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What Is a Business Combination?

A business merger is a common approach to a business combination.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 26 July 2014
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Business combinations are transactions in which one entity gains control, or at least controlling interest, in another entity. It is possible to manage a business combination by way of a merger, a voluntary acquisition, or a hostile takeover. In some cases, acquiring a controlling amount of stock may be the preferred means of managing this type of combination.

One of the more common approaches to a business combination is the business merger. With this model, two businesses choose to combine their assets in order to form a new company that is stronger and more capable of competition in the marketplace than either business could accomplish on its own. A merger of this type allows the new combined company to retain existing clientele while positioning itself to pursue new customers. The goods and services offered by the new business combination may consist of the combined product lines of the two businesses, or be a revamped product line that takes the best sellers of each and couples them with a few new products developed by the new entity.

A variation on a voluntary merger is the forced merger. In this instance, an entity takes action to acquire a controlling interest in another business, usually by gaining control of a majority of the issued shares of stock. Once the entity has control, the merger can commence, with the acquiring company absorbing the acquired company into its own operation, or redesigning a new company from the assets of the two.

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Another approach to the business combination is the business takeover. The takeover may be voluntary or hostile. With a voluntary takeover, the owners of one company agree to sell the business to another company. In a hostile takeover, one company acquires another business without the cooperation of that business. Like a forced merger, this often involves acquiring a controlling amount of stock in order to manage the business combination. Unlike a merger, the new owner may choose to allow the acquired company to continue operations under its own name, but as a subsidiary of the parent company.

The business combination can have a number of beneficial effects for everyone concerned. The combined strength of the two companies can often make it easier to break into new markets, or to increase market share in the consumer markets where both companies already function. At the same time, the combination may aid in overcoming a major competitor, since the joining of resources may allow the new entity to engage in product development, marketing, and a number of other functions with more success than would be possible otherwise.

A business combination can also produce some negative effects. For example, if both companies operated facilities within the same community, those operations may be combined. When this happens, there is a good chance that at least part of the workforce may be terminated from active employment.

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Discuss this Article

Melonlity
Post 2

It's interesting how hostile takeovers get all the press while mergers are far more common, isn't it? That might be because mergers are somewhat boring -- two companies simply choose to combine their assets and form a stronger, more profitable entity. We see those happen regularly, but hostile takeovers are far more fun to watch.

Well, that's not always true. There are those mergers where one party wants to back out at the last minute and the other sues for breach of contract.

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