When two or more independent business firms are combined for a common purpose is called business combination. The combination among firms may be temporary or permanent. The combination may also be written or oral. The primary objective of business combination is to maximize profit. In this article we will learn about the following.
1. Types of Business Combination
2. Forms of Business Combination
Types of Business Combination
Following are the four types of business combination.
When two or more industrial units which produced similar products join together is called horizontal combination. They are at the same stage of production, and are dealing in the same geographical market. For example, association of two sugar mills under one management. The main objectives of horizontal combination is to:
- Eliminate competition
- Avail of large scale of production
- Improve methods of production
- Better use of skilled persons
- Minimize per unit cost
- Find proper market
- Organize of common advertising campaign
- Maximize profit
When various departments of large industrial units combine together under one management is known as vertical combination. For instance, combination of publishing departments such as typing section, printing section and binding section. The main objectives of vertical combination are same as those of horizontal combination.
When two or more business entities performing subsidiary services join themselves is called diagonal combination. For example, joining of automobile manufacturer with a firm providing repairs and maintenance service. It is also known as services combination. The main objective of this type of combination is to make business unit large and self-sufficient.
When two or more business units dealing in different products join hands is called circular combination. For instance, combination of sugar mill with cement factory. This type of combination is also known as mixed combination. The main advantage of this this type of combination is to secure the benefits of administrative integration through common management.
Trust is formed by an agreement among competing firms in order to eliminate competition. The firms retain their ownerships and identities. They agree to fix price for their goods and services to facilitate monopoly and maximize profit. The government interfere in the business for controlling the trust to protect the interests of consumers. Monopoly Control in the UK and Anti-Trust Laws in the USA are the example.
Forms of Business Combination
The forms of business combination are given below.
A trade association is a voluntary association of traders and businessmen producing similar goods or services to protect and promote their common interests through collective efforts. It does not enter into any business transactions. It is non-profit organization. The members of a trade association are usually competitors. They contribute a specified amount to the trade association fund which is utilized to achieve their common objectives.
Chamber of Commerce
Chamber of commerce is also formed to protect and promote common interest of the business community. But Chamber of commerce differ from trade association in that it does not only confine to the interest of a particular trade or industry, but it stands for the business community in a particular region or country. It acts as a spokesman for the business community and makes suggestions to the government regarding legislations that will promote commerce and trade.
Pool is a written agreement made by members dealing in similar products. It is form to avert competition among firms. Under this system the firm’s entities remain same. Pool has the following kinds.
- Production pool: Here quota of production for each firm is fixed in order to avoid over production.
- Market pool: Under market pool the market is divided and allocated to different firms to avoid their concentration on a few markets.
- Price pool: Under price pool the price of a commodity is fixed to facilitate monopoly.
The US does not allow pools in any forms within the country. However, the pool has been allowed outside the US but under the name of cartel.
Cartel is the European name for the American pools. It is the association of independent firms dealing in the same type of business to fix the amount of production, divide the market, determine the price for their products to create monopoly and maximize profit.
In merger one independent firm takes over another independent firm. The taken over firm losses its existence. The buyer firm retains its entity and becomes stronger than previously. This type of business combination is formed to eliminate growing competition among merging firms. See the given below example.
a + b = A
The above example shows that ‘a’ firm purchased ‘b’ firm and ‘a’ becomes more stronger.
This form of business combination takes place when two or more independent firms combined and loss their entities and form a new one. Amalgamation is formed when all combining firms are not quite famous and they are eager to give up their names and identities and adopt a new one. The example is given below.
A + B = C
Here ‘A’ and ‘B’ combined and loss their entities and transformed into ‘C' company.
The holding company is that which holds at least 51 percent shares of other companies. Such other companies are known as subsidiary companies. The subsidiary companies retain their separate entities. The subsidiary company may be holding company of another company. The holding company has more control over the subsidiary companies in management and decision making.
Causes of Business Combination
There are many reasons of business combination. Most of them are following.
Elimination of Competition
Due to growth of competition among firms the rate of margin decreases. Under such circumstances, small enterprises could not survive. Therefore, the only solution available to the competing firms to eliminate competition through business combination.
Expansion of Business
Small units of business face the problem of capital shortage which leads not to expand the business. A business combination can easily raise capital for the expansion of business to buy new machinery, produce large scale of production, use new and improve methods of production and set up research department.
Usually small units of business cannot afford the services of experience and qualified employees. So, business combination is formed to hire services of those employees who are expert in the management of the company.
Business units are also combine to dominate the entire market and create monopoly. By dominating the market, the combined firms can sell their products at higher rates and earn maximum profit.
Frequent changes in government policies increase uncertainty among businessmen. They may therefore join together in a more formalized manner to protect themselves against the effects of uncertain policies of the government.
During the period of depression, new firms are not willing to enter into industry and even the small existing firms cannot survive. Therefore, the small existing firms are willing to go for the technique of business combination to ensure their survival.
Influence of Tariffs
The Governments throughout the world offered protection to home industries by imposing high custom duties on imported goods. Imposition of tariffs restricts foreign competition which increases competition among home industries. Consequently, the increase of competition among home industries leads to business combination.