Business combination is defined as a merger of two or more companies for mutual benefits and to join business operations. There are different reasons for different companies to join hands -some form combinations for cutting down their expenses while some want to broaden their range of products and services. There are also companies which want to beat their competitors by making alliances.
Business combinations does not only mean merger of companies. It also could be seen in the form of business acquisitions, strategic alliances, amalgamations etc. Following our topic, the primary purpose of business combinations is to maximize the profits for both entities. For entrepreneurs, the main concern is to maximize the profits while keeping short term as well as long term planning in mind. Profits are maximized by various techniques such as reducing competition, cutting down cost of production, avoid middlemen and maintaining selling prices.
As stated earlier, businesses follow the old saying – ‘the enemy of my enemy is my friend’. With more competitors in the market, the chances of businesses capturing a major chunk of market share are reduced. When two good businesses enter into a business combination, their market share instantly increases as they become a bigger entity, offering them more control over the market. The same rule applies on online businesses, for instance, when two big online wholesale suppliers enter into a business combination, their market share increases and with their business development teams combined, they form more appropriate marketing techniques.
Cost cutting in production
Going into business combinations broadens the horizon for companies. With two full companies, the production power is increased, enabling them to produce products on a much larger scale. With less competition and larger production, the companies tend to control the local market. The amalgamation also brings more skilled resources and technologies on the table. Besides, two companies can easily store more raw materials or will source products in bulk that will ultimately cost them less.
Maintaining selling prices
One of the most difficult things while selling is to maintain the selling price. In market, different competitors offer products or services on more competitive rates to generate more sales. When two or more companies enter into a business combination, they can easily maintain selling prices by offering products at lower rate than that of their competitors.
Some companies go into the horizontal mergers (between two competitors) while others in vertical mergers (between manufacturer and wholesaler). In horizontal combinations the companies share experienced employees, established operating units, distribution channels, etc. While in vertical combinations, certain costs related to negotiations, bargaining, transportation charges and coordination with other parties are eliminated.
Competing in international market
Business combination might also help the companies to compete in international market. With large operating units, huge number of experienced personnel and a wide distribution channels, the company can diversify its operations by entering into new markets. With two companies combined, the mind power is also enhanced as there are more people to think for the betterment of the company.
When two companies are combined, their capital income and profit is increased due to less competition, less marketing efforts and less cost of production. Two companies combined also have more professionals and experts. They can start research on new products and services as research work yields greater results. With research they can introduce new products and services in market and can make their company more strong.
Use of latest technology
Technology is advancing at great speed these days, every now and then new technological and computerized tools, machinery and instruments are introduced in market. A combined business can quickly opt these new technological instruments and speed up the production which will ultimately further increase their production and sophistication of work.