Forum 3 312
What are the different types of business combinations? Compare and contrast each type and identify
their advantages and disadvantages over the other types.
A business combination happens when one firm buys another or when two or more businesses combine
to become one. The company that obtains control over the other is referred to as parent or acquirer
while the other company that is controlled is the subsidiary or acquiree. There are two types of business
combination, namely, merger and acquisition.
When two or more businesses combine to form one single entity, that company is considered to be one
of the merging businesses. For better understanding, this type of business combination happens when
ABC Corporation + DEF Corporation resulted to either ABC Corporation or DEF Corporation. This type of
business combination is an advantage in terms of reducing the cost of operations, expanding business
into new geographic areas, and preventing closure of an unprofitable business. It also increases the
market share since two businesses are now operating as one in the same industry. However, it has its
own disadvantages as well. It creates gaps in communication since companies may have different
cultures, it creates unemployment due to instances where a company may opt to eliminate the
underperforming assets of the other company, and it raises prices of products or services because of
reduced competition and a larger maker scale.
Another one is the consolidation type of business combination which refers to a combination of many
business entities that resulted in the creation of a brand-new entity. For better understanding, this type
of business combination happens when ABC Corporation + DEF Corporation resulted to GHI Corporation.
The advantages of this type of business combination are simplified tax preparation and record keeping,
allocation of resources is east to monitor, all assets can be viewed and analyzed in one step, reduced
paperwork due to consolidation of statements, and centralized administration. Its disadvantages as well
comprised of cultural differences between firms, increase in debt load, and redundancies in the
workforce that often lead to layoffs and unemployment.
Millan, Z. (2022). Accounting for Business Combinations, Advanced Accounting 2. “Business Combination
Part 1”.
Kenton, W. (2021). “Investopedia: Business Consolidation: Definition, How It Works, and Example”.
Retrieved from https://www.investopedia.com/terms/b/businessconsolidation.asp#:~:text=While%20it%20may%20lead%20to,not%20on%20a%20major%20scale.