External Expansion Or Business Combination – External expansion refers to ‘ business combination where two or more concerns combine and expand their business activities . The ownership and control of the combining concerns may be undertaken by a single agency .
In the process of combination , two or more units engaged in similar business or in different related process or sages of the same business join with a view to carry on their activities or shape their policies on common or co – ordinated basis for mutual benefit or maximum profits . The combination may be among competing units or units engaged in different processes . After combination , the constituent firms pursue some common objectives or goals .
FORMS OF COMBINATION
There is some disagreement on the precise meaning of various terms relating to the forms of External Expansion or business combinations , viz ; merger , amalgamation , absorption , consolidation , acquisition , takeover , etc. Sometimes , these terms are used interchangeably , in broad sense even when there are legal distinctions between the kinds of combinations .
( a ) Merger or Amalgamation – A merger is a combination of two or more companies into one company . It may be in the form of one or more companies being merged into an existing company or a new company may be formed to merge two or more existing companies . The Income Tax Act , 1961 of India uses the term ‘ amalgamation ‘ for merger .
According to the Companies Act , 1956 , the term amalgamation includes ‘ absorption ‘ . In S.S Somayajula v . Hop Prudhommee and Co. Ltd. , the learned Judge refers to amalgamation as ” a state of things under which either two companies are joined so as to form a third entity or one is absorbed into or blended with another . ” Thus , merger or amalgamation may take any of the two forms :
- merger or amalgamation through absorption .
- merger or amalgamation through consolidation .
( i ) Absorption – A combination of two or more companies into an existing company is known as ‘ absorption . ‘ In a merger through absorption all companies except one go into liquidation and lose their separate identities . Suppose , there are two companies , A Ltd. and B Ltd , Company B Ltd. is merged into A Ltd. leaving its assets and liabilities to the acquiring company A Ltd ; and company B Ltd. is liquidated .
( ii ) Consolidation – A consolidation is a combination of two or more companies into a new company . In this form of merger , all the existing companies , which combine , go into liquidation and form a new company with a different entity . The entity of consolidating corporations is lost and their assets and liabilities are taken over by the new corporation or company . The assets of old concerns are sold to the new concern and their management and control also passes into the hands of the new concern . Suppose , there are two companies called A Ltd. and B. Ltd ; and they merge together to form a mew company called AB Ltd. or C Ltd ; it is a case of consolidation . The term ‘ consolidation is also , sometimes used as ‘ amalgamation .
However , a merger through absorption may be distinguished from a merger through consolidation . One concern acquires the business of another concern without forming a new company in the case of an absorption whereas a new concern is formed by the union of two or more concerns in case of consolidation . Consolidation , generally , takes place between two equal – size concerns and the size of concerns considerably differs in case of a merger through absorption . Generally a small concern is merged with a big concern . Though both the terms are used interchangeably . The methods and problems of financing mergers through absorption and consolidations are also similar .
( b ) Acquisition and Take – Over . An essential feature of merger through absorption as well as consolidation is the combination of the companies . The acquiring company takes over the ownership of one or more other companies and combine their operations . However , an acquisition does not involve combination of companies . It is simply an act of acquiring control over management of other companies . The control over management of another company can be acquired through either a ‘ friendly take over ‘ or through ‘ forced ‘ or ‘ unwilling acquisition . When a company takes – over the control of another company through mutual agreement , it is called acquisition or friendly take over . On the other hand , if the control is acquired through unwilling acquisition , i.e. , when the take over is opposed by the target ‘ company it is known as hostile take over .
( c ) Holding Companies – The other form of partial consolidation is a holding company which generally arises out of lust for power . A holding company is a form of business organization which is created for the purpose of combining industrial units by owning a controlling amount of their share capital . Legally , a holding company is one which holds directly or through a nominee , a majority of the voting shares in the subsidiary company or possesses the power to nominate the majority of the directors . A holding company may have a number of subsidiary companies or subsidiary company may be a holding company of another company or companies . The subsidiary of a subsidiary company is also a subsidiary company of the holding company , although a subsidiary company has a separate legal entity but for all practical purposes subsidiaries are under the effective control of a holding company .