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Classify the various Forms of Business Combinations

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Business Combination:

It is a voluntary association of firms for the achievement of a common objective. The combination among the firms may be temporary or permanent. The combination may be formed by a written agreement among the firms, or there may be an oral understanding among them to unite for enjoying the advantages of a monopoly.

Forms of Business Combinations:

When owner is the basis of the combination:

It is known as forms of business combination. According to Haney, the various forms of a combination are grouped under two main heads.

  1. Simple combination

  2. Compound combination

The simple combination is the direct combination and include partnership and companies. The second group, combined combination is a combination of associations which can be classified as follow.

  1. Simple Association
    1. Trade associations
    2. Chamber of commerce
    3. Gentlemen’s Agreement
  2. Federation
    1. Pools
    2. Cartels
  3. Consolidation
    1. Partial consolidation
      1. Trust
      2. Community of Interest
      3. Holding company

      2. Complete Consolidation

  1. Amalgamation
  2. Merger
forms of business combinations
forms of business combinations

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The combined associations are now discussed in brief.

  1. Simple Association

    1. Trade Association:

A trade association is a voluntary association of merchants, industrialists, traders, engaged in the same kind of trade. The trade association is formed to look after the economic interests of a particular trade or industry. The trade association may be formed on locality or on a community basis.

The members of a trade association contribute monthly, quarterly   or yearly, a specified amount of the trade association fund. This fund is utilized for the achievement of common objectives of the particular association. The main objectives of a trade association are to discuss the common problems faced by them from time to time.

In availability of raw material, wages of the labor, the price of the products, the state policy, the distribution of bonuses etc. they chalk out an effective policy to avoid cut-throat competition among themselves. The trade association thus protects the economic interests of the members and encourages friendly relations among themselves.

Every trade association has its elected office bearers which look after the interest of its members and provides them all necessary information regarding the business.

Example:

Grain Market Association, Cloth merchants Association, Hardware association, Cotton textile mills association

2. Chamber of Commerce:

Chamber of commerce is a voluntary association of traders, business, merchants, industrialists, financiers, who work for the benefit of business community generally at a regional level. The elected office bearers of the chamber of commerce in each region serve regional level. The elected office bearers of the chamber of commerce in each region serve their member in different ways.

  1. They collect information regarding trade, commerce, shipping and other allied business in and outside the country and keep the members in touch shipping and other allied business in and outside the country and keep the members in touch with the latest developments taking place in the business.
  2. They submit their suggestion and observation to the government for the improvement of business conditions in the country.
  3. They raise their voice against any legislative or another measure which in their opinion are harmful to the interest of the member and the economic progress of the country.
  4. They help the members in settling their mutual disputes by arbitration and thus save the members of the heavy cost of litigation.
  5. The association also carries research work on the problems concerning trade and industry and provides up-to-date information to the government.
  6. The association remains in touch with the Ministry of Commerce/ department of commerce. The government invites suggestions from the chambers in the formulating of economic policies and in the preparation of annual budget.

3. Gentlemen’s Agreement:

                The gentlemen’s agreement is the simplest and most informal type of business combination among competing enterprise. The rival parties in a business make and unwritten agreement to act in an agreed manner. The person owning the business units retain their individuality but they are honor bound to abide by the terms and regulation of the oral agreement. If any party to the combination violates any term of agreement or gentlemen cease to be gentlemen, the association can impose the fine on the defaulting party or exclude the member from the combination. If the party violating the term is influential, the agreement is easily broken.

The gentlemen’s agreement among the competing firms is normally formed.

  1. Fixing one or minimum level of price of the commodity
  2. Framing conditions of sale of the commodity to the buyers
  3. Division of market
  4. The regulation of output

The main idea behind the gentlemen’s agreement is to avoid cut-throat competition among the competing units and restrict output according to demand for the product in the market.

 

2.Federation:

  1. Pool:

A pool is an agreement made by member producing and dealing in similar products. The agreement is made in writing. The aim of the pool is to eliminate competition among the producer by regulating prices.

Pool are sometimes classified according to the purposes for which they are formed, the main types of pools are

  1. Production pool
  2. Market pool
  3. Income and profit pool
  4. Production pool:

The production pool is formed to restrict the output of each firm according to an agreed formula among the competing firms. When production is controlled according to the existing demand, it does not lead to over-production. There is no competition among the firms resulting in lowering of the prices of products. The advantage of this kind of pool is that it does not lead to undercutting of prices. The disadvantage of this system is that t adversely affects the efficiency of the progressive firms.

  1. Market pool:

According to this method, the market is divided among the member of the combination. A member cannot sell his product in the allotted territory members of the combination. A member cannot sell his product in the allotted territory of the other member of the pool. The market areas of each member are earmarked taking into due consideration the volume of sales made by the firm in the past the number and kind of customers and the nature of product etc. The pooling of market may be local national or it may take an international firm.

  1. Income and profit pool:

The output and market pools have proved an ineffective combination of the competing firms. The pooling agreement is disregarded by the members by overproducing the commodities and there is also resentment on the part of the customers.

Under the income or profit pool, the price of goods is fixed by a central board formed by the representatives of the members. The members are then asked to give a higher bid the price set by the board. The highest bidder gets the contract to sell the goods. The difference between the basic price fixed by the board and the bidding price is divided among the member on the productive capacity of each member.

2.Cartel or Syndicate:

The cartel was originated in Germany. According to a German writer Dr. Lietman, a cartel is a voluntary agreement between or association of independent enterprises of similar type to secure a monopoly of the market. In cartel or syndicate, there comes into existence an organization, a new company for selling the product of member units. The cartel can be formed at national and international level. The government of every country does not allow domestic cartel’s as they foster monopolistic practices which are harmful to the interest of the consumer.

Cartel has been very common in international trade and they enjoy the patronage of the government. Actually, a cartel or a syndicate is formed by a number of producers engaged in the same industry. They agree to sell the goods at the base price, called accounting price through a joint stock company called the cartel. The member of a cartel agrees to sell all their output through the syndicate or cartel. The cartel takes full responsibility of selling the products of the firms in the international market. The cartel pays to the producers a base price fixed for the standardized product. The cartel securing a monopoly sells the product to different countries at different prices on the principle of “what the market will bear”.

The cartel does not operate for earning of profit for itself. The cartel sells the commodities on behalf of the producer and distributes the profit in proportion to the quantity received from each member. The losses, if any, are also shared in the same proportion. The syndicate only performs the function of distribution of products. It does not interfere with the internal management of the producing units.

3. Consolidation:

The are two types of consolidation

  1. Partial consolidation
    1. Trusts
    2. Community of interest
    3. Holding company
  2. Complete consolidation
    1. Amalgamation
    2. Merger

We discuss one by one

  1. Trust:

The trust, which is of American origin, is an amalgamation of two or more than two companies to overcome the weakness of cartel. Trust has been defined as a form of a business organization established through temporary consolidation in which the shareholders of the constituent organization under a Trust agreement transfer a controlling amount of their shares to a board of trustees in exchange for Trust certificates. Their certificates show their equitable interest in the income of combination. The Trust, in brief, is formed by.

  1. Two or more than two companies which pool their capital and form a Trust.
  2. The companies transfer all or much of their share to a group of persons known as trustees.
  3. The trustees in return issue Trust certificates to the member companies.
  4. The member companies do not lose their entity but the Trust has full control over the management of the member companies.
  5. The Trust companies administer the funds deposited with them for investment and share the profit of the Trust on the strength of stock which they possess.
  6. The overall policies and plans are chalked out by the board of trustee. These plans are then carried out by the member companies to realize the goals set up the Trust.
  7. The member companies receive the share of profit from Trust on the strength of the Trust certificate possessed by each of them
  8. The board of trustee acquires the voting right due to the transfer of title of stock to the Trust.

Community of Interest:

It is a new type of combination, it was developed to have some kind of common control and direction over the business concern. This method was adopted to take a place of ‘Trust’ according to Heney, “a community of interest may be defined as a form of business organization in which without and formal administration, the business policy of several companies is controlled by a group of common stockholders of directors” there are two types of community of interest.

  1. Community in ownership:

This applies to an arrangement where a group of the person holds a sizable portion of the stock of various companies. The group of persons in their mutual interest consults each other for the selection of directors for various companies of which they hold shares.

  1. Community in ownership and direction:

This form of combination is accompanied by ‘interlocking Directorate’ inter locking directorate exists when one individual or individuals who are recognized to be prominent industrialists become directors in a number of computing firms where they have ownership as well . The directors guide and advise the various concerns in the successful operation of the concerns.

Holding Company:

Holding company is a form of business organization which is created for the purpose of combining other companies by holding a controlling amount of their stock or processes the power to nominate the majority of a director. Holding company is thus the company.

  1. Which holds more than 50% of the issued capital of another company
  2. Has a majority of the voting power
  3. Holds a sufficient amount of share of that company and has the power to appoint the majority of a director.
  4. The company shoes majority share are held by the holding company retains its independence and legal entity by operating under its own name.

In short, the company and the company whose substantial stock are owned by the holding company are known as a substantial company.

A holding company has more than one subsidiary companies and the subsidiary company may be holding company of another company or companies. The subsidiary company retains its independence has a legal entity and operates under its own name. The subsidiary company is managed by its own board of directors.

Amalgamation:

In amalgamation, the member company loses its separate entitle. For instance. If Leco company and Beco company combine under the name of Seco or they incorporate the tow old names into a new one Leco and Beco company, then it is the case of amalgamation. The main purpose of organization a new company is to develop a company into a bigger unit for attaining the advantages of large scale production.

Merger:

A merger is a popular mean of the combination. in a merger, a joint stock company absorbs one or more than one company. Each of the company that has been absorbed in an existing company loses its identity as a business unit. The absorbing company retains its identity.

The main objects of the merger are.

  1. To monopolies trade
  2. To make an effective use of plant capacity and reduce the cost of output per unit of product
  3. Obtaining tax advantages
  4. The desire to develop big into bigger business
  5. Elimination of completion.

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