CHAPTER TWO
FORMS OF BUSINESS EXPANSIONS
Business Units
A business unit is an organization formed by one or more people with a view of engaging in a profitable
activity.
Incorporated forms of business units
These are businesses that have separate legal entities from that of their owners.
Forms of business expansions
This occurs when two independent business enterprises combine to expand their market share , size and control over
important resources. The main forms of business expansions are;
Business amalgamation
Mergers and acquisitions
Cartels
Trusts
Multinational corporations
BUSINESS AMALGAMATIONS/COMBINATIONS
This occurs when two independent business enterprises combine to form one large organization
Levels of combinations
i. Vertical combination; This is when businesses engaged in different but successive levels of production
combine e.g. primary(extractive) level combines with secondary(manufacturing)level or secondary level
combining with tertiary level. Example; A company producing cotton (raw materials) combining with a
textile industry.
ii. Horizontal combination; this is where business enterprises of the same level combine e.g. secondary and
secondary levels etc.
Types of Amalgamation/combination
Amalgamations whether vertical or horizontal can be achieved in these ways;
a) Holding companies
A holding company is one that acquires 51 percent or more shares in one or more other companies.
The various companies entering into such a combination are brought under a single control.
These companies are controlled by the holding company and are called Subsidiaries.
The subsidiary companies are however allowed to retain their original names and status, but the holding company
appoints some members to be on the board of directors of these subsidiaries, so as to control their activities.
Holding companies are usually financial institutions because they are able to buy controlling shares in subsidiary
companies
b) Absorptions (takeovers)
This refers to a business taking over another business by buying all the assets of the other business which then
ceases to exist.
Example; Kenya Breweries took over the castle company in Kenya
c) Mergers (Amalgamation);
This is where two or more business organizations combine and form one new business organizations.
The merging companies cease to exist altogether.
d) Cartels.
This is a group of related firms/ companies that agree to work together in order to control output, prices and markets
of their products – O. P. E. C (organization of petroleum exporting countries) is an example.
HOLDING COMPANY
An important development of recent times in the business world is the combining of independent business units into
a group or an economic unit. A company may acquire either the whole or majority of shares of another company so
as to have a controlling interest in such a company or companies. The controlling company is known as Holding or
Parent Company and the company controlled is known as Subsidiary Company.
Meaning of Holding Company
According to this section, one company can become the holding company of another in any of the following three
ways:
COMMERCE II COURSE NOTES CHAPTER 2 – FORMS OF BUSINESS EXPANSIONS PREPARED BY MR. ANTONY AMBIA Page 1
,1. By holding more than 50% of nominal value of the equity shares of the other company i.e. the holding company
holds the majority of voting power in the subsidiary company.
2. By controlling the composition of the Board of Directors of the other company so that the holding company is
able to appoint or remove the directors of the subsidiary company.
3. By controlling a holding company which controls another subsidiary or subsidiaries. For example, if B Ltd is a
Subsidiary of C Ltd & C Ltd is a subsidiary of A Ltd then B Ltd is also deemed to be a subsidiary of A Ltd.
A holding company is a business entity—usually a corporation or limited liability company (LLC). Typically, a
holding company doesn’t manufacture anything, sell any products or services, or conduct any other business
operations. Rather, holding companies hold the controlling stock in other companies.
Although a holding company owns the assets of other companies, it often maintains only oversight capacities. So
while it may oversee the company's management decisions, it does not actively participate in running a business's
day-to-day operations of these subsidiaries.
A holding company is also sometimes called an "umbrella" or parent company.
A holding company is a type of financial organization that owns a controlling interest in other companies,
which are called subsidiaries.
The parent corporation can control the subsidiary's policies and oversee management decisions but doesn't
run day-to-day operations.
Holding companies are protected from losses accrued by subsidiaries—so if a subsidiary goes bankrupt, its
creditors can't go after the holding company.
A holding company typically exists for the sole purpose of controlling other companies. Holding companies may
also own property, such as real estate, patents, trademarks, stocks, and other assets.
Businesses that are completely owned by a holding company are referred to as "wholly-owned subsidiaries."
Although a holding company can hire and fire managers of the companies it owns, those managers are ultimately
responsible for their own operations.
Benefits of Holding Companies
Holding companies enjoy the benefit of protection from losses. If a subsidiary company goes bankrupt, the holding
company may experience a capital loss and a decline in net worth. However, the bankrupt company’s creditors
cannot legally pursue the holding company for remuneration.
Consequently, as an asset protection strategy, a parent corporation might structure itself as a holding company, while
creating subsidiaries for each of its business lines. For example, one subsidiary may own the parent corporation's
brand name and trademarks, while another subsidiary may own its real estate.
This tactic serves to limit the financial and legal liability exposure of the holding company (and of its various
subsidiaries). It may also depress a corporation's overall tax liability by strategically basing certain parts of its
business in jurisdictions that have lower tax rates.
If a holding company is set up correctly, the debt liability of one subsidiary won't impact any others; if one
subsidiary were to declare bankruptcy, it would not impact the others.
Holding companies can also serve the purpose of protecting an individual's personal assets. With a holding
company, those assets are technically held by the corporation, and not by the person, who is consequently shielded
from debt liabilities, lawsuits, and other risks.
Holding companies support their subsidiaries by using their resources to lower the cost of much-needed operating
capital. Using a downstream guarantee, the parent company can make a pledge on a loan on behalf of the subsidiary.
Ultimately, this can help companies obtain lower-interest-rate debt financing than they otherwise would be able to
source on their own. Once backed by the financial strength of the holding company, the subsidiary company's risk of
defaulting on its debt drops considerably.
Purpose
The purpose of getting the control over another company may be to gain advantages such as:
1. To eliminate of competition.
2. To enjoy the economies of large scale of production.
3. To achieve an assured market for the product of the company.
4. To ensure a smooth supply of raw materials.
Advantages of Holding Company:
Following are the important advantages of holding company:
COMMERCE II COURSE NOTES CHAPTER 2 – FORMS OF BUSINESS EXPANSIONS PREPARED BY MR. ANTONY AMBIA Page 2
, a) Easy Formation: The holding company can be formed very easily. There is no legal formality. Any company
may purchase the majority shares from stock exchange and can become holding company.
b) Large Business: A holding company can collect the capital and expand the business on large scale.
c) Foreign Capital: The holding company may also attract the foreign capital for the expansion of a business.
d) A Stable Combination: The holding company is a very stable form of business organization. Its life is not
affected by the disagreement of subsidiary company.
e) Goodwill: When the goodwill of the holding company is established in the market, it also improves the goodwill
of its subsidiary company before the public
f) Separate Position: The subsidiary companies can maintain their separate position under this system. They do not
lose their identity.
g) Control on Production: A holding company can check the production and adjusts the supply according the
demand. So over production cannot take place.
h) Elimination of Competition: The holding company eliminates competition due to centralized control over the
subsidiary companies, so it earns maximum profit.
Disadvantages or Defects of Holding Company:
Following are the main defects of the holding company:
a) Problem of Monopoly: A holding company tries to create monopoly over the market. Monopoly is always
against the public interest. It fixes higher prices and consumer suffers a loss.
b) Unequal Distribution of Wealth: Due to holding companies wealth goes in few hands and society is divided
into two classes, rich and poor. Rich class enjoys all the amenities of life while poor class faces poverty and hunger.
c) Costly Management: A holding company spends a lot of money on the officers and offices. All the units are
managed by the central authority. So it is costly to maintain the proper control on large number subsidiary
companies.
d) Minority Interest Ignored: The interest of the minority shareholders is ignored and the members of the holding
company dispose of every resolution for their own interest.
e) Misuse of Funds: The directors of the company enjoys unlimited powers and they take undue advantages. They
misuse the funds also.
f) Over Capitalization: There is always a danger of over capitalization in the holding companies. It is very harmful
for both the companies.
g) False Reports: Generally the directors of the company present false reports about the company's financial
position. The true condition of the company no body knows, and due to this sometimes creditors suffer a loss.
h) Chances of Fraud: In the preparation of accounts the chances of fraud are bright in company transaction
MERGERS AND ACQUISITIONS
Mergers and acquisitions (M&A) are defined as consolidation of companies. Differentiating the two terms, Mergers
is the combination of two companies to form one, while Acquisitions is one company taken over by the other. M&A
is one of the major aspects of corporate finance world.
A merger also refers to an agreement in which two companies join together to form one company. In other words, a
merger is the combination of two companies into a single legal entity. In this article, we will look at different types
of mergers that companies can undergo.
The reasoning behind M&A generally given is that two separate companies together create more value compared to
being on an individual stand. With the objective of wealth maximization, companies keep evaluating different
opportunities through the route of merger or acquisition.
Mergers & Acquisitions can take place:
• by purchasing assets
• by purchasing common shares
• by exchange of shares for assets
• by exchanging shares for shares
Reasons for Mergers and Acquisitions:
• Financial synergy for lower cost of capital
• Improving company’s performance and accelerate growth
• Economies of scale
• Diversification for higher growth products or markets
• To increase market share and positioning giving broader market access
COMMERCE II COURSE NOTES CHAPTER 2 – FORMS OF BUSINESS EXPANSIONS PREPARED BY MR. ANTONY AMBIA Page 3
FORMS OF BUSINESS EXPANSIONS
Business Units
A business unit is an organization formed by one or more people with a view of engaging in a profitable
activity.
Incorporated forms of business units
These are businesses that have separate legal entities from that of their owners.
Forms of business expansions
This occurs when two independent business enterprises combine to expand their market share , size and control over
important resources. The main forms of business expansions are;
Business amalgamation
Mergers and acquisitions
Cartels
Trusts
Multinational corporations
BUSINESS AMALGAMATIONS/COMBINATIONS
This occurs when two independent business enterprises combine to form one large organization
Levels of combinations
i. Vertical combination; This is when businesses engaged in different but successive levels of production
combine e.g. primary(extractive) level combines with secondary(manufacturing)level or secondary level
combining with tertiary level. Example; A company producing cotton (raw materials) combining with a
textile industry.
ii. Horizontal combination; this is where business enterprises of the same level combine e.g. secondary and
secondary levels etc.
Types of Amalgamation/combination
Amalgamations whether vertical or horizontal can be achieved in these ways;
a) Holding companies
A holding company is one that acquires 51 percent or more shares in one or more other companies.
The various companies entering into such a combination are brought under a single control.
These companies are controlled by the holding company and are called Subsidiaries.
The subsidiary companies are however allowed to retain their original names and status, but the holding company
appoints some members to be on the board of directors of these subsidiaries, so as to control their activities.
Holding companies are usually financial institutions because they are able to buy controlling shares in subsidiary
companies
b) Absorptions (takeovers)
This refers to a business taking over another business by buying all the assets of the other business which then
ceases to exist.
Example; Kenya Breweries took over the castle company in Kenya
c) Mergers (Amalgamation);
This is where two or more business organizations combine and form one new business organizations.
The merging companies cease to exist altogether.
d) Cartels.
This is a group of related firms/ companies that agree to work together in order to control output, prices and markets
of their products – O. P. E. C (organization of petroleum exporting countries) is an example.
HOLDING COMPANY
An important development of recent times in the business world is the combining of independent business units into
a group or an economic unit. A company may acquire either the whole or majority of shares of another company so
as to have a controlling interest in such a company or companies. The controlling company is known as Holding or
Parent Company and the company controlled is known as Subsidiary Company.
Meaning of Holding Company
According to this section, one company can become the holding company of another in any of the following three
ways:
COMMERCE II COURSE NOTES CHAPTER 2 – FORMS OF BUSINESS EXPANSIONS PREPARED BY MR. ANTONY AMBIA Page 1
,1. By holding more than 50% of nominal value of the equity shares of the other company i.e. the holding company
holds the majority of voting power in the subsidiary company.
2. By controlling the composition of the Board of Directors of the other company so that the holding company is
able to appoint or remove the directors of the subsidiary company.
3. By controlling a holding company which controls another subsidiary or subsidiaries. For example, if B Ltd is a
Subsidiary of C Ltd & C Ltd is a subsidiary of A Ltd then B Ltd is also deemed to be a subsidiary of A Ltd.
A holding company is a business entity—usually a corporation or limited liability company (LLC). Typically, a
holding company doesn’t manufacture anything, sell any products or services, or conduct any other business
operations. Rather, holding companies hold the controlling stock in other companies.
Although a holding company owns the assets of other companies, it often maintains only oversight capacities. So
while it may oversee the company's management decisions, it does not actively participate in running a business's
day-to-day operations of these subsidiaries.
A holding company is also sometimes called an "umbrella" or parent company.
A holding company is a type of financial organization that owns a controlling interest in other companies,
which are called subsidiaries.
The parent corporation can control the subsidiary's policies and oversee management decisions but doesn't
run day-to-day operations.
Holding companies are protected from losses accrued by subsidiaries—so if a subsidiary goes bankrupt, its
creditors can't go after the holding company.
A holding company typically exists for the sole purpose of controlling other companies. Holding companies may
also own property, such as real estate, patents, trademarks, stocks, and other assets.
Businesses that are completely owned by a holding company are referred to as "wholly-owned subsidiaries."
Although a holding company can hire and fire managers of the companies it owns, those managers are ultimately
responsible for their own operations.
Benefits of Holding Companies
Holding companies enjoy the benefit of protection from losses. If a subsidiary company goes bankrupt, the holding
company may experience a capital loss and a decline in net worth. However, the bankrupt company’s creditors
cannot legally pursue the holding company for remuneration.
Consequently, as an asset protection strategy, a parent corporation might structure itself as a holding company, while
creating subsidiaries for each of its business lines. For example, one subsidiary may own the parent corporation's
brand name and trademarks, while another subsidiary may own its real estate.
This tactic serves to limit the financial and legal liability exposure of the holding company (and of its various
subsidiaries). It may also depress a corporation's overall tax liability by strategically basing certain parts of its
business in jurisdictions that have lower tax rates.
If a holding company is set up correctly, the debt liability of one subsidiary won't impact any others; if one
subsidiary were to declare bankruptcy, it would not impact the others.
Holding companies can also serve the purpose of protecting an individual's personal assets. With a holding
company, those assets are technically held by the corporation, and not by the person, who is consequently shielded
from debt liabilities, lawsuits, and other risks.
Holding companies support their subsidiaries by using their resources to lower the cost of much-needed operating
capital. Using a downstream guarantee, the parent company can make a pledge on a loan on behalf of the subsidiary.
Ultimately, this can help companies obtain lower-interest-rate debt financing than they otherwise would be able to
source on their own. Once backed by the financial strength of the holding company, the subsidiary company's risk of
defaulting on its debt drops considerably.
Purpose
The purpose of getting the control over another company may be to gain advantages such as:
1. To eliminate of competition.
2. To enjoy the economies of large scale of production.
3. To achieve an assured market for the product of the company.
4. To ensure a smooth supply of raw materials.
Advantages of Holding Company:
Following are the important advantages of holding company:
COMMERCE II COURSE NOTES CHAPTER 2 – FORMS OF BUSINESS EXPANSIONS PREPARED BY MR. ANTONY AMBIA Page 2
, a) Easy Formation: The holding company can be formed very easily. There is no legal formality. Any company
may purchase the majority shares from stock exchange and can become holding company.
b) Large Business: A holding company can collect the capital and expand the business on large scale.
c) Foreign Capital: The holding company may also attract the foreign capital for the expansion of a business.
d) A Stable Combination: The holding company is a very stable form of business organization. Its life is not
affected by the disagreement of subsidiary company.
e) Goodwill: When the goodwill of the holding company is established in the market, it also improves the goodwill
of its subsidiary company before the public
f) Separate Position: The subsidiary companies can maintain their separate position under this system. They do not
lose their identity.
g) Control on Production: A holding company can check the production and adjusts the supply according the
demand. So over production cannot take place.
h) Elimination of Competition: The holding company eliminates competition due to centralized control over the
subsidiary companies, so it earns maximum profit.
Disadvantages or Defects of Holding Company:
Following are the main defects of the holding company:
a) Problem of Monopoly: A holding company tries to create monopoly over the market. Monopoly is always
against the public interest. It fixes higher prices and consumer suffers a loss.
b) Unequal Distribution of Wealth: Due to holding companies wealth goes in few hands and society is divided
into two classes, rich and poor. Rich class enjoys all the amenities of life while poor class faces poverty and hunger.
c) Costly Management: A holding company spends a lot of money on the officers and offices. All the units are
managed by the central authority. So it is costly to maintain the proper control on large number subsidiary
companies.
d) Minority Interest Ignored: The interest of the minority shareholders is ignored and the members of the holding
company dispose of every resolution for their own interest.
e) Misuse of Funds: The directors of the company enjoys unlimited powers and they take undue advantages. They
misuse the funds also.
f) Over Capitalization: There is always a danger of over capitalization in the holding companies. It is very harmful
for both the companies.
g) False Reports: Generally the directors of the company present false reports about the company's financial
position. The true condition of the company no body knows, and due to this sometimes creditors suffer a loss.
h) Chances of Fraud: In the preparation of accounts the chances of fraud are bright in company transaction
MERGERS AND ACQUISITIONS
Mergers and acquisitions (M&A) are defined as consolidation of companies. Differentiating the two terms, Mergers
is the combination of two companies to form one, while Acquisitions is one company taken over by the other. M&A
is one of the major aspects of corporate finance world.
A merger also refers to an agreement in which two companies join together to form one company. In other words, a
merger is the combination of two companies into a single legal entity. In this article, we will look at different types
of mergers that companies can undergo.
The reasoning behind M&A generally given is that two separate companies together create more value compared to
being on an individual stand. With the objective of wealth maximization, companies keep evaluating different
opportunities through the route of merger or acquisition.
Mergers & Acquisitions can take place:
• by purchasing assets
• by purchasing common shares
• by exchange of shares for assets
• by exchanging shares for shares
Reasons for Mergers and Acquisitions:
• Financial synergy for lower cost of capital
• Improving company’s performance and accelerate growth
• Economies of scale
• Diversification for higher growth products or markets
• To increase market share and positioning giving broader market access
COMMERCE II COURSE NOTES CHAPTER 2 – FORMS OF BUSINESS EXPANSIONS PREPARED BY MR. ANTONY AMBIA Page 3
