Business Combinations

What is a Business Combination?

• Occurs when one company obtains control over another company

• Referred to as– Merger– Acquisition– Takeover

• Sought out when the acquiring firm’s management believes it can accomplish its objectives more efficiently and at lower cost

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Merger

• When two or more companies combine into a single company, the action is called a merger.

• When AOL purchased Time Warner to form AOL Time Warner, Inc., the merger created the world's largest and most powerful company in the communications industry.

WHY DO SOME BUSINESS FIRMS COMBINE?

• Business firms combine because they expect that the move will enable them to increase profits.

• Profits may be increased if the business combinations allow businesses to produce more goods at lower costs and reduce or eliminate competition.

Reasons

• Produce More Goods at Lower Costs– Workers Assigned More Efficiently. – Shared Risks. – Reduced Expenses

• Reduce or Eliminate Competition• Make more money or profit

HOW DO BUSINESS FIRMS COMBINE?

• Vertical Mergers• Horizontal Mergers• Conglomerate

Horizontal Mergers• When a company acquires another firm that makes or sells similar

products or services, we call the combination a horizontal merger. • The acquisition of one newspaper company by another is an

example of a horizontal merger.• The most important reasons why companies seek horizontal

mergers are – to reduce competition, – acquire a larger share of the mar ket for their goods and services, – lower certain business costs.

• Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry.

Vertical Mergers• A vertical merger is a merger between a company and

one of its suppliers. • The principal reason for creating a vertical merger is to

reduce the costs of doing business. – When USX, the nation's largest steel company, acquired an

iron mine, a vertical merger was formed. – Why was it called a vertical merger?– Because iron ore is used in the manufacture of steel.

• A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations.

• Most often the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one.

Conglomerate Mergers• A conglomerate merger combines companies that sell

vastly different products, services, or both.• With $14.5 billion in assets, Cendant Corporation is

one of the nation's larger conglomerates. – Among the well-known companies combined under the

Cendant logo are hotel and motel chains such as Days Inn, Ramada, Super 8, and Howard Johnson; real estate franchises like Coldwell Banker and Century 21, and financial services such as Jackson Hewitt Tax Services, as well as Long Term Preferred Care (a health-related insurance company) and Avis Rent-a-Car.

– Because hotels, health insurance, real estate, financial services, and auto rental companies are hardly related, Cendant stands as a classic example of a conglomerate merger.

Types of Conglomerate

• There are two types of conglomerate mergers: pure and mixed.

1.Pure conglomerate mergers involve firms with nothing in common,

2.mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.

Mergers