A PRESENTATION ON

Business combination
Introduction
 Business combinations are widely practiced across the globe for
several purposes. ‘Combine’ means to unite, merge, or acquire.
More clearly, when two or more independent business entities
join together for specific purpose, the act is called a business
combination.
 It is a common practice in today’s business environment.
 The governments try to control and regulate business combination
procedures to reduce evil-effects of such combinations.
 Sometimes, governments also encourage business combinations
for rapid growth of business operations. There are several forms
of business combinations, such as merger/acquisition, pools,
cartels, holding company, amalgamation, etc.
DEFINITION

 “A business combination is a transaction or an

event in which one company obtains control of the
one or more companies. It is the combinations of
two or more companies into a new entity.”
Causes of business combination
 Avoiding Wasteful Competition:- Severe competition is the
major driving force leading to the emergence of business
combinations in any industry.
 Mass production has increased supply, it leads to increase in
the level of competition.
 Severe competition affects profitability, as everyone has to
sell at low price. All business firms become the loser due
to more and more wasteful advertising and This will lead to
lowering the profit for all firms.
 To avoid wasteful competition, independent business entities
prefer to form business combi­nations.
Benefits of Economies of Large-Scale Operations
 Economies of scale are a powerful force leading to

growth of business operations across the globe.

 Naturally, a large size organisation can manage its

operations more efficiently (i.e., at low costs).

 To take benefits of large size organisation, small

companies prefer to unite. By doing Large scale

production as a single entity the benefits of mass
production can be availed.
 Desire for Monopoly Power
 A firm with monopoly position in the market can
get more benefits.
 Monopoly leads to the control over the market,
which fetches larger profits.
 The desire to secure monopolistic position certainly
prompts producers to join together and create
business combination.
 Business Cycles
 business is a powerful reason leading to business
combinations. Business cycle indicates the alternate periods
of boom and depression.
 Business cycles lead to upsides and downsides in business
opportunities. During the boom stage, companies can harvest
more profits due to unusual growth, which attracts
competition. Competition leads to business combination.
 During depression, many firms have to face business crisis.
They have an option to form a business combination to
survive during hard times.
 Joint Stock Companies
 The corporate form of business organisation is a
facilitating force, leading to emergence of business
combinations.
 Under a company form of organisation, a holding
company can easily acquire controlling interests in the
share capital of various other companies.
 Thus, existence of joint stock companies is a
facilitating condition. It is difficult to form a
combination of sole traders and partnerships.
 Respect for Bigness
 ‘Small is beautiful, but big is beneficial.’ Bigger size
of business serves as advantageous in many way.
 Normally and naturally, a big company solicits more
respect, pockets more market share, bags more profits,
dares take more risk, holds a strong bargaining
position, and enjoys satisfactory political influence.
 Giant companies do not require to compromise with
anyone. A businessman is highly respected in the
industry if he owns a big business unit.
 Encouragement by the Government
 Sometimes, government encourages business combinations
for the interest of society.
 When the government feels that an intensified competition
is wasteful and harmful to social interest, it may
encourage the smaller firms to absorb in bigger firms.
 If required, the government even forces small firms
through legislation to join with big firms. This
amalgamation may improve the overall efficiency of all
industrial undertakings.
Types of business combination
 Vertical Combination :
Vertical combination takes place when two or more firms,
engaged in same line of business or similar lines of activity, but
operating at different stages of production or distribution, join
hands together to operate collectively. Backward : In case of
backward combination, the company involves backward /
upstream integration by joining hands with the raw material
supplier of the product it manufactures.
 Forward : In case of forward combination, the company
involves forward / downstream integration by extending hands
with firms or intermediaries who help in selling the product
manufactured by the company.
Example of vertical combination

Vertical combination
takes place when two or
more firms, engaged in
same line of business or
similar lines of activity,
but operating at different
stages of production or
distribution, join hands
together to operate
collectively.
Horizontal combination

It is also popularly known as

Parallel, Unit or Trade combination.
Horizontal combination takes place
when two or more firms, engaged
in same line of business or similar
lines of activity join hands together
to operate collectively. In other
words, when two or more
companies producing same
products or providing same services
and are in direct competition with
each other, combines together then
horizontal combination has said to
be taken place. The purpose of such
type of combination is to eliminate
or reduce the level of competition
in the market.
Lateral combination

Lateral combination is a type

of combination wherein the
firms engaged in producing
allied products combine
together to operate collectively.
There are some products
whose parts are produced in
different industries at different
locations by different firms.
The main product will be ready
when these different parts are
assembled together. Now, these
parts producing industries,
when join hands together to
operate collectively, then it is
known as Lateral Combination.
 Circular Combination : Circular combination / integration, also referred to as mixed
combination, is a combination of unreleated business. In such combination, the
combining companies are neither competitors nor they are operating in different stages
of production in same line of business or product. The companies in this type of
combination may be manufacturing totally different products or are providing totally
different type of services.
EX.When a cold drink manufacturer combines with steel manufacturer, it is said to be
circular or mixed combination.
 Voluntary Combination :When different combining business units combine with a
specific purpose without any coercion or compulsion i.e. when business units combine
voluntarily business combination.
 Compulsory Combination :The compulsory combinations are generally initiated by the
intervention of the government. The government, at times, forces some firms to combine
themselves in order to achieve some common objective in the best interest of public.
EX.The merger of State Bank of India and State Bank of Saurashtra.
POOLS
 Pool is a horizontal type of combination intended to regulate the market
price by collective agreement.
 It is a union of competing units handling the same business created and
operated in accordance with a specific agreement for mutual benefit. Each
firm retains its separate entity.
 The objectives are therefore mainly to exert control over price, regulate
production, and maximise the profit.
 The basic purpose of a pool is to control/regulate price; a pool tries to
hold complete control over the price.
 A pool is a written agreement among the manufacturers to sell the
products at the rate fixed by the members. If any member of the pool
violates the conditions, there is a provision for penalty.
TYPES OF POOLS
 Output Pool: Output pool is an agreement whereby each
member firm of the pool is expected to limit its output to
predetermined quota. Each member is allotted with quota and
each member has to adhere to the agreement.
 Traffic Pools: Normally, traffic pool specifies rate of services.
No member can offer services below the rate specified. The
object of traffic pool is to avoid duplication of services and
eliminate wasteful competition on definite routes.
 It also restricts and regulates competition among the transport
agents.
 Such pools are formed by shipping companies, airlines,
railway and road transport agencies.
 Market Pool: Market pool is an agreement about allocation of market
territories to the member firms. For this purpose, the entire market is
divided among the members in any of these three ways by customers, by
products, or by territories.
 Price Pool: Price pool is an agreement among member firms that regulate
price of the product. The members have to obey all the conditions relating
to price specified in the agreement.
CARTELS
 A cartel is a federal form of business combination, essentially
as selling agency, acting on behalf of the member firms.
 A cartel is a voluntary agreement of independent firms
with similar type of business, which is created to regulate the
sales. It is an output pool.
 Thus, a cartel is formed by the firms with same business; the
members of a cartel are engaged in the same business.
 The purpose is to reduce or eliminate inter-firm competition
in a particular line of business, through (1) regulating output,
(2) dividing market among members, and (3) regulating price
and sales.
 Cartel is association of manufacturers or suppliers to maintain
regulate and control production and price.
 Thus, a cartel is an organisation of sellers or buyers that agree to
fix selling prices, purchase prices, or reduce production using a
variety of tactics. Cartels usually arise in oligopolistic industry.
 The aim of cartel agreement is to increase individual members’
profit by reducing competition. In cartel, member firms create a
central agency. The agency is empowered by the members to
regulate production, market, and price.
 The he most suitable example of cartel is Organisation of
Petroleum Exporting Countries (OPEC). OPEC is an example of
a historically effective cartel.
 Term Cartel: In this type of cartel, terms (conditions or rules) regarding sales,
such as rate of discount, period of credit, terms of payment, etc., are prescribed.
When the terms of sales are fixed by the association, it is called Term Cartel
 Price Cartel: In this type of cartel, prices are fixed for goods and members
cannot sell below those prices.
 Output Cartels/Quota Cartel: In this type of cartel, production quotas are
fixed for each member, and no member would produce more than the allotted
quota.
 Territorial Cartel: In this type of cartel, different firms are allotted specific
territories for selling their production. Here, division of market among units takes
place. Mostly these cartels are formed for dividing the world market.
 Customer Assigning Cartels: In this type of cartel, each member firm is allotted
certain customers. Each members can sell is production only to assigned
customers.
Difference between cartel and pool
 In fact, pool and cartel seem similar. Pool and cartel both formed to regulate demand
and supply, and control the price. Pool and cartel both concern with selling the output.
 But, there is a little difference. The motive of pool is earning profits, but the motives
of cartel are distribution of product.
 A cartel does not operate for earning profits for itself; cartel works for members. Pool
is an agreement, which is made by the members of the pool who produce similar
product and they want to regularize the price of product. But cartel is an association of
independent producers.
 Pool can interfere the internal matter of the member firms, but cartel cannot do so. The
pool eliminates the competition. But cartel secures monopoly. Pool divides market but
cartel distributes product.
 In pool, there is no federal agency, but a cartel is regulated by a federal agency. A pool
is not always created to secure monopoly, but cartel is mainly formed to secure
monopoly. If any member of the pool violates the conditions, there is a provision for
penalty. A cartel is a federal agency and working on behalf of member firms. There is
no question of penalty.
HOLDING COMPANY
 A holding is a company that owns other companies'
outstanding stock.
 The term usually refers to a company that does not
produce goods or services itself; rather it purpose is
to own shares of other companies to form a
corporate group.
 Holding company controls other companies
through stock ownership but that usually does not
engage directly in their productive operations.
Advantages
1. Each subsidiary company can maintain its own separate
individuality.
2. Control over a large number of companies can be obtained with
relatively small investment.
3. The holding company gains control without knowledge of public
or even the employees. There is no question of public opposition.
4. Each subsidiary keeps and prepares separate accounts, which
enable investors to know the profitability and financial position
of the company.
5. A holding company can give the control easily, through
disposing off the share of subsidiary held by it.
DISADVANTAGES
1. There is a possibility of exploitation of subsidiaries at the hands of the
holding company.
2. The executives of holding company possess inside information which
they may use for their personal benefit at the cost of shareholders of the
subsidiary company.
3. The management of personnel of these subsidiaries are so far from the
management of the holding company that they have no motivation or
interest in the efficient management.
4. The holding company with its network of subsidiary may develop into a
secret monopoly of which the public and consumers may not have any
knowledge.
MERGER
 It means any combination of two companies or firms,
where one firm survives and other goes out of existence.
 In merger, there are initially two companies, i.e., the
acquiring company which takes over the shares of another
company and other is called acquired company. After
merger acquired company loses its identity forever.
 For example: Company ‘A’ purchases debt-equity and
other assets of Company ‘B’ for cash, Company ‘B’ will
be dissolved, and Company ‘A’ survives with Assets and
liabilities of Company ‘B’.
Acquisition
 An acquisition is a corporate action in which
company buys most, if not all, of the target
company’s ownership stake in order to assume
control of the target firm.
 Acquisition are often made a part of company’s
growth strategies where by it is more beneficial to
take over an existing firm’s operations, compared
to expanding on its own.
Difference between merger and acquisition

 A type of corporate strategy in which two companies amalgamate to form

a new company is known as Merger. A corporate strategy, in which
one company purchases another company and gain control over it, is
known as Acquisition.
 In the merger, the two companies dissolve to form a new enterprise (in
which one maintains its identity).Whereas, in the acquisition, the two
companies do not lose their existence.
 Two companies of the same nature and size go for the merger. Unlike
acquisition, in which the larger company overpowers the smaller company.
 The merger is done voluntarily by the companies while the acquisition is
done either voluntarily or involuntarily.
 In a merger, there are more legal formalities as compared to the
acquisition.
Amalgamation
 It means the combinations of more than two
companies into one. The amalgamated companies
lose their existence and identity and form
themselves into a new separate legal entity.
 For ex. If A and B companies decide to amalgamate
then, both the companies lose their identity an form
a new called ‘C’ company. The new company is
registered and enjoys a separate legal entity.
SEZ
 India was the first nation in Asia to recognize the
effectiveness export processing zone to promote exports.
 India established Asia’s first EPZ in kandla in 1965.
 There were many issues/ practical problems relating to
functioning of EPZ.
 To overcome these shortcomings and attract foreign
investment in India, India announced the first economic zones
policy in April 2000.
 The govt has converted eight export processing zones into
special economic zones and all are functional now.
 Special economic zone is a particular place inside
the country that is allocated by the government for
industry and trade purpose.
 These area has more liberal laws than a country’s
typical economic laws.
 This zone is designated as duty free and deemed as
foreign territory for the purpose of trade operations,
duties and tariffs.
 Meaning: A SEZ is a designated duty free place to be treated as a
foreign territory for the purpose of trade operations and duties and taxes.
 SEZ allowed to carry out manufacturing, trading and service activities.
 Developer of SEZ:There two parties,SEZ – developers and industrial
units. Developers are those people who want to establish a SEZ. Indian
SEZs are developed by government, private sector, and joint sector.
 Any individual, co-operative society, company, or partnership firm can
file an application for setting up of Special Economic Zone.
 Foreign players are also encouraged to invest in the SEZs. Industrial
units are business units that are allowed to operate in the SEZ.
 Objectives of Setting up SEZs:The Government of India announced the
introduction of Special Economic Zones in April 2000 to achieve five
objectives, such as (1) Generation of additional economic activity, (2)
promotion of exports of goods and services, (3) Promotion of investment
from domestic and foreign sources, (4) Creation of employment
opportunities, and (5) Development of infrastructure facilities.
 Applicable Act: The Special Economic Zones Act, 2005, was passed by
the Parliament in May, 2005, which received Presidential assent on the
23rd June, 2005. Special Economic Zone Act, 2005, came into force with
effect from 10th February, 2006. The SEZ Act, 2005, provide for the
establishment, development, necessary facilities, tax benefits, etc.
 Minimum Areas Requirement :Minimum area requirements for
setting up a SEZ are (1) 1000 hectares for setting up a Multi Sector
SEZ, (2) 100 hectares for setting up a Sector Specific SEZ, (3) 40
hectares for Free Trade and Warehousing Zones, and (4) 10 hectares
for IT, handicrafts, bio-technology, non-conventional energy, gems
or jewellery sector.
 Number of SEZs and SEZ Units
 As per the latest SEZ facts available from various Government and
private sources, including official websites, as on 31st December,
2016, (1) approval has been issued to 416 SEZs, (3) 205 SEZs are
Operational, and (3) in all, 4127 units are operating in 205
operational SEZs. 187 SEZs were established after the SEZ Act,
2005. In Gujarat 15 (including one central Government) SEZs are
operational.
 Types of Benefits/incentives: SEZ developer and SEZ units
carrying on manufacturing, trading or service activity are
given various incentives.
 Some of them include, tax holiday, exemption from stamp
duty, freedom from routine inspection/examination by
Custom officials, Tax, exemption from Custom Duty and
Central Excise, freedom from license to export, easy and short
clearance for setting SEZs and industrial units therein, and
many other special incentives.
 Industrial units find more comfortable environment to
operate in SEZ areas.
 Importance (Role) and Limitations of SEZ
 The recent rush to set up SEZs can fuel the economic growth
and provide the cost advantage to the industry in the rapidly
changing global market.
 SEZs are islands of opportunity and they offer business
opportunity across the sectors.
 SEZs (1) Contribute in rapid economic growth, (2) boost
export business, (3) ensures balanced economic growth, (4)
attract FDI, (5) generate employment, etc. SEZs indicate a
rosy picture, but the facts are different. The dark side of the
SEZ cannot be ignored.
Advantages
 Strong Base of Infrastructures
 A SEZ sets up all type of basic infrastructure necessary to support
industrial units start and stabilize their business operations.
 Normally, SEZs have sound infrastructure with only thirty percent of the
area involved in production activities.
 It provides the industrial units with enough space, water supply,
electricity, artificial harbor and facility for handling bulk containers,
professional services, supply of skilled and unskilled labour,
 hosting of public and private banks, Internet facility, better roads and
easy excess to railways and airports, transportation agencies,
communication facilities, pollution control measures, export-import
support, safety and protection means, warehouses, and technical-
professional know-how.
 Ease to Start and Operationalize SEZ: SEZs entitle for special benefits that are
not available to units located in non-SEZ areas. To set up and operate industrial
unit in SEZ is quite easy, due to a lot of special reliefs, exemptions, and freedoms.
SEZs have quite liberal rules and regulations. SEZs are given special liberal
treatments. Availability of these basic facilities at the single place helps
entrepreneurs to start their manufacturing and commercial ventures at a
considerable ease.
 Special Incentives and Tax Benefits :The SEZ Act, 2005, provides a number of
incentives to the units proposed to be set up in SEZs.
 SEZ units may be set up for carrying on manufacturing, trading or service activity.
Some of incentives available to SEZ developers and industrial unit may include,
tax holiday to industrial units, exemption from duties on all imports for project
development exemption from excise or VAT on domestic sources of capital goods,
exemption from import duty, exemption from regular Custom inspection,
Industrial units find more comfortable environment to operate in SEZ areas. Rapid
industrial development is possible.
 Freedom from Labour Problems: Since SEZ units are
considered as ‘public utility services’, no strikes would be
allowed in such companies without giving the employer six
weeks prior notice in addition to the other conditions mentioned
in the Industrial Disputes Act, 1947.
 Pollution-free Environment: Most Special Economic Zones
(SEZs) are well-equipped with the latest pollution control
techniques. SEZs undertake all necessary steps to reduce
pollution and manage industrial wastes. SEZs can also afford
standard pollution control plants. In short, they support
industrial development without deteriorating the ecological
health.
 Attracting FDIs: SEZs enjoy several privileges over normal industrial
areas. SEZs permit FDI in several areas. SEZs attract FDIs (Foreign Direct
Investments) along with the domestic investments. SEZs are notified
areas, which are treated as deemed foreign territory. Availability of the
world-class basic facilities and positive environment lures foreign
investors to make a huge investment in the SEZs.
 Foreign exchange :Quantum of foreign exchange determines degree of
the country’s international strength. More reserve of foreign exchange
indicates a sound economy. It also affects the rate of national currency. In
fact, SEZs are primarily set up to boost export business. SEZs offer many
incentives to encourage export business. SEZs are usually export oriented,
and hence contribute to generate foreign exchange by boosting export
business operations.
 Bringing Latest Technology:SEZs attract foreign companies to invest in
Indian companies, which are located in SEZs. Foreign companies bring
with them their technology. This can boost up Indian economic system.
Still we are deprived of the latest technology. This will surely help to get
the technology updated in various industries. Technological transfer
through SEZs plays important role in Indian economy. Cheaper labour and
better technology multiplies the total gain.
Demerits
 Land Grabbing :A multiple SEZ requires 1000 hector land
while a sector-specific SEZ requires 100 hector land.
 For the purpose of setting up of SEZs, the developers are
allotted lands at the very cheaper rates. For setting up
SEZs at the appropriate places, thousand of hector land is
acquired by the government at low price.
 Lands are grabbed from poor and middle class people under
the pretext of development. Generally, the land is
considered to be an asset to these people and they pass on
it their entire life.
Problems for farmers
 All SEZs are not set up only on the non-agriculture or
barren land.
 When SEZs are built on agricultural land, the farmers will
lose their livelihood as they are not skilled labourers.
 It would too tough to relocate them to other jobs. Farmers
are already facing very bad days in India. Their hardships
get multiplied.
 SEZs also create compensatory problems. Government
provides compensation to the farmers. But compensations
are hardly justifiable as against market value of lands.
 Heavy Revenue Loss: SEZ developers and industrial units are entitled for
a lot of tax and tariff exemptions and concessions. The companies that
operate under SEZ enjoy a lot of tax holidays. A nation has to forgo a
huge amount of income. Sometimes, subsidies are also liberally granted to
SEZs and industrial units operating therein.
 Declining Export Business :SEZs are set up to boost export business.
Export oriented industries are given priority. Despite of 205 operational
SEZs across the country, the volume of export from SEZs noticed a drastic
decline in growth rate. Average growth in export in last 8 year (from
2007 to 2014) is 50.2%; but shockingly, in the year 2011-12, growth rate
was 15.5%, in 2012-13 rate was 31%, in 2013-14 was only 4%. Growth
rate of export from SEZs is on decline.
 Adverse Impacts of Liberal Terms and Exemptions: SEZ developers
and industrial units set up on the SEZs are allowed to do business at very
liberal terms. The terms quite different and liberal, compared to other
parts of the nation. The liberal terms, including no license for import and
import, exemption from regular inspection of export-imported cargoes,
duty free procurement of goods/equipments for setting up SEZ units.
 Fear of Drug Trafficking and Illegal Business :The danger of illegal
business through export from and import to SEZ units cannot be denied.
 The SEZs units have more freedom to do export and import businesses.
Their cargoes are not subject to regular inspection by the Custom
Officials. This type of favourable situation may promote/attract illegal
drug trafficking and export-import of other illegal goods.
 Political Influence :All decisions relating to SEZs are subject to political
influence. Ego, attitudes, economic interest, and leg-pulling gesture of
politicians of the ruling party as well as the opposite party may divert the
noble purpose. Limitless compromising by the top political leaders (for
enhancing political interest) may affect the nation’s economic interest.
 De-industrialisation and Regional Disparity :SEZs also create a
situation of deindustrialization and regional disparity.
 SEZs attract many industrialists from other places of the country. They
show interest as there is tax exemption. This process creates a situation of
de-industrialization in already existed places and migration starts.
 This is not a good sign for common people. There is a possibility that the
special economic zone will be set up in regions where there is already a
strong tradition of manufacturing and exports