Business Combination and what circumstances contribute the formation of Business Combination

Business Combination :It is a voluntary association of firms for the achievement of common objectives to enjoy the monopoly advantages various firms combine themselves. The combination may be formed by a written or oral agreement among the firms. Sometimes firms decide to merge themselves into one unit. The main object of the business combination is to achieve common economic welfare for its members. But it is considerd to be unlawful if any of its objective is against the public interest. Business combination may be permanent or temporary. CAUSES OF BUSINESS COMBINATION GROWTH 1. Elimination of Competition :Due to hard competition among the firms rate of profit decreases. Some firms may suffer a loss also. So the industrialists feels pleasure to set up combination to avoid the competition. It increases the rate of profit. 2. To Solve Capital Problem :Small units of production face the problem of capital shortage. These can not expand the business. So small units may form a combination to over come this problem. 3. To Achieve Economies :Some small units cmbine themselves to achieve the economies of large scale. They purchase the raw material on loqw prices and sell the product on large scale cost of production falls and profit increases. 4. Effective Management :Generally small units are unable to hire the services of experts and experiancd managers. So

small industrial units combine themselves to hire the services of effective management. 5. Tariff Facilities :To compete with external firms some industrial units combine themselves. Government also provide protection and tarrif facilities. Government also imposes heavy duties to protect the domestic producers. 6. Uniform Policy :All the units adopt uniform policy due to business combination. It regularizes the business avtivities of all the units. 7. Use of Technology :The business combination can use the latest technology and new methods of production because its sources are sufficient. While a single unit can not do so. 8. To Face Crises :It is very difficult for the small industrial units to face crises in the days of inflation and deflation. So the small units combine themselves to face these problems easily. 9. Growth of Joint Stock Companies :The growth of joint stock companies has also made possible for various industrial units to form combination. 10. Status in Market :A big firm enjoys higher status and respect then the smaller. So small business units prefer to combine themselves for higher status. 11. Demand and Supply Balance :Business combination is very useful in controlling the over production. It adjust the supply according to the demand of the market. So over production can not take place and prices remain stable. 12. Transport and Communication Development Activities :It has made economic activities fast. Now there is a close contact of businessman with the others. So it has also contributed to the growth of combination. 13. Research Facilities :A small firm can not set up the research department, while through business combination these facilities can be enjoyed. 14. Economic Instability :In case of economic and political instability there is chance of loss in every moment. To reduce the risk small industrial units combine themselves.

Demerits or Disadvantages of Combination or Business combination

Disadvantages of Business Combination :Following are important disadvantages of combination : 1. Creation of Monopoly :It creates monopoly which is harmful for the public. 2. Concentration of Wealth :It concentrates the wealth in few hands and divides the society into two classes rich and poor. 3. Not Acceptable :Combination is disliked by the people, it is not acceptable. 4. Changes of Friction :The chances of friction among directors and officers are bright. They quarrel with each other for their own interest. 5. No Personal Contact :It is not possible to maintain direct contact between employees, creditors and shareholders. Due to this business may suffer a loss. 6. Costly Management :A combination hires costly management, which increases the cost of production. 7. Over Capitalization :There is always a danger of over capitalization in the combination. It is harmful for the combination. 8. Misuse of Funds :The directors of the company enjoy unlimited power and misuse the capital. 9. National Interest Ignored :Generally the combinations ignore the national interest and they involved in such activities which are against the national interest.

Advantages or Merits of Combination or Business combination

Advantages of Business Combination :The advantages of combination are controversial because creation of monopoly and elimination of competition both are considered the merits and demerits of the combination. Any how following are the important merits of combination : 1. Increase in Capital :The volume of capital may be increased by the formation of combination. The members combine their resources to conduct large size business. 2. Elimination of Competition :By the formation of combination unnecessary competition is eliminated and member firms eran monopoly profit. 3. Saving in Expenses :Administrative production, and distribution expenses reduce due to combination. 4. Controls Over Production :Combination is very effective to control over production. It helps to adjust the supply according to the demand. 5. Large Scale Marketing :In the market competition position is strong in bargaining. So it sells the product at higher price. 6. Experts Services :A combination is able to acquire the services of experienced specialists. It increases the efficiency of the combination. 7. Research Work :A combination is able to spend money on research work which is very important for the business. This research work reduces its cost and increases its [profit. 8. Use of Modern Technology :A combination is capable to use the latest inventions and new methods of production. It will increase its profit.

9. Stability :A combination is more stable form of business as compared to the individuals units. The chances of dissolution are also less than others. 10. Division of Labour :The principle of division of labour is applied in combination which increases the production efficiency of combination.

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.

Define the Amalgamation and Merger

AMALGAMATION :Amalgamation comes into existence when two or more than two established joint stock companies combine themselves into a large one. After amalgamation each company loses, its separate entity. New combination company generally take over all the assets and obligations of old companies. Main purpose of a new company is to enlarge a business to obtain the benefits of large scale. MERGER :When a joint stock company absorbs one or more than one company is called merger. Each firm which is absorbed loses its identity. It eliminate the competition and obtains the monopoly profit it reduces the cost and obtain the tax advantages. 0 6Share External expansion refers to business combination where two or more concerns combines and expand their business activities. The ownership and control of the combined concerns may be undertaken by a single agency. Business combination is a method of economic organization by which a common control, of greater or lesser completeness is exercised over a number of firms which either is operating in competition or independently. This control may either be temporary or permanent, for all or only for some purposes. This control over the combining firm can be exercised by a number of methods which in turn give rise to various forms of combinations. In the process of combination, two or more units engage in similar business or in different related process or sages of the same business join with a view to carry on their activities or shape or shape their polices on common or coordinated basis for mutual benefit or maximum profits. The combination may be among competing units or units engaged in different processes. After combination, the constituted firm pursues some common objectives or goals. Forms of combination

There is some disagreement on the precise meaning of various terms relating to the forms of business combinations, viz; merger, amalgamation, absorption, consolidation, acquisition, takeover, etc. sometimes, these terms are used interchangeably, in a broader sense even when there are legal distinctions between the kinds of combinations. 1. Merger or Amalgamation In business or economics a merger is a combination of two companies into one larger company. It may be in the form of one or more companies being merged into an existing company or a new company may be formed to merge two or more existing companies. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. A merger can resemble a takeover but result in a new company name (often combining the names of the original companies) and in new branding; in some cases, terming the combination a merger rather than an acquisition is done purely for political or marketing reasons. Merger is a financial tool that is used for enhancing long-term profitability by expanding their operations. Mergers occur when the merging companies have their mutual consent. The income tax Act, 1961 of India uses the term amalgamation for merger. According to companies act, 1956, the term amalgamation includes absorption. In SS Somayajula v. Hop Prudhommee and co. ltd. The learned judge refers to amalgamation as a state of things under which either two companies are joined so as to form a third entity or one is absorbed into or blend with another.
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Merger or amalgamation through absorption. Merger or amalgamation through consolidation.

Absorption. A combination of two or more companies into an existing company is known as absorption. In absorption all companies expect one go into liquidation and lose their separate identities. E.g. Absorption of Reliance Polyproplene Ltd. (RPPL) by Reliance Industries Ltd. As a result of the absorption, the RPPL was liquidated and its shareholders were offered 20 shares of RIL for every 100 shares of RPPL held by them. Consolidation. A consolidation is a combination of two or more companies into a new company. In this form of merge, all the existing companies, which combine, go into a new company. In this form of merger, all the existing companies, which combine, go into liquidation and form a new company with a different entity. The entity of the existing company is lost and their assets and liabilities are taking over by the new corporation or company. The assets of old concern are sold to a new concern and their management and control also passes into the hands of the new concern.eg. there are two companies called A ltd. and B Ltd. and they merge together to form a new company called AB Ltd. or C Ltd. it is a case of consolidation . The term consolidation is also sometimes used as amalgamation. Types of Mergers

From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:
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Horizontal merger Two companies that are in direct competition and share similar product lines and markets, join together it is known as a horizontal merger. The idea behind this type of merger is to avoid competition between the units. (e.g.: two manufacturers of same type of cloth, two transport companies operating on the same route-the merger in all these cases will be horizontal merger. Vertical merger A customer and company or a supplier and company. (e.g.: an ice cream maker merges with the dairy farm that they previously purchased milk from; now, the milk is free) Market-extension merger Two companies that sell the same products in different markets (e.g.: an ice cream maker in the United States merges with an ice cream maker in Canada) Product-extension merger Two companies selling different but related products in the same market (e.g a cone supplier merging with an ice cream maker). Conglomeration Two companies that have no common business areas where two merging firms are in the same general industry, but they have no mutual buyer/customer or supplier relationship, such as a merger between a bank and a leasing company. Example: Prudentials acquisition of Bache & Company.

2. Acquisitions or Take-Over An acquisition, also known as a takeover or a buyout, is the buying of one company by another. It is an act of acquiring control over management of other companies. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the targets board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Reverse take-over: When a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover. Distinction between Mergers and Acquisitions Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer swallows the business and the buyers stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a merger of equals. Both companies stocks are surrendered and new company stock is issued in its place.

Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved.