Concept of business combination
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Business combinations occur when two or more companies join together under common control. They form to achieve common objectives like growth, cost reduction, diversification, and tax benefits. There are different types of combinations including horizontal, vertical, conglomerate, and circular combinations. Companies combine through asset or stock acquisitions, mergers, or consolidations. The combined company may preserve separate legal entities or create an entirely new entity. Businesses combine to address issues like competition and business cycles or to achieve economies of scale.
Concept of business combination
- 2. 2-2 “A business combination occurs when two or more companies join under common control i.e. the ability to direct policies and management.” - - BAKER, et.al. “A business combination occurs when an enterprise acquires net assets that constitute a business or equity interests of one or more other enterprises and obtains control over that enterprise or enterprises.” - - SFAS No. 141 Business combinations are combinations formed by two or more business units, with a view TO ACHIEVE CERTAIN COMMON OBJECTIVE, such combinations ranging from loosest combination through associations to fastest combinations through complete consolidations.
- 3. 1. Growth New markets Increase in market share 2. Reduction in operating costs 3. Diversification 4. Tax reasons 5. Management incentives
- 4. Horizontal Integration- This type of combination is one that involves companies within the same industry that have been PREVIOUSLY COMPETITORS. Vertical Integration- This type of combination takes place between two companies involve in the same industry but at different levels. It normally involves a COMBINATION OF A COMPANY AND ITS SUPPLIERS OR CUSTOMERS. Conglomerate Combination- In this one involving company in unrelated industries having little, if any, production or market similarities FOR THE PURPOSE OF ENTERING INTO NEW MARKETS OR INDUSTRIES. Circular Combination- It ENTAILS SOME DIVERSIFICATION, but does not have a drastic change in operation as a conglomerate. For example, San Miguel Corporation accomplished this
- 5. 1. Acquisition of Assets Statutory Merger- It results when one company acquires all the net assets (assets and liabilities) of one or more other companies through an exchange of stock, payment of cash or other property, or the issue of debt instruments . THE ACQUIRING COMPANY SURVIVES , WHEREAS THE ACQUIRED COMPANY CEASES TO EXIST AS A SEPARATE LEGAL ENTITY, ALTHOUGH IT MAY BE CONTINUED AS A SEPARATE DIVISION OF THE ACQUIRING COMPANY.
- 6. Statutory Consolidation – It results when a new corporation is formed to acquire the net assets (assets and liabilities) of two or more other corporations. THE ACQUIRED COMPANY, THEN, CEASES TO EXIST AS A SEPARATE LEGAL ENTITY. 2. Stock Acquisition- an acquiring corporation may acquire majority ownership interest of outstanding voting stock or control of a corporation and the separate legal entity of each enterprise is preserved. In this case, THE ACQUIRING CORPORATION IS KNOWN AS THE PARENT
- 7. Wasteful competition Economies of large scale organization Desire for monopoly power Business cycle Joint stock companies Influence of tariffs Cut of the colossal (or respect for bigness) Individual organism ability
- 9. 1. Associations: There are 3 types Trade Associations: A trade association comes into being when business units ENGAGED IN A PARTICULAR TRADE OR INDUSTRY OR IN CLOSELY RELATED TRADES come together for the promotion of their economic and business interests. Chambers of Commerce: Chambers of commerce is VOLUNTARY ASSOCIATIONS OF PERSONS connected with commerce and industry. Informal Agreements: Informal agreements are types of business combinations which may be formed for the PURPOSE OF REGULATING PRODUCTION OR FOR
- 10. 2. Federations : There are 2 types Pools: Under the pool form of business combination, the members of a pooling agreement join together TO REGULATE THE DEMAND OR SUPPLY OF A PRODUCT without surrendering their separate entities, in order to control price. Cartels (Kartells): Basically cartel is the European name for the American pools. According to Von Beckereth, “A cartel is a voluntary agreement of capitalistic enterprises of the same branch for a REGULATION OF THE SALES MARKET WITH A VIEW TO IMPROVING THE PROFITABLENESS OF
- 11. 3. Consolidations: There are 2 types Partial Consolidations: Under partial consolidations, the COMBINING UNITS SURRENDER THEIR FREEDOM FOR ALL PRACTICAL PURPOSES to the combination organization; but retain respective individual entities nominally. Complete Consolidations: Complete consolidation is that form of business combination under which there is A COMPLETE FUSION OF THE COMBINING UNITS and the separate entities of