A PRESENTATION ON

Business combination
Introduction
 Business combinations are widely practiced across the globe for
several purposes. ‘Combine’ means to unite, merge, or acquire.
More clearly, when two or more independent business entities
join together for specific purpose, the act is called a business
combination.
 It is a common practice in today’s business environment.
 The governments try to control and regulate business combination
procedures to reduce evil-effects of such combinations.
 Sometimes, governments also encourage business combinations
for rapid growth of business operations. There are several forms
of business combinations, such as merger/acquisition, pools,
cartels, holding company, amalgamation, etc.
DEFINITION

 “A business combination is a transaction or an

event in which one company obtains control of the
one or more companies. It is the combinations of
two or more companies into a new entity.”
Causes of business combination
 Avoiding Wasteful Competition:- Severe competition is
the major driving force leading to the emergence of business
combinations in any industry.
 Mass production has increased supply, it leads to increase in
the level of competition.
 Severe competition affects profitability, as everyone has to
sell at low price. All business firms become the loser due
to more and more wasteful advertising and This will lead
to lowering the profit for all firms.
 To avoid wasteful competition, independent business
entities prefer to form business combi­nations.
Benefits of Economies of Large-Scale Operations
 Economies of scale are a powerful force leading to

growth of business operations across the globe.

 Naturally, a large size organisation can manage its

operations more efficiently (i.e., at low costs).

 To take benefits of large size organisation, small

companies prefer to unite. By doing Large scale

production as a single entity the benefits of mass
production can be availed.
 Desire for Monopoly Power
 A firm with monopoly position in the market can
get more benefits.
 Monopoly leads to the control over the market,
which fetches larger profits.
 The desire to secure monopolistic position certainly
prompts producers to join together and create
business combination.
 Business Cycles
 business is a powerful reason leading to business
combinations. Business cycle indicates the alternate periods
of boom and depression.
 Business cycles lead to upsides and downsides in business
opportunities. During the boom stage, companies can
harvest more profits due to unusual growth, which attracts
competition. Competition leads to business combination.
 During depression, many firms have to face business crisis.
They have an option to form a business combination to
survive during hard times.
 Joint Stock Companies
 The corporate form of business organisation is a
facilitating force, leading to emergence of business
combinations.
 Under a company form of organisation, a holding
company can easily acquire controlling interests in
the share capital of various other companies.
 Thus, existence of joint stock companies is a
facilitating condition. It is difficult to form a
combination of sole traders and partnerships.
 Respect for Bigness
 ‘Small is beautiful, but big is beneficial.’ Bigger size
of business serves as advantageous in many way.
 Normally and naturally, a big company solicits more
respect, pockets more market share, bags more profits,
dares take more risk, holds a strong bargaining
position, and enjoys satisfactory political influence.
 Giant companies do not require to compromise with
anyone. A businessman is highly respected in the
industry if he owns a big business unit.
 Encouragement by the Government
 Sometimes, government encourages business
combinations for the interest of society.
 When the government feels that an intensified
competition is wasteful and harmful to social interest,
it may encourage the smaller firms to absorb in bigger
firms.
 If required, the government even forces small firms
through legislation to join with big firms. This
amalgamation may improve the overall efficiency of all
industrial undertakings.
Types of business combination
 Vertical Combination :
Vertical combination takes place when two or more firms,
engaged in same line of business or similar lines of activity, but
operating at different stages of production or distribution, join
hands together to operate collectively. Backward : In case of
backward combination, the company involves backward /
upstream integration by joining hands with the raw material
supplier of the product it manufactures.
 Forward : In case of forward combination, the company
involves forward / downstream integration by extending hands
with firms or intermediaries who help in selling the product
manufactured by the company.
Example of vertical combination

Vertical combination
takes place when two or
more firms, engaged in
same line of business or
similar lines of activity,
but operating at different
stages of production or
distribution, join hands
together to operate
collectively.
Horizontal combination

It is also popularly known as

Parallel, Unit or Trade
combination. Horizontal
combination takes place when two
or more firms, engaged in same line
of business or similar lines of
activity join hands together to
operate collectively. In other words,
when two or more companies
producing same products or
providing same services and are in
direct competition with each other,
combines together then horizontal
combination has said to be taken
place. The purpose of such type of
combination is to eliminate or
reduce the level of competition in
the market.
Lateral combination

Lateral combination is a type

of combination wherein the
firms engaged in producing
allied products combine
together to operate
collectively. There are some
products whose parts are
produced in different
industries at different locations
by different firms. The main
product will be ready when
these different parts are
assembled together. Now,
these parts producing
industries, when join hands
together to operate
collectively, then it is known
as Lateral Combination.
 Circular Combination : Circular combination / integration, also referred to as
mixed combination, is a combination of unreleated business. In such combination,
the combining companies are neither competitors nor they are operating in different
stages of production in same line of business or product. The companies in this type
of combination may be manufacturing totally different products or are providing
totally different type of services.
EX.When a cold drink manufacturer combines with steel manufacturer, it is said to
be circular or mixed combination.
 Voluntary Combination :When different combining business units combine with a
specific purpose without any coercion or compulsion i.e. when business units
combine voluntarily business combination.
 Compulsory Combination :The compulsory combinations are generally initiated by
the intervention of the government. The government, at times, forces some firms to
combine themselves in order to achieve some common objective in the best interest
of public.
EX.The merger of State Bank of India and State Bank of Saurashtra.
POOLS
 Pool is a horizontal type of combination intended to regulate the market
price by collective agreement.
 It is a union of competing units handling the same business created and
operated in accordance with a specific agreement for mutual benefit. Each
firm retains its separate entity.
 The objectives are therefore mainly to exert control over price, regulate
production, and maximise the profit.
 The basic purpose of a pool is to control/regulate price; a pool tries to
hold complete control over the price.
 A pool is a written agreement among the manufacturers to sell the
products at the rate fixed by the members. If any member of the pool
violates the conditions, there is a provision for penalty.
TYPES OF POOLS
 Output Pool: Output pool is an agreement whereby each
member firm of the pool is expected to limit its output to
predetermined quota. Each member is allotted with quota and
each member has to adhere to the agreement.
 Traffic Pools: Normally, traffic pool specifies rate of services.
No member can offer services below the rate specified. The
object of traffic pool is to avoid duplication of services and
eliminate wasteful competition on definite routes.
 It also restricts and regulates competition among the transport
agents.
 Such pools are formed by shipping companies, airlines,
railway and road transport agencies.
 Market Pool: Market pool is an agreement about allocation of market
territories to the member firms. For this purpose, the entire market is
divided among the members in any of these three ways by customers, by
products, or by territories.
 Price Pool: Price pool is an agreement among member firms that regulate
price of the product. The members have to obey all the conditions relating
to price specified in the agreement.
CARTELS
 A cartel is a federal form of business combination, essentially
as selling agency, acting on behalf of the member firms.
 A cartel is a voluntary agreement of independent firms
with similar type of business, which is created to regulate the
sales.
 Thus, a cartel is formed by the firms with same business;
the members of a cartel are engaged in the same business.
 The purpose is to reduce or eliminate inter-firm competition
in a particular line of business, through (1) regulating output,
(2) dividing market among members, and (3) regulating price
and sales.
 Cartel is association of manufacturers or suppliers to maintain
regulate and control production and price.
 Thus, a cartel is an organisation of sellers or buyers that agree to
fix selling prices, purchase prices, or reduce production using a
variety of tactics. Cartels usually arise in oligopolistic industry.
 The aim of cartel agreement is to increase individual members’
profit by reducing competition. In cartel, member firms create a
central agency. The agency is empowered by the members to
regulate production, market, and price.
 The he most suitable example of cartel is Organisation of
Petroleum Exporting Countries (OPEC). OPEC is an example of
a historically effective cartel.
 Term Cartel: In this type of cartel, terms (conditions or rules) regarding sales,
such as rate of discount, period of credit, terms of payment, etc., are
prescribed. When the terms of sales are fixed by the association, it is called
Term Cartel
 Price Cartel: In this type of cartel, prices are fixed for goods and members
cannot sell below those prices.
 Output Cartels/Quota Cartel: In this type of cartel, production quotas are
fixed for each member, and no member would produce more than the allotted
quota.
 Territorial Cartel: In this type of cartel, different firms are allotted specific
territories for selling their production. Here, division of market among units
takes place. Mostly these cartels are formed for dividing the world market.
 Customer Assigning Cartels: In this type of cartel, each member firm is
allotted certain customers. Each members can sell is production only to
assigned customers.
Difference between cartel and pool
 In fact, pool and cartel seem similar. Pool and cartel both formed to regulate
demand and supply, and control the price. Pool and cartel both concern with
selling the output.
 But, there is a little difference. The motive of pool is earning profits, but the
motives of cartel are distribution of product.
 A cartel does not operate for earning profits for itself; cartel works for members.
Pool is an agreement, which is made by the members of the pool who produce
similar product and they want to regularize the price of product. But cartel is an
association of independent producers.
 Pool can interfere the internal matter of the member firms, but cartel cannot do so.
The pool eliminates the competition. But cartel secures monopoly. Pool divides
market but cartel distributes product.
 In pool, there is no federal agency, but a cartel is regulated by a federal agency. A
pool is not always created to secure monopoly, but cartel is mainly formed to
secure monopoly. If any member of the pool violates the conditions, there is a
provision for penalty. A cartel is a federal agency and working on behalf of member
firms. There is no question of penalty.
HOLDING COMPANY
 A holding company, also known as a parent company, is a
unique type of business organization that primarily exists
to control or own other companies' shares.
 its main purpose is to manage subsidiary companies.
 A holding company typically holds a majority of shares in
one or more subsidiary companies, giving it the power to
control these companies' strategic decisions.
 Holding companies are often created to diversify
investments. They can own shares in a wide range of
businesses across different industries, spreading risk and
enhancing stability.
Advantages
1. Each subsidiary company can maintain its own separate
individuality.
2. Control over a large number of companies can be obtained
with relatively small investment.
3. The holding company gains control without knowledge of
public or even the employees. There is no question of public
opposition.
4. Each subsidiary keeps and prepares separate accounts, which
enable investors to know the profitability and financial
position of the company.
5. A holding company can give the control easily, through
disposing off the share of subsidiary held by it.
DISADVANTAGES
1. There is a possibility of exploitation of subsidiaries at the hands of the
holding company.
2. The executives of holding company possess inside information which
they may use for their personal benefit at the cost of shareholders of the
subsidiary company.
3. The management of personnel of these subsidiaries are so far from the
management of the holding company that they have no motivation or
interest in the efficient management.
4. The holding company with its network of subsidiary may develop into a
secret monopoly of which the public and consumers may not have any
knowledge.
MERGER
 It means any combination of two companies or firms,
where one firm survives and other goes out of existence.
 In merger, there are initially two companies, i.e., the
acquiring company which takes over the shares of
another company and other is called acquired company.
After merger acquired company loses its identity forever.
 For example: Company ‘A’ purchases debt-equity and
other assets of Company ‘B’ for cash, Company ‘B’ will
be dissolved, and Company ‘A’ survives with Assets and
liabilities of Company ‘B’.
Acquisition
 An acquisition is a corporate action in which
company buys most, if not all, of the target
company’s ownership stake in order to assume
control of the target firm.
 Acquisition are often made a part of company’s
growth strategies where by it is more beneficial to
take over an existing firm’s operations, compared
to expanding on its own.
Difference between merger and acquisition

 A type of corporate strategy in which two companies amalgamate to form a

new company is known as Merger. A corporate strategy, in which
one company purchases another company and gain control over it, is known
as Acquisition.
 In the merger, the two companies dissolve to form a new enterprise (in
which one maintains its identity).Whereas, in the acquisition, the two
companies do not lose their existence.
 Two companies of the same nature and size go for the merger. Unlike
acquisition, in which the larger company overpowers the smaller company.
 The merger is done voluntarily by the companies while the acquisition is
done either voluntarily or involuntarily.
 In a merger, there are more legal formalities as compared to the acquisition.
1. Vodafone-Idea Merger (2018): Vodafone India and Idea Cellular,
two of India's leading telecom operators, merged to form Vodafone
Idea Limited. This merger was aimed at creating a stronger
competitor in the highly competitive Indian telecom market.

2. Tata Steel-Corus (2007): Tata Steel's acquisition of the UK-based

Corus Group, formerly known as British Steel, was a significant
international M&A deal. This made Tata Steel one of the world's top
steel producers.
3.Walmart-Flipkart (2018): U.S.-based retail giant Walmart acquired
a majority stake in the Indian e-commerce company Flipkart. This
deal signaled Walmart's entry into the Indian e-commerce market.
 4.Zee Entertainment Enterprises-Sony Pictures Networks
India (Ongoing): Zee Entertainment Enterprises and Sony
Pictures Networks India announced a merger to create a leading
media company in India.
 5.Sun Pharmaceutical-Ranbaxy (2014): Sun Pharmaceutical
Industries, India's largest pharmaceutical company, acquired
Ranbaxy Laboratories, expanding its global presence in the
pharmaceutical industry.
 6. HDFC Bank-Centurion Bank of Punjab (2008): HDFC
Bank, one of India's leading private sector banks, acquired
Centurion Bank of Punjab, strengthening its presence in the
Indian banking sector.
Amalgamation
 It means the combinations of more than two
companies into one. The amalgamated companies
lose their existence and identity and form
themselves into a new separate legal entity.
 For ex. If A and B companies decide to amalgamate
then, both the companies lose their identity an form
a new called ‘C’ company. The new company is
registered and enjoys a separate legal entity.