3. Business Combination
Business combination is the joining of two or more
companies to form a single organization for the
conduct of business activities.
To combine is to become one of the parts of a whole,
and a combination is merely a union of persons to
make a whole or group for the prosecution of some
common purpose.
4. Causes of business combination
• Strict competition
• Foreign Goods
• Advantages of large scale
• Create Monopoly
• Business Cycle
• Efficient Management
• Government Policies
• International Markets
• Patent Rights
• Infrastructure and communication
• diversification
6. Horizontal combinations
When different business of similar
nature producing similar products
combine, it is called horizontal
combination e.g., combination of two or
more cement factories. It is also
known as parallel combination.
7. Vertical Combination
When different business units involved
in various stages of production of a
product combine, it is called vertical
combination e.g., combination of firms
engaged in cotton cultivation, spinning,
and weaving. It is also known as
sequence or process combination.
8. Lateral combination
When different business units engaged
in the production of related products
combine, it is called lateral combination
e.g., combination of printing press with
businesses engaged in the supply of
paper and ink.
9. Diagonal combination
When one main business unit combines
with a unit providing subsidiary goods
or services, it is called diagonal
combination e.g., combination of a
newspaper company with a transport
company for quick delivery. It is also
known as service combination.
10. Circular Combination
When business units engaged in the
production of different products
combine, it is called circular
combination e.g., a combination of
cement factory and steel mill. It is also
called mixed combination.
11. Forms of business combination
• Associations
• Federations
• Consolidations
12. Associations
A association is the combination of
businesses of a particular trade or industry.
It is a non-profit organization formed for
the purpose of promoting the interest of its
members. Usually, the businesses of the
same line of business become members of
trade association e.g., All Pakistan Textile
Mills Association (APTMA).
13. Federations
It means association of firms engaged in the
same business with a formalized agreement
to follow certain policies in common so as to
reduce the intensity of wasteful competition
in the respective business line. It is, in other
words, an alliance of competing firms into a
federal framework.
14. Consolidations
consolidation or amalgamation is the
merger and acquisition of many smaller
companies into a few much larger ones.
In the context of financial
accounting, consolidation refers to the
aggregation of financial statements of
a group company as consolidated
financial statements.
15. Advantages of Combination
• Economies in Production
• Economies in Management
• Economies in Finance
• Economies in Marketing
• Stability
• Exchange of knowledge
• Survival of during Recession
• Possibility of Expansion
• Research and Development
• Goodwill
• Cooperation
• Diversification
16. Disadvantages of Combination
• Monopoly
• Elimination of Small Businesses
• Inefficient Management
• Political Power
• Risk
• Instability
• Concentration of wealth
17. Holding Company
• A holding company holds a majority
of the voting shares in a subsidiary
company or possesses the power to
nominate the majority of the
directors. The subsidiary company
retains its separate entity
18. Advantages of Holding
Company
• It is easy to form.
• Subsidiary companies remain their
separate entities.
• Cost savings associated with
lower overhead .
• Control with fractional
ownership.
19. Disadvantages of Holding
Company
• It uses the profits of subsidiaries
and transfers their loss to
subsidiaries.
• It may lead to concentration of
capital in the hands of few persons.
• It creates secret monopoly.
• limited staff support
20. Difference b/w Holding
Company And Trust
Holding Company
• It is formed by purchasing
shares in the subsidiaries.’
• It is managed by a board of
directors.
• Holding company and its
subsidiaries are independent
from each other.
• Its subsidiaries have no right
to elect its directors.
• Its life in not long. It may
terminate on the sale of
shares in the subsidiaries.
Trust
• It is formed by the transfer
of shares.
• It is managed by a board of
directors.
• Its member units are
dependent on each other.
• Its trustees are appointed by
the combining units.
• Its life is long. It cannot be
terminated before the fixed
period.