LINES OF BUSINESS COMBINATIONS

Types of business combinations

There are five commonly-referred to types of business combinations known as mergers:

conglomerate merger, horizontal merger, market extension merger, vertical merger
and product extension merger.

Conglomerate

A merger between firms that are involved in totally unrelated business activities. There are
two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve
firms with nothing in common, while mixed conglomerate mergers involve firms that are
looking for product extensions or market extensions.

A hotel chain deciding to merge with a software developer - two unrelated market players
combining forces.

By merging and managing disparate yet potentially complementary specialties, these

conglomerate partners can realize a whole greater than the sum of their parts.

Example

A leading manufacturer of athletic shoes, merges with a soft drink firm. The resulting
company is faced with the same competition in each of its two markets after the merger as
the individual firms were before the merger.

Advantages of conglomerate mergers

 Increased diversification to spread risk.

 New growth opportunities in multiple sectors.
 Improved stability due to varied revenue streams.
 Enhanced access to financing and credit.

Disadvantages of conglomerate merger

 Complex integration across disparate operations.

 Diversion from core competencies.
 Difficulties achieving full synergies.
 Overextension into too many markets.
 Culture clashes and poor communication.

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 Horizontal Merger

A merger occurring between companies in the same industry. Horizontal merger is a business
consolidation that occurs between firms who operate in the same space, often as competitors
offering the same good or service. Horizontal mergers are common in industries with fewer
firms, as competition tends to be higher and the synergies and potential gains in market share
are much greater for merging firms in such an industry.

Example

A merger between Coca-Cola and the Pepsi beverage division, for example, would be
horizontal in nature. The goal of a horizontal merger is to create a new, larger organization
with more market share. Because the merging companies' business operations may be very
similar, there may be opportunities to join certain operations, such as manufacturing, and
reduce costs.

Advantages of horizontal merger

 Increased market share.

 Improved purchasing power.
 More diverse offerings.
 Cost savings via synergies.
 Economies of scale.

Disadvantages of horizontal merger

 High initial integration costs.

 Overlap in organizational roles.
 Regulatory concerns over competition.
 Too much market control.
 Integration and cultural challenges.

Market Extension Mergers

A market extension merger takes place between two companies that deal in the same
products but in separate markets. The main purpose of the market extension merger is to
make sure that the merging companies can get access to a bigger market and that ensures a
bigger client base.

For example, envision two construction firms in different countries merging to tackle
international construction projects jointly.

Even though the two companies specialize in construction and could be considered rivals to
some degree, they can extend their combined market reach by merging.

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 Example

Facebook buying WhatsApp is a perfect example of a market extension deal. WhatsApp has a
huge international user base, especially in developing countries.

Folding in WhatsApp, Facebook could immediately swell the number of people globally
using its messaging services.

Even though Facebook already had its own chat tools, WhatsApp offered a foothold in key
overseas markets where Facebook struggled to gain traction.

Advantages of market extension mergers

 Quick expansion into fresh customer demographics.
 Leveraging existing capabilities in new locales.
 Growth without building extensive new infrastructure.
 Potentially increased cultural relevance.

Disadvantages of market extension mergers

 Navigating varied regional legal and compliance demands.

 Adapting branding, marketing, and products to new preferences.
 Competing with the acquired company’s existing regional rivals.
 Language barriers and cross-cultural integration hurdles.

Vertical Merger

A merger between two companies producing different goods or services for one specific
finished product. A vertical merger occurs when two or more firms, operating at different
levels within an industry's supply chain, merge operations.

A vertical merger is when two companies that work in related stages of producing something
join together.

Most often the logic behind the merger is to increase synergies created by merging firms that
would be more efficient operating as one.

For example, a steel manufacturer merging with a company that makes automotive parts.

The steel maker creates a key material that goes to the parts supplier, who shapes it into
components that are eventually used in car production.

Example

A vertical merger joins two companies that may not compete with each other, but exist in the
same supply chain. An automobile company joining with a parts supplier would be an

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example of a vertical merger. Such a deal would allow the automobile division to obtain
better pricing on parts and have better control over the manufacturing process. The parts
division, in turn, would be guaranteed a steady stream of business.

Synergy, the idea that the value and performance of two companies combined will be greater
than the sum of the separate individual parts is one of the reasons companies merger.

Product Extension Mergers

A product extension merger takes place between two business organizations that deal in
products that are related to each other and operate in the same market. The product extension
merger allows the merging companies to group together their products and get access to a
bigger set of consumers. This ensures that they earn higher profits.

Example

The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of product

extension merger. Broadcom deals in the manufacturing Bluetooth personal area network
hardware systems and chips for IEEE 802.11b wireless LAN.

Mobilink Telecom Inc. deals in the manufacturing of product designs meant for handsets that
are equipped with the Global System for Mobile Communications technology. It is also in
the process of being certified to produce wireless networking chips that have high speed and
General Packet Radio Service technology. It is expected that the products of Mobilink
Telecom Inc. would be complementing the wireless products of Broadcom.

Advantages of product extension mergers

1. Market Expansion: Companies can reach new customer segments and markets by
combining their product lines, enhancing their overall market presence.
2. Increased Product Offering: By merging, companies can provide a wider range of
products, improving customer choice and potentially increasing sales.
3. Cost Synergies: Mergers can lead to reduced costs through shared resources, such as
marketing, distribution, and R&D, leading to higher profitability.
4. Cross-Promotion Opportunities: Companies can leverage each other’s customer bases
to promote new products, potentially increasing sales across the combined portfolio.
5. Enhanced Competitive Position: A larger product offering can strengthen a company's
position against competitors, making it more resilient in the market.

Disadvantages of product extension mergers

1. Integration Challenges: Merging operations, cultures, and systems can be complex and
may lead to disruptions if not managed effectively.
2. Potential Brand Confusion: Customers might be confused by the merger, especially if
the branding or positioning of products changes significantly.
3. Loss of Focus: Companies may lose sight of their core competencies, diluting brand
identity and potentially leading to a decline in quality.

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 4. Regulatory Scrutiny: Depending on the market power gained, mergers may attract
scrutiny from regulators, which can lead to delays or conditions that limit operational
flexibility.
5. Cultural Clashes: Differences in corporate culture between the merging companies can
create friction, impacting employee morale and productivity.

Benefits of business acquisition or merger

1. Obtaining quality staff or additional skills, knowledge of your industry or sector and other
business intelligence. For instance, a business with good management and process systems
will be useful to a buyer who wants to improve their own. Ideally, the business you choose
should have systems that complement your own and that will adapt to running a larger
business.

2. Accessing funds or valuable assets for new development. Better production or distribution
facilities are often less expensive to buy than to build. Look for target businesses that are
only marginally profitable and have large unused capacity which can be bought at a small
premium to net asset value.

3. Your business underperforming. For example, if you are struggling with regional or national
growth it may well be less expensive to buy an existing business than to expand internally.

4. Accessing a wider customer base and increasing your market share. Your target business
may have distribution channels and systems you can use for your own offers.

5. Diversification of the products, services and long-term prospects of your business. A target
business may be able to offer you products or services which you can sell through your own
distribution channels.

6. Reducing your costs and overheads through shared marketing budgets, increased purchasing
power and lower costs.

7. Reducing competition. Buying up new intellectual property, products or services may be

cheaper than developing these yourself.

8. Organic growth, ie the existing business plan for growth, needs to be accelerated. Businesses
in the same sector or location can combine resources to reduce costs, eliminate duplicated
facilities or departments and increase revenue.

MULTINATIONAL COMPANIES OR CORPORATIONS (MNC)

Multinational Corporation – MNC, the name in itself is pretty self-explanatory. It is a company
or a corporation that operates in many countries. So it has business activity in more than one
country at any given time.

Multinational Corporations or Multinational Companies are corporate organizations that operate

in more than one country other than home country. Multinational Companies (MNCs) have

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their central head office in the home country and secondary offices, facilities,
factories, industries, and other such assets in other countries.

These companies operate worldwide and hence also known as global enterprises. The activities
are controlled and operated by the parent company worldwide. Products and services of MNCs
are sold around various countries which require global management.

Examples of multinational enterprises in Kenya include Safaricom, East African Breweries,

KCB Bank, Kenya Airways, Unilever, British American Tobacco, Equity Bank, Centum
Investment, Google, Airtel, and Coca Cola. The companies span various industries such as
telecommunications, banking, insurance, manufacturing, healthcare, energy, and agriculture.

Features of a Multinational Company – MNC

1. High Turnover and Many Assets

MNCs operate on a global scale. Which means they have huge assets in almost all countries in
which they operate. Their turnovers can also be incomprehensibly large. For example, Apple
has a market capitalization of 1 trillion dollars. This is bigger than the entire economy of Saudi
Arabia!

2. Control

MNCs have unity of control. So while they have many branches in many countries, the main
control will remain with the head office in its country of origin. The business operations in the
host country have their own management and offices, but the ultimate control will still remain at
the head office.

3. Technological Advantages

As we saw earlier, an MNC has at its disposal huge amounts of wealth and investments. This
allows them to use the best technology available to boost their products and their company.
Most companies also invest huge money in their Research & Development Department to
invent and discover new technological marvels.

4. Management by Professionals

An MNC is run by very competent and capable individuals. They have suitable managers to
take care of their business operations, technology, finances, expansion etc. And they are also
able to attract the top talent to their corporations due to their resources and their reputations.

5. Aggressive Marketing

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MNCs can spend a lot of their money on marketing, advertising, and promotional activities.
They target an international audience, so effective marketing becomes necessary. Aggressive
marketing allows them to capture the market and sell their products globally.

Merits of a Multinational Companies in a Host Country

 One of the main advantages to the host country is that MNCs boost their economic
growth. They bring with them huge investments and capital. And then
through subsidiaries, joint ventures, branches, factories they promote rapid industrial
growth. In fact, MNCs are known as the messengers of progress.
 A multinational corporation helps the technological growth of the country as well. They
bring new innovations and technological advancements to the host country. They help
modernize the industry in developing countries.

 MNCs also reduce the host countries dependence on imports. Imports reduce while
exports from the country see a rise.
 All MNCs have enormous capital and resources at their disposal. A good portion of such
resources is invested in R&D. This can be very beneficial to the host countries where
they set up their R&D facilities.
 Multinational corporations also promote maximum utilization of the country’s resources.
This, in turn, leads to economic development.

Merits of Multinational Companies in the Home Country

 MNCs make their home countries (country of origin) very rich by their revenues. The
corporation will collect fees, royalties, profits, charges from all their host countries and
bring them back to the home country. This huge inflow of foreign exchange is very
beneficial to the home country.
 MNCs provide a means of co-operation between developed countries and developing or
underdeveloped countries. This allows both to benefit from the partnership.
 And these multinational corporations also help promote bilateral trade relations between
countries. This is beneficial to both the countries and the global market and economy.

Demerits of a Multinational Corporation?

 A multinational corporation only has a profit motive. Their interests may not align with
the national interests of the host country and be harmful to their economy and
development
 In some host countries, the presence of MNCs can restrict competition and may even
cause a monopoly or monopolistic competition.

 They also charge heavy fees and charges in their host countries. And move all the profits
to their home country. This outflow of foreign exchange can be detrimental to the host
country.
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 They also use tactics like transfer pricing to avoid heavy tax liabilities

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