Chapter o4

Business Combinations
Definition

The voluntary association of firms for the

achievement of common objectives.
Difference of Firm & Industry

Firm:
Firm is a legal business entity or unit
which combines the factors of production
to produce the goods and services.
Industry:
The collection of all firms which are in the
same line of production. For example Car
industry, computer industry, textile industry
etc.
Reasons for Business Combinations

Elimination of Competition
Large Scale Production
Tax payments
Avoid huge losses
Elimination of Competition

The first cause of merging is the

elimination of competition. Initially when
two businesses are producing a similar
product, they face competition with each
other in price and quality. The combination
of these two businesses eliminates the
competition.
Large Scale Production

When two businesses join together they

can share their factors of production and
can produce more output. Because of this
large scale production this business has
got some benefits. Like Financial benefits,
Marketing benefits and risk bearing
benefits etc.
Tax Payments

When there are high taxes in a country.

Individual business may not be able to pay
the high tax. Thats why these individual
business join together to afford the high
tax.
Avoid Huge Losses

If the business activity in the country is

low, this affects the sales of the business
in a country. Because of low sales some
business may suffer through losses, that is
why its better to join with another business
to avoid huge losses.
Types of Business Combinations

Horizontal Combination
Vertical Combination
Diagonal Combination
Horizontal Combination

Horizontal combination is a voluntary

association of two or more than two firms
at the same production level. For example
auto mobile industry etc.
Vertical Combination

Vertical combination is the combination of

firms which are involved in successive
phase of the same production line
process.
For Exp: some businesses are involved in
cotton wearing, some businesses are
involved cotton bleaching, some
businesses are involved cotton spinning.
Diagonal Combination

Diagonal combination is the combination

of two or more than two business units
providing services in the main line of
production.
For Exp: cigarette maker may combine
with firm making cartons or packaging etc.
 Acquisition

The purchase of one company by

another, through
either the purchase of its shares,
or the purchase of its assets

Example ,in 2008 the Kraft foods

company acquired the Cadbury
Types Of Acquisition
Friendly Acquisition
"friendly takeover" is an acquisition which is approved by the
management. it

usually first informs the company's board of directors. In an ideal world,

if the

board feels that accepting the offer serves the shareholders better than

rejecting it, it recommends the offer be accepted by the shareholders.

Example. Universal insurance company acquired by the united insurance

company through a mutual agreement

Example ,in 2008 the Kraft foods
company acquired the Cadbury foods
company.
Reverse Acquisition

A Reverse acquisition occurs when a large private company

acquires a public

Company .

Example. When Etisalat acquired a public company PTCL then

Etisalat becomes a public company through this Acquisition.
Examples, US air ways was acquired by America west airlines.
Hostile Acquisition

hostile takeover is a type of corporate

acquisition which is carried

out against the wishes of the board of

directors (and usually management) of

the target company.

Back Flip Acquisition

A very rare case of acquisition in which,

the purchasing company becomes a

subsidiary of the purchased company.

Example. Tata group India largest

multinational company has so many
subsidiary companies or daughter
company. Like Tata steel, Tata motors,
General motors India etc.