7 Types of Business Combination You Should Know About
Business combination is a term that refers to the process of merging or acquiring two or more businesses to form a new entity. Business combination can have various benefits, such as increasing market share, diversifying products or services, reducing costs, or enhancing innovation. However, not all business combinations are the same. There are different types of business combination that have different legal and accounting implications. In this article, we will explain the main types of business combination and how they differ from each other.
Statutory merger
A statutory merger is a type of business combination where one company (the acquirer) absorbs another company (the target) and the target ceases to exist as a separate legal entity. The acquirer assumes all the assets and liabilities of the target and issues its own shares to the target’s shareholders. A statutory merger is also known as a direct merger or an absorption merger.
Statutory consolidation
A statutory consolidation is a type of business combination where two or more companies (the combining companies) merge to form a new company (the consolidated company) and the combining companies cease to exist as separate legal entities. The consolidated company assumes all the assets and liabilities of the combining companies and issues its own shares to the combining companies’ shareholders. A statutory consolidation is also known as an amalgamation or a consolidation merger.
Stock acquisition
A stock acquisition is a type of business combination where one company (the acquirer) acquires a majority or all of the voting shares of another company (the target) and the target continues to exist as a separate legal entity. The acquirer gains control over the target’s operations and policies, but does not assume its assets and liabilities. The target becomes a subsidiary of the acquirer and the acquirer’s shareholders do not receive any shares of the target. A stock acquisition is also known as an equity acquisition or a purchase of shares.
4. Asset acquisition
An asset acquisition is a type of business combination where one company (the acquirer) acquires some or all of the assets of another company (the target) and the target continues to exist as a separate legal entity. The acquirer pays cash or issues its own shares to the target’s shareholders in exchange for the assets. The acquirer assumes only the assets and liabilities that are related to the acquired assets, while the target retains its other assets and liabilities. An asset acquisition is also known as an asset purchase or a purchase of assets.
Reverse merger
A reverse merger is a type of business combination where a private company (the acquirer) merges with a public company (the target) and the target ceases to exist as a separate legal entity. The acquirer issues its own shares to the target’s shareholders and becomes a public company without going through the initial public offering (IPO) process. The acquirer assumes all the assets and liabilities of the target and changes its name to reflect the new identity. A reverse merger is also known as a reverse takeover or a reverse IPO.
Joint venture
A joint venture is a type of business combination where two or more companies (the venturers) create a new entity (the joint venture) to carry out a specific project or activity. The venturers contribute some of their assets, liabilities, resources, or expertise to the joint venture and share its profits and losses according to an agreed ratio. The joint venture operates as a separate legal entity from the venturers and has its own management and governance structure. A joint venture is also known as a strategic alliance or a partnership.
Holding company
A holding company is a type of business combination where one company (the holding company) owns a majority or all of the voting shares of two or more companies (the subsidiaries) and exercises control over them. The holding company does not engage in any operational activities itself, but rather acts as an umbrella organization for its subsidiaries. The holding company and its subsidiaries operate as separate legal entities and have their own financial statements. A holding company is also known as a parent company or a conglomerate.
These are some of the main types of business combination that you should know about if you are interested in expanding your business or investing in other businesses. Each type has its own advantages and disadvantages, depending on your goals, resources, and preferences. Therefore, it is important to do your research and consult with experts before deciding on which type of business combination suits your needs best.
Types of Business Combinations and Their Impact on Global Demand
Business combinations are transactions in which two or more businesses join together to form a larger entity. There are several types of business combinations, such as mergers, acquisitions, joint ventures, and consolidations. Each type has different advantages and disadvantages for the businesses involved and may affect the global demand for their products or services.
Horizontal Combinations
Horizontal combinations are when two or more businesses operating in the same line of business or industry combine together. This type of combination can reduce competition, increase market share, lower costs, and achieve economies of scale. However, it may also face regulatory hurdles, integration challenges, and customer backlash. Horizontal combinations can increase the global demand for the combined entity’s products or services by offering more variety, quality, and innovation to customers. For example, the merger of Disney and Pixar in 2006 created a dominant player in the animation industry that could produce more appealing and diverse movies for global audiences.
Vertical Combinations
Vertical combinations are when two or more businesses operating at different stages of the production or distribution process of a product or service combine together. This type of combination can improve efficiency, quality, and coordination along the supply chain. It can also reduce dependence on external suppliers or distributors and increase bargaining power. However, it may also involve high capital investment, operational complexity, and legal restrictions. Vertical combinations can increase the global demand for the combined entity’s products or services by offering lower prices, faster delivery, and better customer service. For example, the acquisition of Whole Foods by Amazon in 2017 enabled Amazon to expand its online grocery business and offer more convenience and choice to customers worldwide.
Lateral Combinations
Lateral combinations are when two or more businesses operating in different but related lines of business or industries combine together. This type of combination can diversify the product portfolio, reduce risk, and leverage synergies across businesses. It can also create cross-selling opportunities and access new markets or customers. However, it may also entail high integration costs, cultural clashes, and loss of focus. Lateral combinations can increase the global demand for the combined entity’s products or services by offering complementary or supplementary products or services that meet different customer needs or preferences. For example, the joint venture of Starbucks and PepsiCo in 1994 created a new product category of ready-to-drink coffee beverages that appealed to a wider range of consumers globally.
References:
http://highered.mcgraw-hill.com/sites/0072922559/student_view0/chapter6/chapter_highlights.html
https://books.google.com/books?id=Is-O46iiMTAC&pg=PA797
https://www.investopedia.com/terms/b/businesscombination.asp
https://www.accountingtools.com/articles/what-is-a-business-combination.html
https://corporatefinanceinstitute.com/resources/knowledge/deals/types-of-business-combinations/
