
sellerfirms.
•Itisimportanttoconsidertheextenttowhichamergermayleadtopositive
synergisticeffects.
•Forthis,thestrategicadvantagesanddistinctivecompetenciesofthe
mergingfirmshavetobeanalysed.
•Besidesthese,therehastobeamatchbetweentheobjectivesofthefirms.

32. Financial issues
•Financialissuesrelatetothevaluationofthesellerfirmandthesourcesof
financingformergerstotakeplace.
•Valuationinvolvesassessingthevalueofthesellerfirm.
•Theothermajorfinancialconsiderationisthesourceoffinancing.

33. 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.

34. 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

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

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

37. Acquisition and takeover
•Inthisonecompanyabsorbsanothercompanyorcompanies.Theabsorbing
companytakesovertheassetsoftheabsorbedcompanyandoftenassumes
itsliabilities.Theidentityoftheabsorbedcompanyislostsinceitsassets
fromthepropertyoftheabsorbingcompany.Theshareholdersofthe
absorbedcompanyarecompensatedinformofcash,sharesintheabsorbing
company,etc.takeoverisahostileactivitywheretheacquisitionisafriendly
takeover.

38. 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

39. Types of acquisition
Hostile
Acquisition
Back Flip
Acquisition
Reverse
Acquisition
Friendly
Acquisition

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

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

42. Merger Acquisition
Definition
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 financial gains
along with breaking the trade barriers.
The two companies of different sizes come
together to combat the challenges of
downturn.

43. 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