Business Combinations
Introduction
Some managers on realization that a particular business unit is not performing well tend to combine it with another better performing unit within the organization. There are a variety of reasons for this. In this text, I discuss business combinations and the rationale of combining segments or business units. I will also discuss the various issues associated with business combinations
Business combinations
Business combinations may include buy are not limited to consolidations and mergers. The main rationale behind business combinations is synergy. Here, the thinking is that what can be done by two is greater that what can be done by one. Units could hence be combined to bring together superior talent in an attempt to revive the operations and profitability of either. Secondly, business combinations according to Rankine et al. (2003) can be informed by the need to lower costs. Here, revenues can be enhanced by the reduced costs on combining. There are also benefits with regard to economies of scale once businesses combine. When units that were formerly working separately come together, there can be cost reductions because there will be more units produced hence bringing down the production cost per unit.
However, as Bosecke (2009) argues, business combinations may fail to rectify the situation. A business combination can in fact bring about management redundancy and end up bringing about inefficiencies. This is because there needs to be more consultations to be made once the two units come together and hence decision making might be inhibited.
Conclusion
It is important to note that though effective in some cases when it comes to enhancing profitability as well as reducing costs, business combinations might end up making the new entity largely ineffective hence infecting the efficiency and/or profitability of a previously well performing unit or segment.
References
Bosecke, K. (2009). Value Creation in Mergers, Acquisitions, and Alliances. Gabler Verlag
Rankine, D., & Bomer, M. (2003). Due diligence: definitive steps to successful business combinations. Financial Times Prentice Hall
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