BUSINESS COMBINATIONS

TOPIC 3
LEARNING OBJECTIVES
 Definition of business combinations
 Reasons for business combinations

 Types of business combinations

 Disadvantages of business combinations

 BUSINESS COMBINATIONS

 Definition: A business combination occurs when

two or more separate businesses are joined together
through common ownership
 BUSINESS COMBINATIONS
 Take place through mergers or takeover
(acquisitions)
 Mergers – agreed amalgamation between two
firms with each firm maintaining its identity
(Monitor & Nation’s media)
 Takeover – One firm seeking control over
another with the taken over firm losing its
identity (Barclays & Nile banks)
- Could be ‘friendly’ or ‘hostile’
Reasons for business
combinations
 Wasteful competition
 businesses forced to combine to
eliminate intense competition to
avoid over supply and collapse
of prices. E.g. OPEC (Oil
Producing and Export Countries).
 Managerial Rewards
 External growth through
combinations may satisfy
managerial objectives – power,
influence, status
 Diffusion of Risks
 Diversification to spread risks
(Uganda Telecom and Mango to
form UTL, Picfare and Nytil)
 Increasing Shareholder
Value
 Improve the value of the overall
business for shareholders
 Business cycles.
 Are trade cycles or ups and downs.
Consist of booms (peak prosperity)
and depressions (low economic
activity.
 During a period of depression ,
economic activity drops to low
levels thus business units think of
combinations in an attempt to
regulate supply and raise the level
of prices
Reasons for business
combinations
 Efficiency (scarcity of  Control of Markets
organizing ability)  Gain some form of monopoly
 Scarcity of organizational talent has power through control supply
led to many units to combine to and secure outlets
take advantage of talents of  Means larger profits (Uganda
particular skilled business Railways Corporation and Kenya
managers Railways Corporation to form the
 Improves technical, productive or Rift Valley Railways)
allocative efficiency  Economies of Scale
 Synergy  The advantages of large scale
production that lead to lower
 One head is better than one (2 + 2 unit costs e.g. raising finances or
= 5!)
low costs of raw – materials
 Combined effort yield better results (bulk purchase), R&D
Reasons for business
combinations
 Influence of tariffs
 Also known as Mother of Trusts
 Used to protect infant industries
in a country from foreign
competition
 A number of firms come up in
the infant industry encouraged
by the protection
 As a result competition within
the industry intensifies creating
a desire to co- operate and
hence combinations
 Respect for big businesses
 People generally admire and have
more confidence in big businesses
 Thus business owners take pride
in owning or being associated
with large sized organizations
 Try to bring several firms under
one roof to become big.
 Companies like General Motors,
Toyota, Toshiba, Ford, General
Motors, MacDonald's, IBM, Coca –
cola have world wide respect
because they are big.
 Types of business combinations
 Horizontal / parallel / unit
trade combination
 Combination involving firms
within the same industry & at
the same stage of production or
the same plane of trade
 Have been previously
competitors.
 Vertical combination /
sequence / process
 Involves firms within the same
industry at different but
successive levels of production
 Can be forward or backward
integration
 Backward vertical
integration
 Where the business marketing
intermediaries join with the
manufacturers to control the
quality of output
 Forward vertical
integration
 Where manufacturers combine
with their marketing
intermediaries to control the
market.
 Types of business combinations
 Lateral /Allied  Convergent Lateral
combinations integration
 Combination of firms that  Where various small firms join the
manufacturer different types but bigger firm to supply raw
related products materials
 can be convergent or divergent  E.g. units engaged in
manufacturing of paper, type
 Divergent Lateral setting equipment, photocopying
integration chemicals and machinery
combining with the Stationary
 Where the big firm joins the bureau to provide it with raw –
smaller firms to supply them materials
with raw materials
 E.g. Sugar producing companies
and the out growers
 Types of business combinations
 Diagonal / Service
combination
 Where a unit that is producing
essential auxiliary goods and
services combines with the main
line of production
 E.g. a school and a bookshop ,
 Transport company operating
many buses combining with a
mechanical workshop that
repairs buses
 Circular / mixed
combination
 Entails diversification of
business operations
 Firms producing totally different
commodities integrate
 E.g. Combination of a firm
producing scholastic materials
and another producing textiles
 Merits & Demerits of business
combinations
 Advantages  Disadvantages
 Diversification of business
 Reduce /prevent unnecessary  Concentration of economic
competition power in few hands
 Advantages of large scale
production  Small firms may be driven out of
 Control of the market the market
 Increased efficiency and develop
managerial abilities  Encourages monopoly and its
 Stability during recessions disadvantages e.g. production of
 Production of quality products poor quality products &
 Increased share value overcharging of customers
 Increased public confidence
Home Work

 Identify examples of firms that have combined in

Uganda under each type of business
combinations?

 Read about the different forms of business

combinations i.e. Associations, Federations, Partial
and Complete Combinations