UNIT V
BUSINESS COMBINATIONS
When a voluntary association of firms is formed to achieve common goals and to enjoy the monopoly advantages, that sort of initiative is called business combination. The combination may be formed by a written or oral agreement among the firms.
Sometimes firms decide to merge themselves into one unit. The main object of the business combination is to achieve common economic welfare for its members.
Advantages/Merits of Business Combination:
The advantages of a combination are controversial because the creation of monopoly and elimination of competition both are considered the merits and demerits of the combination.
- Increase in Capital
The volume of capital may be increased by the formation of a combination. The members combine their resources to conduct large size business.
2. Elimination of Competition
By the formation of combination, unnecessary competition is eliminated, and member firms earn monopoly profit.
3. Saving in Expenses
Administrative production and distribution expenses reduce due to combination.
4. Controls over Production
The combination is very effective in controlling overproduction. It helps to adjust the supply according to the demand.
5. Large Scale Marketing
In the market, competition position is strong in bargaining. So it sells the product at a higher price.
6. Experts Services
A combination can acquire the services of experienced specialists. It increases the efficiency of the combination.
7. Research Work
A combination can spend money on research work, which is very important for the business. This research work reduces its cost and increases its profit.
8. Use of Modem Technology
A combination is capable of using the latest inventions and new methods of production as a consequence of a transfer of technology. It will increase profit.
9. Stability
A combination is a more stable form of business as compared to the individuals’ units. The chances of dissolution are also less than others.
Disadvantages/Demerits of Business Combination:
Following are important disadvantages of combination:
- Creation of Monopoly
It creates a monopoly that is harmful to the people in the long run.
2. The concentration of wealth
It concentrates the wealth in a few hands and divides society into few classes, such as rich, middle, and poor.
3. Reluctant to be Accepted
The combination is disliked by the people, and it is not acceptable.
4. Changes in Friction
The chances of friction among directors and officers are bright. They quarrel with, each other for their interest
5. No Personal Contact
It is not possible to maintain direct contact between employees, creditors, and shareholders, due to this business may suffer a loss.
6. Costly Management
A combination hires costly management, which increases the cost of production.
7. Over Capitalization
There is always a danger of over-capitalization in the combination. It is harmful to the combination.
8. Misuse of Funds
The directors of the company enjoy unlimited power and misuse the capital.
9. National Interest Ignored
Generally, the combinations ignore the national interest, and they involved in such activities that are against the national interest.
Key Takeaways:
- When a voluntary association of firms is formed to achieve common goals and to enjoy the monopoly advantages, that sort of initiative is called business combination.
Although the business combination is primarily formed for achieving a common (single) goal, it may also be formed keeping in mind the following reasons: -
- Elimination of Competition
Due to hard competition among the firms’ rate of profit decreases. Some firms may suffer a loss also. So, the industrialists feel pleasure in setting up a combination to avoid the competition.
2. To Solve Capital Problem
Small units of production face the problem of capital shortage. They cannot expand their businesses. As a result, small units may form a combination to overcome this problem.
3. To Achieve Economies
Some small units combine themselves to achieve the economies of large-scale production advantage. It helps to purchase the raw materials at low prices and sell more products which would increase the profit.
4. Effective Management
Generally, small units are unable to hire the services of experts and experienced managers. So, small industrial units combine themselves to hire the services of effective management.
5. Tariff Facilities
To compete with external firms, some industrial units combine themselves. The government also imposes heavy duties to protect domestic producers.
6. Uniform Policy
All the units adopt uniform policy due to business combinations. It regularizes the business activities of all the units.
7. Use of Technology
The business combination can use the latest technology and new methods of production because its sources are sufficient. In contrast, a single unit cannot do so.
8. To Face Crises
It is very difficult for the small industrial units to face crises in the days of inflation and deflation. So, the small units combine themselves to face these problems easily.
9. Growth of Joint Stock Companies
The growth of Joint-stock companies has also made it possible for various industrial units to form combinations.
10. Status in Market
A big firm enjoys a higher status and respect than the smaller one. So, small business units prefer to combine themselves for higher status.
11. Demand and Supply Balance
A business combination is very useful in controlling the overproduction. It adjusts the supply according to the demand of the market. So, overproduction cannot take place, and prices remain stable.
Key Takeaway
- Although the business combination is primarily formed for achieving a common (single) goal, it may also be formed keeping in mind many other reasons.
Combinations may take several forms, such as horizontal, vertical, lateral, and diagonal, circular, or maybe a mixture of two or more of these types.
Horizontal Combination
A horizontal combination comes into being when units carrying on the same trade or pursuing the same productive activity join together with a common end in view. Facebook’s 2012 acquisition of Instagram is an example of horizontal combination.
The intensity of competition is naturally reduced when several units competing in the same line of business join together. The combining units can well take advantage of the various economics associated with large scale production by making common purchases, pooling resources for research, common advertising, etc.
Vertical Combinations
Vertical integration is the combination of firms in successive stages of the same industry. It implies the integration of various processes of an industry.
Vertical combinations are brought into existence with the following objects in view:
- To eliminate the wasteful and unnecessary expenses involved in carrying on the connected processes separately.
- To eliminate middlemen functioning between various units
- To securer economies in marketing, advertising, and transport
- To maintain control over the quality of raw materials and finished products.
Lateral Combination
Lateral integration refers to the combination of those firms which manufacture different kinds of products though they are ‘allied in some way.’
It can be of two kinds;
- Convergent lateral integration, and
- Divergent lateral integration.
The convergent lateral combination comes into existence when different forms join together to supply goods and services to help the functioning of major undertakings.
For instance, a book publishing may join with other units producing paper, doing printing work, and providing bookbinding services.
Diagonal Combination
It is also called ‘Service’ integration. Diagonal combination comes into existence when a unit providing auxiliary goods and services to industry is combined with a unit engaged in the mainline of production, within the organization.
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For example, if an industrial enterprise combines with a transport company, a power station or a repairs and maintenance workshop, and makes these facilities available within the organization, it will be said to have effected diagonal integration.
Circular Combination
When firms belonging to different industries and producing altogether different products and combine under the banner of a central agency, it is called a mixed or circular combination.
This is affected to ensure smooth conduct of business operations by making timely availability of auxiliary services within the organization.
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Example, Godrej is engaged in the manufacturing of cosmetics, electrical goods, office equipment locks, etc. The object is to secure the benefits of large-scale operations arising out of co-operation.
Key Takeaway
- Combinations may be of different types, such as horizontal, vertical, lateral, and diagonal, circular, or may be a mixture of two or more of these types.
- A horizontal combination comes into being when units carrying on the same trade or pursuing the same productive activity join together with a common end in view.
- Vertical integration is the combination of firms in successive stages of the same industry. It implies the integration of various processes of an industry.
- Lateral integration refers to the combination of those firms which manufacture different kinds of products though they are ‘allied in some way.
- Diagonal combination comes into existence when a unit providing auxiliary goods and services to industry is combined with a unit engaged in the mainline of production, within the organization.
- When firms belonging to different industries and producing altogether different products and combine under the banner of a central agency, it is called a mixed or circular combination.
Public enterprise is one autonomous body which is managed and owned by government and which provide goods/ services for public. It is owned, managed and controlled by the government. It is financed and operated by the government. It provides goods and services to the public at reasonable price. It is guided by service motive but it can earn nominal profit. It helps in maintaining the state of ownership and operation of industrial, agricultural, financial and commercial undertaking.
Key Takeaway
- Public enterprise is one autonomous body which is managed and owned by government and which provide goods/ services for public.
Public enterprise has many contributions towards the society, at large. The importance or significance of public enterprise is enumerated below:
i. Planned development: Its main aim is to promote economic and social development in the weaker section. It helps to run all the works of development in an efficient manner. It follows government plans and policies. It generally focuses on private sector. It also earns profit. It provides planned development by setting up industries too.
ii. Balanced regional development: Development works are done in planned and balanced way. It also provides decentralization of industries. It tries to develop all regions in harmonious ways. Balanced development is the main aim of public enterprise.
iii. Accelerating the rate of economic growth: In developing countries, increasing the rate of economic growth always gets the first priority. It tries to remove deficiency of economy. It provides infrastructural facilities for economic development. It provides employment opportunities. Government invests the money. Amount of capital, technical empowerment and other facilities can be easily arranged by the government.
iv. Public utilities: Public enterprises provide the utility of transportation, water supply, irrigation, electricity, communication, education, health facilities and so on to the general public.
v. Supply essential goods and services: public enterprise provides goods and services to the public at reasonable price. The government helps in manufacture and distribution of goods. These types of services are not done for earning profit.
vi. Provide job opportunities: They help to create the employment opportunities in the society and work as the model employer. They help in uplifting the living standard of the people.
vii. Reducing economic inequality: It removes economic inequality. It helps to develop different regions of the country. Therefore, it maintains living standard of the public.
vii. Establishment of social welfare: They help in planned development and balanced development of the country. They also try in accelerating the rate of economic growth. They are also established for supply essential goods and services. They help in providing job opportunities to many people. They further help in reducing economic inequality. Thus, they establish social welfare.
Key Takeaway
- Public enterprise promotes economic and social development in the weaker section, accelerating the rate of economic growth.
- It promotes balanced regional development.
- It ensures regular supply of essential goods and services.
- Public enterprises provide the utility of transportation, water supply, irrigation, electricity, communication, education, health facilities and so on to the general public.
- They help to create the employment opportunities in the society and work as the model employer.
Public enterprises have the following forms-
- Departmental Organizations.
- Public Corporations.
- Government Companies.
1. Departmental Organisation
Under departmental management, a public undertaking is run as a department of the government. The traditional enterprises such as the post and telegraphs, broadcasting, munitions factories etc. are managed as departments of the government. The overall responsibility for management rests with the ministry concerned, e.g. Ministry of Posts and Telegraphs, Ministry of Broadcasting. This type of enterprise is financed through annual budget appropriates made by legislatures and its revenues are paid into the treasury. Departmental enterprises are subject to budget accounting and auditing controls applicable to all government departments. If public is not satisfied with the working of such enterprise, the matter can be raised in Parliament because they are within the control of the Parliament.
The principal characteristics of Departmental Undertaking are:
1. It is financed by annual appropriations from the treasury and all, or a major share, of its revenues are paid into the treasury.
2. It is subject to the budget, accounting and audit controls applicable to govt. activities.
3. Its permanent staff consists of civil servants.
4. It can be sued only by following the procedure prescribed for filing suits against the government.
Merits of Departmental Organisation
1. The need for secrecy, strategic importance and similar conditions make the departmental form the most suitable form of organisation in certain areas (for defence sector).
2. These undertakings provide finances to the government for initiating other social and developmental activities.
3. It provides a means of securing absolute government control.
4. The state can make use of these undertakings as instruments of its economic and social policy.
5. These undertakings provide public utility services at cheap rates.
6. From the public point of view, departmental organisation has an advantage that if anything goes wrong or if the public is dissatisfied with the working of an undertaking the matter can be immediately raised in Parliament.
Disadvantages of Departmental Organsiation
1. The basic weakness of department management is that such enterprises cannot be run in business-like fashion. Control by legislature makes it subject to political changes and consequently it becomes difficult to formulate long-range business plans.
2. Government departments are noted for red-tapeism and procrastination and cannot be sensitive to consumer demand. Government officials generally do not have necessary management training which is essential for running industries.
3. The revenues of the enterprise are merged with the general revenues of the govt. and are not generally used for the expansion of the business.
4. The departmentally managed undertakings are under the control of ministers and the political parties to which they belong and who hardly understand the problems of management of industry. Moreover, their policies suffer from instability because of the uncertainty attached to the tenure of political parties and ministers.
5. Government officials who are asked to manage public undertakings generally lack business acumen. They are used to working under a rigid system of set rules and for every decision they look for a precedent. This causes delay in decision-making which is harmful for business enterprise.
6. Frequent transfers of officers make it difficult to follow a long-term policy on the part of the business enterprise.
7. The departmental organisation fails to provide flexibility.
For all these limitations, departmental undertakings are confined to those cases only where there are sufficient reasons.
2. Public or Statutory Corporation
A public or statutory corporation is created by a special Act which defines its powers, functions, privileges and prescribes the pattern of management. However, when the government has to provide capital to these corporations, parliamentary control is exercised over them, otherwise they are free from parliamentary control. Examples of such corporations are the Indian Airlines Corporation, Life Insurance Corporation, Damodar Valley Corporation, Oil and Natural Gas Commission etc.
The features of Statutory Corporations are:
1. It is owned by the State.
2. It is created by a special law defining its objectives, powers and privileges and prescribing the form of management and its relationship with government departments.
3. It is an autonomous body corporate and is administered by a board of directors in which various interests are represented. The board formulates policies which are executed by a chairman or a director general in its day-to- day administration.
4. In most cases, its staff are not civil servants and they are appointed under terms and conditions determined by the corporation itself.
5. It is financially self-supporting. It is usually set up with a capital fund and is allowed to use its earnings.
6. It is a body corporate and can sue and be sued, enter into contracts and acquire property in its own name.
7. Except for appropriations to provide capital or to cover losses, it is usually independently financed. It obtains funds by borrowing either from the government or in some cases, from the public and through revenues derived from the sale of goods and services and has the authority to use and reuse its revenue.
8. It is ordinarily not subject to the budget, accounting and audit laws and procedures applicable to government departments.
Advantages of Public Corporation
1. It is capable of making quick decisions. Ability to make quick decisions not only on routine matters but also on important questions of policy is an essential condition of success of business management.
2. It enjoys complete internal autonomy and is free from parliamentary or political control in the internal and routine management.
3. Management is vested in a chosen body, Governing Board, representing top persons of ability, skill and business experience. All executive and management powers are given to a small board responsible for management and administration of the state enterprise. It is neither answerable to shareholders nor elected by them. The Board and its executives are free from political influence and completely responsible for internal organisation and administration.
4. Corporation has defined powers and functions which are governed by a special Act. It has financial independence and a clear-cut jurisdiction over a specific area, industry or commercial activity.
5. Corporation is a legal person. It can sue or be sued in the Court. It is its own master, answerable fully as any other individual or company.
6. A public corporation has flexibility of operation, accountability to the Parliament but no bureaucracy. For the success of a business enterprise, flexibility is the essential prerequisite. It is available in public corporation.
Disadvantages of Public Corporation
Theoretically, public corporations possess all the advantages mentioned in practice, however, there are limitations.
1. The autonomy or independence of management is somewhat limited. The Minister has the power to issue instructions on matters of national interest but sometimes this is stretched further than its legitimate field and he meddles with matters relating to internal management, thereby defeating the fundamental objective autonomy.
2. It is a rigid form of organisation as any change in its constitution and powers will require amendment of the special Act.
3. It needs special legislation and hence its formation is elaborate and time-consuming.
4. It is suitable only for the management of very big enterprise. For trading business, it is not a suitable organisation.
3. Government Company
Under the Companies Act, 1956, Government Company has been defined as “any company in which not less than 51% of paid-up share capital is held by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments”.
It is like a statutory corporation in many respects but no special law is required to set it up.
The principal characteristics of the Government Company are the following:
1. It has most of the features of a private limited company.
2. The whole of the capital stock or 51 percent or over of it, is owned by the Government.
3. All the directors or a majority of them, are appointed by the Government, depending upon the extent to which private capital is participating in the enterprise.
4. It is a body corporate created under the Companies Act.
5. It can sue and be sued, enter into contract, and acquire property in its own name.
6. Unlike the public corporation, it is created by an executive decision of the Government without Parliament’s specific approval having been obtained and its Articles of Association, though conforming to an Act, are drawn upon and are revisable by the government.
7. Its funds are obtained from the Government and in some cases, from private shareholders and from revenues derived from the sale of its goods and services.
8. It is generally exempt from the personnel, budget, accounting and audit laws and procedures applicable to govt. departments.
9. Its employees, excluding those who are on deputation, are not civil servants.
Advantages of Government Company
1. The strongest argument for a government company is its flexibility, both operational and functional. Flexibility may also refer to the case with which the Articles are drawn up and altered. As the Ministry drafts the Articles, it can provide operational flexibility which becomes more difficult in the case of a public corporation which is set up by an Act passed by the legislature. Similarly, any modification or alteration of Articles can be made very easily by the Ministry, while in the case of a public corporation the procedure is lengthy and cumbersome.
2. The setting up of an enterprise takes no time; and as a large number of undertakings are being set up, it is very simple to form a company. To set up so many public corporations would mean delay in establishing an enterprise. Generally, the provisions of the Acts creating public corporations are more rigid than the Articles of government companies and thus they are against flexibility.
3. The advantage of autonomy is also greater in the case of a government company than with a public corporation.
4. The company form is very useful where foreign capital is invited to assist the setting up of huge public enterprises, such as Hindustan Steel Limited, which is government company owning three steel plants and assistance given by U K, Germany and the former USSR.
5. The Company form may be adopted for three reasons:
(a) When the govt. may have to take over an existing enterprise in an emergency.
(b) Where the state wishes to launch an enterprise in association with private foreign capital or
(c) Where government wishes to start an enterprise with a view to transforming it to private management.
Disadvantages of Government Company
1. The separate entity, and autonomy of a company exist only in name. In reality, everything rests with the govt. which exercises the functions of shareholders and of managerial control.
2. In the case of a company in private sector the directors are elected by a large number of shareholders and their choice is the result of collective judgment, while in the case of a govt. company, the govt. is the only shareholder and the judgment of a single shareholder is bound to be inferior.
3. The extent of autonomy that it provides for can be substantially affected or altered by executive agencies of the government. But this can also happen in the case of public corporation. The company form of organisation has limited utility for the operation of State enterprises. It is not only considered to be inferior to public corporation but also condemned “as a fraud on the Companies Act and on the Constitution”.
Key Takeaways
- Public enterprises have three forms- Departmental Organizations, Public Corporations and Government Companies.
- Under departmental management, a public undertaking is run as a department of the government.
- A public or statutory corporation is created by a special Act which defines its powers, functions, privileges and prescribes the pattern of management.
- Government Company is any company in which not less than 51% of paid-up share capital is held by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments.
References
- Tulsian, P.C. Business Organization and Management, Pearson Education, India (2002). Pp. 671.
- Wason, V. Textbook of Business Studies, S.Chand, New Delhi (2010).
- Dam, B.B., Choudhury, R.N., Nag, R & Dam, L.B. Company Law, Gayatri Publications, Guwahati, Assam (2020).
