Question

Why would businesses choose to combine? Identify a combined group of companies and explain the reasons for the business combination

Answer 1

Why would businesses choose to combine?

The businesses chose to combine in order to take advantage of SYNERGY GAIN. A synergy gain represents the excess of market value/present value that a combined business entity is able to attract compared to when they were separate entities. The above synergy gain will be shared by the combining firms based on their respective bargaining power/based on their respective market values or market capitalization.

Identify a combined group of companies and explain the reasons for the business combination:

One of the largest combinations in US happened between  America Online (AOL) and Time Warner Inc.

The reasons for the business combination are generally comprises the following

1. Economies of Scale - If more production due to a bigger combined entity , the cost will get reduced.

2. To Increase market share - If two companies merged to a one bigger company , their combined market share will be considerably increased.

3.To reduce competition - If an entity acquires a competitor entity , they becomes one and that competition ends.

4.for instant diversification - If a company acquires another entity which is doing a non similar business , then this results in an instant diversification for the acquiring company.

5.To acquire new technology - By business combinations it is possible to gain new technologies for the acquirer company from the acquired company / Target company

6.Tax Considerations and personal reasons - This may not be the sole reasons for business combinations but may combined with the major reasons stated above.