Different Business Combination

The business combination is formed when two or more business undertaking units combine to carry on business together for achieving economic benefits.

It is also originated when a number of different business concerns of the same line combine together under one management with a view to achieving some definite objects of mutual benefits.

At present we find a general tendency to form a cartel, trust, holding companies, pool, and amalgamation, etc at home or abroad for the object of increasing capital volume, specialization, and standardization. Rival firms combine together in order to avoid the heavy cost of the competition.

In this article,

Forms of Business Combinations

These business combination forms have different types; entirely depend upon missions, agreements, benefits of both parties.

Trade Association

It is a voluntary association of traders, merchants, and industrialists who belong to a particular place and who engage in similar nature of business. It is formed for the achievement of common purposes.

For example, Cloth Merchants Association, Leader Traders Association, Iron Merchants Association. A common fund is established in which each member contributes for the protection of their interest.

Objective of Trade Associations

To Encourage the friendly relation among the members.
To avoid the competition among the members.
To promote the interest and welfare of its members.
To arrange the supply of raw material and labours.

Chamber of Commerce

It is an association of various merchants, industrialists, and businessmen who belong to a particular city or district. It is formed to promote trade, commerce, and industrial activities in the country. Its management is conducted by an elected executive committee.

The government has also the right to appoint some members. Its recommendations are considered very useful in formulating budgets and other trade and commercial policies. These chambers remain in close touch with the Ministry of Commerce.

Objectives of Chamber of Commerce

To protect the interest of its members.
To promote the business activities in the country.
To remove or minimize the effect of trade restrictions.
To collect the information relating to trade, commerce, industry and shipping.
To settle the disputes arising among the members inside or outside the business.

Pool

A pool is a device to regulate production, divide the territory of the market, and distribute the profit of its members. Under this system, members do not lose their entity so it is deemed a stable form of combination.

Objectives of Pool

To avoid competition among its members.
To regulate the supply of production.
To control the prices of product.
To avoid over production.
To minimize the expenditure on distribution.
To earn handsome profit of their goods.

Cartel

It is an association .of independent producers and businessmen to design certain arrangements for jointly conducting their marketing functions. A joint selling agency is to be organized for performing marketing functions.

All the participating members agree with the cartel to dispose of their entire product to it. Then the cartel arranges to supply the goods to the market. It is a loose type of combination where the member units enjoy full independence. So they can easily come out of the cartel at any time.

The form of the combination was first introduced in Germany.

Objectives of Cartel

To achieve economy of large scale distribution.
To eliminate unnecessary competition.
To limit the supplies of their product.
To improve the quality of the product and condition of sale.
To control the price of their products.

Rings

This is an organization of producers who combine to restrict the output they produce for the purpose of securing some monetary gain. All the members agree with the ring that they would not produce the goods in excess of the quota fixed for them. Defaulters are to be fined by the rings. It is usually organized to exploit the consumers.

Objectives of Rings

To avoid over production.
To control the supply of the product.
To secure monetary gain by controlling price.

Trust

Trust is another kind in which the stockholders transfer a majority of their stock or shares to a Board of Trustees in exchange for trust. certificates This is the combination of several joint-stock companies which is managed by the Board of Trustees who control the shares of stock of its members.

Trust is formed to control the production and distribution. As it enjoys a sound financial position it can achieve the benefits of large-scale production. This is a strong vertical type of combination. Its members cannot easily come out of the trust.

Trust originated in the U.S.A in 1879 but due to its harmful activities for the public, it was declared illegal by the court in 1890.

Objectives of Trust

To increase capital volume for large scale production.
To enjoy the benefits of large scale organization.
To achieve the economies in production and distribution.
To control the market.
To regulate the prices and output.

Corner

This is the combination of speculators which is generally organized in the share market. Under this system, entire goods or shares available on the particular market are purchased by the corner with the object of reducing the supply to the minimum.

Thus its members are in a position to achieve monetary gain by affecting prices. But in the modem age, this device cannot be successful due to fast means of transport and communications.

Objectives of Corner

To establish a temporary monopoly of the market.
To charge high prices of their goods.
To control the supply of the particular commodity.

Informal Agreement

This is the form of mutual understanding or agreements among the competing business with the object of controlling the prices of the product and regulating the market. This is the simplest and loose form of combination which is generally based on oral agreement among the rival units.

A member can be expelled from the combination if he fails to abide by any rules and regulations but it may also come to an end if the members are violating rules. This is also known as Gentlemen’s, Agreement.

Objectives of Informal Agreement

To avoid unnecessary competition among the constituent units.
To control the prices of the product.
To improve the condition of the scale.
To restrict output of the competing members.
To reduce the cost of marketing the product.

Syndicate

This is the organization of producers and manufacturers who combine to regulate the product and price. This is a loose type of combination in which member units have complete independence in the matter of internal administration of their own units.

It can be formed at a local, national and international level. The following procedure is to be adopted by the syndicate.

Its members cannot dispose of their product directly in the market, but entire output of its members are purchased by syndicate at agreed prices.
Syndicate arranges to sell the product of its members in the market at reasonable prices.
The profit earned by the syndicate is distributed among the members in agreed producers.

Objectives of Syndicate

To avoid competition among the producers.
To regulate the output and prices of the product.
To locate reasonable market for the products of its constituent units.
To dispose of the output at handsome prices.

Holding Company

A holding company is a device to control the majority of other company’s shares. Under this system, any company may become holding if a sufficient number of shares are purchased by it.

The company whose shares are owned by the holding company is named a subsidiary company. A company may itself be a holding company and at the same time be a subsidiary to another company.

Objectives of Holding Company

To eliminate competition.
To obtain the benefit of large scale production.
To achieve economy in the field of management and production.
To increase the efficiency of business by modern technique.
To control market and to avoid over production.
To enjoy the research results and patent rights of each other.
To increase the financial stability of the subsidiary company before the general public.

Amalgamation

When two or more joint-stock companies which are already established combine into large one amalgamation comes into existence. New combination companies generally take over all the assets and obligations of the old companies.

Each company of the amalgamation lost its separate entity. For example, if X company and Y company combined together under the new name of X and Y company it is called amalgamation.

Objectives of Amalgamation

To achieve the economies of large scale production.
To increase the financial resources.
To attain the benefit of technical and scientific development.

Merger

When a joint-stock company takes over the entire ownership of one or more than one business unit. It is known as a merger. So two or more firms absorb into one in exchange for stock and shares. In case of a merger, each firm loses ~ its separate entity. For instance, if y company merges with the A company, y company will lose its identity.

Objectives of Merger

To eliminate competition.
To secure benefit of large scale production.
To control market.
To achieve the economies in management, production and distribution.
To hire the services of expert and efficient persons.
To enjoy taxes and other exemption facilities.
To increase the efficiency of business by adopting technique, improved formula and scientific invention.

Types of Business Combination

Vertical Business Combination

The vertical combination takes place when the various departments of large industrial units combine together under single management. Under this arrangement, constituent units link up all the stages of production i.e. from purchasing raw material to its finishing.

Objectives of Vertical Business Combination

To regular the supply of raw material
To achieve economy in the purchasing and other sectors.
To locate the assured market for their products
To minimize the cost per unit.
To eliminate competition.
To avoid over production.
To reduce the middle man’s commission.
To supervise the management and production of effectively.

Horizontal Business Combination

When two or more similar nature business units combine under one management Horizontal combination comes into form. For instance, two or more textile industrial undertakings unite under single management it is called a horizontal combination. It is also known as a parallel combination

Objectives of Horizontal Business Combination

To achieve benefits of large scale production.
To avoid competition.
To obtain economy in management and production.
To regulate the prices of product.
To hire the service of outstanding talented persons.
To increase the efficiency of constituent units.
To produce the goods at minimum cost.
To supply the goods at possible lowest prices.
To secure the market of the product.
To introduce the improved method of production.
To avoid over production.

Circular Business Combination

When different natures of industrial business units combine into a single large company under one managing authority it is called a circular combination. It is also named a lateral combination.

For example, if sugar; chemical, and glass industries are combined together under one controlling authority, a circular combination takes place.

Objectives of Circular Business Combination

To
establish the cordial relation among the constituent units.
To
supervise the production and management most effectively.
To
promote the cooperation in financing advertising, research and other overheads.

Diagonal Business Combination

The diagonal combination takes place when two or more business units rendering subsidiary services unite under the main industry. Suppose if repairing and distributing units are combined with the textile industrial units, it is called diagonal combination.

Objectives of Diagonal Business Combination

To maintain the quality of the product.
To reduce the cost per unit.
To achieve the economy in various overheads.
To promote the efficiency of business

Methew Harbor

Matthew is a Co-Founder at BusinessFinanceArticles.org. Matthew was a floor manager at a local restaurant in Wales. He lost his job after the pandemic and took initiative to make a team and start the project.