Business Combinations: Types, Advantages, and Defensive Tactics
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Business Combinations
- Business combinations make up one of the strategies that companies and other business entities engage in when expanding and growing.
- Business combination refers to an undertaking in which one company (acquirer) takes control over another company (the acquiree).
1- Horizontal Combination
- Horizontal combination refers to combination of companies or other business entities that are in the same industry. The major aim was acquiring monopoly power.
- Advantages: minimization of costs, maximization of profits, reduction of the possibilities of overproduction.
2- Vertical Combinations
- Vertical combinations refer to joining of two companies that are in the different stages of productions. The major aim of the business combination to boost competitiveness was fostered by the federal government.
- Advantages: minimize costs, acquire a better integration of activities, a company joining with its suppliers or its clients
3- Conglomerate
- Conglomerate, joining of companies from different industries which have little or no similarities in their line of operations although they fall under one group.
- Advantage: firms or companies that have come together operate independent of other business entities in the combination.
Reasons Firms Combine
- 1- Synergy, an increment in the value and performance of the company when combined with another than when it operates individually.
- 2- Economies of scale, combining of firms leads to creation of a one large entity which has more benefits such as economies of scale than individual firms.
- 3- Survival, Some companies combine with other companies in order to continue existing in the market.
- 4- Diversification is one of the risk management techniques that companies and other business entities use to minimize risk.
Diligence
- 1- Potential risks, Managers should evaluate clearly the risks that the business combination will have.
- 2- Financial and accounting diligence, a comprehensive examination of the company’s audited financial statements information and interviewing the financial management of the company.
- 3- Tax issue, The managers should ensure that they get a deeper understanding of the tax profile of the target company during the exercise.
Defensive Tactics
- 1- Poison pill, involves issuing of stock rights to the company’s shareholders to enable them purchase the company’s stock at a price normally lower than the market price.
- 2- Greenmails, involve a target company buying the stock of the prospect acquirer at prices that are considerably in excess of what the company is offering.
- 3- Pac-man, defense tactic involves launching an unfriendly takeover of the prospect acquirer.
- 4- Leverage buyouts, include purchase of the company’s stock by the managers and other third party investors. The ultimate outcome of this is emergence of a private company.
- 5- Selling crown jewels, includes selling of the company’s assets that are more valuable in order to make the company less attractive for a combination.