Meaning of Business Combination To be combined means to be united. Business combination is a union of business units formed to pursue their common goals. Whenever, two or more business units engaged in the same line of business or different units producing different products combine for mutual benefit, they are said to have formed business combination. In simple terms, business combination refers to joining together of two or more business units. According to Haney, “to combine is to become one of parts of a whole, and combination is merely a union of persons to make a whole or group for the prosecution of some common purpose.” According to this definition, business combination is a union of some persons or business units. Unions are formed under written or unwritten agreements to pursue their common goals. Causes For Business Combinations There is no particular reason for the growth of business combinations. Several factors are responsible for the formation of business combines. However, following are the major factors responsible for the growth of business combinations: 1. Unhealthy and cut throat competition: Unhealthy and cut throat competition among the business firms is the most important cause of business combinations. Competing firms indulging in the act of cutting one another’s another’s throat by means of overproduction, deliberate price cuts and unfair trade practices. This type of competition may force some of the companies to stop their operation due to low profit margin. Under such circumstances, business firms have to unite together to protect themselves from the risk arising out of competition. Therefore, in order to reduce the wastes of cut throat competition business units formed their combines. 2. Company forms of Organisation: Company form of organization also facilitated the growth of business combinations. Ownership rights of a person are transferable from one person to another in case of company. Few individuals may purchase majority of the shares of two or more companies to control their affairs. Similarly, directors of a company acquire the shares of another company and bring it under their control. This result into a combination of business units by common directorship for two or more units. 3. Economies of large scale operation: Business units may be combined together to derive the benefit of large scale operation. Large scale business activities result in economies of production, marketing, marketing, purchasing, finance etc. production cost can be reduced reduced if a company carries on large scale production. Scientific methods and techniques can be used to produce the goods. Advertising cost, storage cost and transportation cost can be minimized by a company carrying on large scale marketing. Raising funds from the public and financial institutions also facilitated by a large scale organization. Economies of bulk purchases like discount, rebate, saving in middlemen’s profit and transportation cost can be achieved. Similarly large scale organization can be derive the benefit of specialized management. 4. Control over the market: Combinations can be created due to the businessmen’s ambition to create monopoly and have control over the entire market. By controlling the entire market, combining units can sell their products at higher price an d earn large profit margin. 5. Individual business ability: Lack of managerial talents with some individuals also one of the reasons for the growth of business combinations. Some individuals are gifted with business talents, organizing ability and business courage. Industries which lack managerial talents combine with other units who are endowed with organizing abilities. Thus, individual business ability along with an ambition to become monopoly results in the formation of business combinations.
6. Lust for economic power: Desire to build industrial empire by one or few individuals is also a reason for business combinations. Individual who desires to become monopoly power join together through combines with other business units. Combined units can charge high prices without fear of reduction in demand for the product so that enormous amount of profits can be earned. 7. Business cycles: Business combinations also come into existence as a result of changes in the economic activities during boom and depression. During boom, there is high demand for products and higher prices are prevailing in the market. In order to take the benefits of raising demand business units combine together. During depression, prices of products come down, no demand for products due to lack of purchasing power. In such situation small units run into losses and may be absorbed by large scale industries. Therefore, trade cycles also influence the business combinations during boom and depression. 8. Protective tariffs. Tariff policy of the government is also a reason for business combination. If a country raises import duty the cost of foreign products will be more than the domestic products. There will be heavy demand for domestic products. New industries grow in the domestic economy. It results into competition among the business units within the country. Competition becomes so severe that producers of the same country realize the need for co-operation among themselves. Therefore, government policy of protecting the domestic industries is also a reason for business combination. 9. Government pressure on sick units. Government may put pressure on sick units to amalgamate with stronger units to improve their performance. Sometimes, government takes over all the sick units and combines their resources and management into a new unit in order to make efficient and productive. 10. Advantages of patent rights: Business combinations may be formed to get the benefit of patent rights. A business unit may purchase rights of another firm. The patent right purchaser will bring the operations and management of patent rights sel ler under its control. 11. Desire for self-sufficiency in raw material and components: A large company depending upon other business units for the supply of raw materials and components. Adequate and continuous supply of raw materials is assured if raw material supplying unit comes under the manufacturing company. Therefore, manufacturing company and the raw material supplying unit join together in the form of combination. 12. Rationalization. Rationalization is a scheme involving collective action by firms to improve their efficiency. Rationalization calls for improving the efficiency of business units through standardization, modernization of plant and effective utilization of resources. It requires the combination of less efficient units with efficient units. Thus, the rationalization of industries has provided a strong ground for business combination. 13. Government regulations. Government makes certain regulations on prices, production of certain products, distribution in certain areas, employment, use of resources, foreign exchange etc. These restrictions by the government make the small industries very difficult to run their business. Therefore, too much restrictions and regulations by the government compel the small industries to combine together for their mutual advantage. 14. Development in the area of money market, capital market, transport and communication. Easy availability of funds from the money markets and development of capital market helped to establish large number of business units. Development in the field of transport and communication helped to expand their market from national to international market. Multinational corporations established subsidiary companies all over the world. Independent small business units found very difficult to complete with multinational combines.
