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Business Combination

Meaning and definition of Business Combination


A business combination is essentially an event or transaction where an acquirer acquires
control of either one or over one business. Further, a business can be defined as a set of
integrated assets and activities which are capable of being managed and conducted with an
intention of offering a return to the investing members or other participants, owners and
members. Generally, business combinations refer to transactions in which one company
gains control, or at least controlling interest, in another company. A business combination
can be aptly defined as amalgamation of the assets of two or more business entities for
their consolidation as a single entity under single ownership. A business combination can
be managed easily through the way of a voluntary acquisition, a merger, or a hostile
takeover. In many cases, a preferred means of managing a business combination might be
acquiring a controlling amount of stock.
IFRS 2 Business Combinations is about accounting at a time when the acquirer
successfully acquires control of a particular business (for example, merger or acquisition). It
is these kinds of business combinations that are recognized by utilizing the acquisition
method that usually requires liabilities and assets that are assumed for measurement on
the basis of fair value on the date of acquisition.
A very common approach to business combinations is merger. As per this particular model,
two entities operating in similar area combines their assets with an intention to set up a new
entity, which is very strong and efficient in handling competition than would they could have
accomplished on their own. Such a merger enables a the newly formed entity in retaining
existing customers whereas it also gets an opportunity to position itself in a manner that it is
able to acquire new customers.
The IFRS 3 new version was issued in the month of January in 2008 after revision and is
applicable to business combinations that occur in an organizations first annual year
beginning after or on 1st of July 2009.
Method of accounting for business combinations
The business combinations are accounted on the basis of the acquisition method as per
IFRS 3. This particular method is utilized for all types of business combinations. However,
when it comes to the application of this method, the acquirer has to be identified first. After
this the acquisition date needs to be determined. Once the date has been determined, the
measurement and recognition of the assets that are identifiable is required in addition to
assumption of liabilities. Besides, measuring and recognizing of any NCI (non-controlling
interest) in the acquiree is also needed. Apart from this, measurement and recognition of
gain or a goodwill from a bargain based purchase and measurement of liabilities and assets
that have been acquired on a fair value basis is done. The method also involves measuring
of NCI either at fair values or the proportionate share of the NCI of net assets of the
acquiree.
Different types of Business Combinations
Business combinations can be categorized into the following four types:
1. Vertical combination
This is a business combination wherein various departments of large industrial units come
together under single management. Under this business combination all the stages, from
purchase to selling of product, are linked by units. The key objectives of a vertical
combination include:
i. minimizing the per unit cost
ii. elimination competition
iii. hiring the experts services
iv. supplying goods at lowest prices
v. avoiding over production
vi. improving production methods
vii. achieving large scale benefits
viii. finding proper market for their product
ix. supervising the management
x. reducing the middleman commission
xi. earning maximum profit
2. Horizontal combination
Also referred as voluntary combination, it is an association of two or more business units of
same nature under a single management. Both the business units involved in combination
are engaged in same activity and their combination is, therefore, referred as horizontal
combination. The key objectives of this business combination are the same as those of a
vertical combination.
3. Circular combination
This business combination type involves different business units coalesce themselves
under a single management. For instance, a shoes industry combining with cloth and sugar
industry exemplifies mixed combination. The key objective of this benefit is securing the
benefits of administrative ability by the way of common management.
4. Diagonal combination
A diagonal business combination involves two or more business entities performing
subsidiary services combining themselves under a single management. The key objective
of this amalgamation is making the business unit large and self sufficient.
Reasons for Business
combinations?
1- Cost Advantage

2-lower risk

3- fewer operating delays

4-avoidance of takeovers

5-acquisition of intangible assets

What are advantages and disadvantages


of business combination?
Following are the advantages of business combination.

1. Competition between and among the companies will be eliminated.


2. Amount of capital can be increased by combining business.
3. Establishment and management cost can be reduced.
4. Benefits of large scale production can be secured.
5. Operating cost can be reduced by avoiding duplication.
6. Research and development facilities are increased.
7. Monopoly in the market can be achieved.
8. Bulk purchase of materials at reduced price is possible.
9. Stability of the price of goods is maintained.

Following are the disadvantages of business combination

1. Business combination brings monopoly in the market, which may be harmful for
the society.
2. The identity of the old company finishes.
3. Goodwill of the old companies decrease.
4. Management of the company becomes difficult.
5. Business combination may result in over-capitalization.
Types of Business Combinations
Types of Combinations:
Horizontal Combination : It is also known as parallel or trade unit integration. It is
affected by units engaged in manufacturing similar products or rendering similar
services .It involves the brining together of competing firms under single ownership
and management. For instance, if two or more sugar mills are combined under the
same management, it will be a case of horizontal combination. Tata Iron and steel
Ltd and associated cement company are the illustrations of horizontal combination.
The benefit of horizontal combination is as follows;
(i) It eliminates wasteful inter-firm completion in the same line of industry.
(ii) It helps in achieving economies of large scale production and distribution.
(iii) It can control supply of the product and market prices.
Horizontal combination may lead to the point of view of following evils:
(i) It creates monopoly which is harmful form the point of view of the customers.
(ii) There may be restriction of output and exploitation of customers.
(iii) It give rise to concentration of economic power
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. In other words, it implies
combination under single control of enterprises in different stages of manufacturing
the product. The aim of vertical integration is to gain self-sufficiency as regards raw
materials and distribution of finished products. Two or more business units engaged
in successive stages of production, or producing articles leading to the same final
product, may combine together and mange all stages of production and the
distribution of the final product. For example, in cotton textile industry, there may be
a combination of units engaged in successive stages of cloth manufacturing. Such
as spinning, weaving, bleaching and finishing of cloth. Vertical combination may
result from backward or forward integration. Manufacturers at successive stages in
production may integrate backward up to the sources of raw materials or they may
expand through forward integration to retail selling of the finished product. Thus, the
basic objective of vertical combination is either to secure an assured supply of raw
materials and other requirements or to create steady market for the products
manufactured. The former objective is fulfilled by backward integration and the latter
is realized by forward integration.

The advantages of vertical integration are as follows:


(i) It reduces the dependence on other enterprises in the industry and helps in
achieving
self-sufficiency.
(ii) It eliminates the intermediate profits and thus reduces the cost of production.
(iii)There is steady production as a result of regular supply of raw materials and
regular
sales.
(iv) Products of higher quality can be obtained because of the control be achieved.
(v) Economies in storage, transport and handling of materials may be achieved.

Vertical integration may leads to the following evils:


(i) It does not eliminate competition as in case of horizontal integrations.
(ii) The size of the business may grow and it may bring grow and it may bring
inflexibility of operations.
(iii) Since its processes are interdependent, a slight interruption in one process may
dislocate the entire production system.
(iv) It gives rise to concentration of economic power.

Lateral Combination : It refers to the integration of business units producing and


selling different but allied products. The lateral combination may be either
convergent or
divergent. Convergent lateral combination arises when firms producing different
products but supplying to a common user join with him. For example, brick
manufacturer, stone supplier, cement supplier, and wood supplier may integrate with
a construction company; Divergent lateral combination represents combination of
one supplier of a common raw material with different users. The example of
divergent lateral integration is provided by a flourmill supplying flour to a number of
units like bakery, confectionary, and hotel. The main benefit of lateral integration is
that both the supply of raw materials and availability and existence of demand are
ensured to the new combination. Benefits of centralized control of various units are
achieved. Under divergent integration, markets are diversified and risks are
scattered.
Diagonal Combination : It means integration of a main activity or process with
ancillary activities and services. For instance, a newspaper company may integrate
with
transport company to ensure quick deliver of the newspaper to different parts of the
country or an automobile plant may combine with a power generating unit. Thus,
diversification of activities is diagonal. The purpose of diagonal integration is to
ensure smooth and timely availability of ancillary services which are essential for the
continuous working of the main units.
Circular Combination : When there is integration of business units which remotely
connoted with one another in their production and sales, furculum integration is
achieved.
The remote connection may be found between products requiring similar
manufacturing
processes or using the same marketing or trade channels. Circular combination or
created to build up big industrial empires. Business house of Tatas, Birlas and
D.C.M. are the
illustrations in this regard. For instance, the D.C.M. group controls the units engaged
in
textiles, chemicals, fertilizers, sugar, electronic goods, business machines, etc.
Associations: The term association is meant for voluntary union of traders for the
purpose of safeguarding the interest of all the members therein. Broadly speaking,
association may be classified into two types namely trade associations and
chambers of commerce.
Trade Associations: A trade association may be defined as an association of
business
units engaged in a particular trade or industry, or a group of closely related trades. It
is a
voluntary and non-profit organization of business units which are competitors. They
are
formed for the promotion of the economic interest of their members. In fact, the trade
association is a combination of businessmen, engaged in a particular line of
business for the promotion of their common interest, growth of friendly relations and
exchange of news and views pertaining to their business activities. The name of the
association is usually after natural of the business conducted by the members. The
members include businessmen engaged in the same line of business in a particulars
region. Some of the associations a t the all India level are: All India Manufacturers
Organisation, All India Organisation of Employers, All India Marketing Association,
Indian Jute Mills Association, Indian Sugar Mills Association, Indian Paper Mills
Association, etc.
Trade associations at the regional level include: Bombay Mill Owners Association,
Bombay Printing Press Owners Association, Ahmedabad Cotton Mill Owners
Association, etc.

The trade associations perform the following functions:-


Chambers of Commerce : A chamber of commerce may be defined as an
association
of businessmen which works for the benefit of its members in a particulars territory it
serves. Their aim is to protect the general commercial interest of the members.
Chambers of commerce is found all over the differed in their composition and
character. For instance in India and England, a chamber of commerce is a voluntary
association of businessmen to further their commercial interest. But in France it is a
semi-official body comprising of a fixed number of representatives of the
Government and the business community. The chambers of commerce perform the
following functions:-
(i) They collect and disseminate important on traffic routes, trade conditions,
potential
markets, etc.
(ii) They maintain statistical bureaus for providing classified information to the
members.
(iii)They act as the spokesmen of the business community be commenting on
government
polices affecting business or in connecting with an existing piece of legislation that
obstructs business.
(iv) They make representations to the government on proposed legislations
concerning some spheres of business or in connection with an existing piece of
legislation that obstructs business.
(v) They arrange for the settlement of disputes arising out of trade or industry by
means of
arbitration.
(vi) They introduce standard trade practices to be followed by their members.
(vii)They organise industrial fairs and exhibitions to further the interest of the
business
community.
(viii) They provide & forum of exchanging views to the members by holding
conference and seminars.
Distinction Between Trade Association and Chambers Commerce : Trade
Associations and Chambers of Commerce differ in regard to the following points:-
(i) A trade association is formed by those engaged in the same trade or line of
business whereas a Chamber of Commerce is an association of businessmen and
/or business units from a particular region belonging to different trades.
(ii) The members of trade association are competitors whereas the members of a
Chamber of Commerce are both competitors and non-competitors.
(iii) A trade association is engaged in protecting the interest of the particular trade
but
a Chamber of Commerce is engaged in the general commercial interest of the
members
engaged in different trades.
Discuss the various Types or Kinds of Business combination

Types of Business Combination :-


It has following four types :

1. Vertical Combination.
2. Horizontal Combination.
3. Circular Combination.
4. Diagonal Combination.

1. Vertical Business Combination :-


When various departments large industrial units combine together under single management is
called vertical combination. Under this combination from purchasing of raw material to selling of
product all the stages are linked up by the units.For examp0le, all the business units engaged in
publishing books can make vertical combination as under :

Objectives or Advantages of Vertical Business Combination :-


1. To minimize the cost per unit.
2. To eliminate competition.
3. To hire the services of experts.
4. To supply the goods at lowest price.
5. To avoid over production.
6. To use improved methods of production.
7. To achieve the benefits of large scale.
8. To find proper market for their product.
9. To supervise the management.
10. To reduce the middleman commission.
11. To earn maximum profit.

2. Horizontal Business Combination :-


It is also voluntary association which two or more than two similar nature business units
combined them selves under the one management, it is called horizontal combination. For
example, if four tea industrial units are at the same stage of production. The are engaged in
same activity. They sell wholesale. They sell the product in the same market. Their combination
will be called horizontal combination.
Objectives or Advantages of Horizontal Business Combination :-
1. To minimize the Cost per unit.
2. To eliminate competition.
3. To hire the services of experts.
4. To supply the goods at lowest price.
5. To avoid over production.
6. To use improved methods of production.
7. To achieve the benefits of large scale.
8. To find proper market for their product.
9. To supervise the management.
10. To reduce the middleman commission.
11. To earn maximum profit.

3. Circular or Mixed Business Combination :-

When different types of business units combine themselves under the one management it is
called circular combination.

Example :- If a cloth industry combining with shoes industry and sugar industry is an example

of mixed combination.
Objects :- The main object of mixed combination is to secure the benefits of administrative
ability through common management.

4. Diagonal Business Combination :-


When two or more than two business units performs subsidiary services, if they combine
themselves under the main industry it is called diagonal combination.

Example :- If designing and tailoring business units are combined with the garments industry it
is called diagonal combination.

Objects :- The main object and advantage f this combination is that it makes the business unit
very large and self sufficient.
Classify the various Forms of Business Combinations and explain
its objectives or Advantages

Forms of Business Combination :-


Following are the important forms of combination :

1. TRADE ASSOCIATION :-
It is a voluntary association of industrialists traders and merchants who belong to the same
nature of business. The trade association main objective is to protect the economic interests of
the members. It also encourages the friendly relations among the members. Every trade
association elects its office bearers to look after the interest of the members. This association
also provides necessary information's to the rubbers about the business. Wood merchants, iron
merchants and leather trading association are the examples of Trade Association. Trade
associations also establishes its common fund. Each member contributes the fund. This fund is
used to obtain the common objectives.

2. CHAMBER OF COMMERCE :-
It is an association of industrialists traders and businessman who belongs to the particular city
or district. Its management is conducted by the elected office bearers. Govt. has also right to
appoint some members while preparing the commercial and fiscal policy government considers
the recommendations of the chambers of commerce.

Advantages of Chamber of Commerce :-


1. It promotes the trade and commerce activities.
2. It protects the interest of the members.
3. It collects and provides the information's regarding trade and industry to the members.
4. It settles the disputes among the members.

3. POOL :-

Pool is an agreement which is made by the members. Members of the pool produce similar
product and they want to regularize the price of the product. The management of the pool
controls the price and product of the pool members. All the member firms transfer their sources
of rights to the pool. The pool eliminates the completion. It divides the market and distributes
profit among the members. Under this system firms do not loose their identity. Pool has three
kinds :

1. Production pool or out put pool :- When quota of production is fixed for each of the
member firm in order to avoid over production it is called production pool.

2. Market pool :- According to this method market is divided among the member firms. Each
firm sells its product only in the allocated area. The pooling of market may be local national or
international.

3. Income or profit pool :- The member of the pool fix the base price which is equal the cost of
production. The members of the pool are allowed to sell the product at higher price fixed by the
central body of the pool. The difference between selling price and cost is transferred to the
account of the Central body of the pool. The pool divides the profit according to their agreed
share.

Advantages of Pool :-
1. It can be easily formed.
2. There is no fear of over production.
3. It reduces competition.
4. It saves the expenditures of the firms.
5. It increases the profit of the firms.
6. It controls the prices of the product.

Disadvantages of the Pool :-


1. The efficient firms can not produce the goods according to their capacity.
2. Pool works for a limited period.
3. Pool members often disregard the pool agreement.
4. Customers generally dislike the pool.

4. CARTEL or SYNDICATE :-

It is formed by a number of producers engaged in the same industry. They make an agreement
to sell their product jointly through the joint stock company called cartel. The Cartel is
responsible to dispose of the product of the firms in the market. The Cartel secures monopoly
and sells the product at different prices in different countries. The Cartel sells the product on the
behalf of the firms and distributes the profit according to their supply. The Cartel only performs
the duty of distribution of product it does not operate for earning of profit for itself.

Note :- Cartel is an association of independent producers. Cartel can not interfere in the internal
affairs of the firms.

Advantages of Cartel :-
1. The members can earn monopoly profit.
2. The inefficient firm may save itself from competition.
3. The bargaining power of the Cartel is better as compared to others.
4. Selling of the product is economical.
5. The member do not lose their identity.
6. It is more stable than pool.
7. Publicity expenditure of the firms is saved.
Disadvantages of Cartel :-
1. Member of the firms can not maintain uniform standard of the goods.
2. The customers are charged higher prices.
3. Wealth goes in few hands.
4. Non members of the Cartel Compete with the Cartel.
5. New firms also enter into the market due ti high rate of profit.

5. TRUST :-
Trust is a that kind of business organization in which the stock holders transfer their stock or
shares to the Board of Trustees and receive the trust certificates in exchange. The agreement
which takes place is called trust agreement.

Essential or Conditions for Trust :-


1. Two or more than two companies can form trust.
2. Board of Trustees is formed.
3. All the members transfer their stock to the Board of Trustees.
4. Board issues the certificates against the stock.
5. The members of the companies do not lose their identity.
6. Member companies receive profit according the certificates obtained.
7. The over all policies are framed by the Board of Trustees.

Advantages of Trust :-
1. Trust is in a better position to control the out put and market.
2. Trust financial conditions is strong.
3. Trust uses the latest machinery and reduces the cost.
4. Trust has effective control on the member firms.
5. Trust avails the economies of large scale.
6. There is no danger of over production.
7. Trust produces the goods of standard quality.

Disadvantages of Trust :-
1. The process of trust formation is very difficult.
2. The consumer suffers a loss due to Trust monopoly.
3. There is also a danger of over investment in the trust.
4. Wealth goes in few hands.
5. The government of various countries declared it illegal because it is harmful for the public.

Rings :- It is organized to secure the monetary gains. Producers combine themselves to restrict
out put and earn maximum profit. All the members production quota is fixed and no one can
produce more than his quota. It is organized to exploit the consumers. Any member if violates
the agreement he is fined by the ring. Supply of the firm is controlled by the ring.
Posted by fysul mirza at 03:16

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