Other Enerprises – Consortium, Cartel, Trust, Merger, Holding….
What is Consortium?
This is the coming together of firms to work on a particular capital-intensive project which cannot be funded by one firm alone (e.g. a railway project, laying of pipeline, construction of an airport, etc) and requires civil, electrical, and mechanical companies to execute the project together.
Reasons for Forming a Consortium:
1. To finance a project which requires a large capital outlay.
2. When the project is complex in nature.
Here, the producers or manufacturers in the same line of trade come together to regulate supply in an effort to control prices. The producers form a united front so as to ensure that producers of goods do not exceed the quota assigned to them. The producers, however, maintain their individuality and independence as producers e.g. Organization of Petroleum Exporting Countries (OPEC).
Features of a Cartel:
1. Cartel is monopolistic in nature.
2. It is established by independent producers.
3. They allocate quotas to members.
4. They restrict output so as to force the price up.
5. Competition is removed.
This is a large-scale amalgamation of firms under one central agency or body for the purpose of reducing competition and controlling prices in all their member firms.
1. To maximize output and profit.
2. To eliminate competition among members.
3. To increase maximization and efficiency.
4. To ensure maximization of profit.
5. To reduce waste by eliminating competition.
If the merged entities were competitors, the merger is called horizontal integration, it is the association or merger of business organizations doing exactly the same type of business or trade. If they were suppliers or customers of one another, it is called vertical integration, it is s a business strategy used to expand a firm by gaining ownership of the firm’s previous supplier or distributor.
Differences between Cartel and Trust:
|Members will lose their |
|Members will still maintain their |
|Trust is a complete merger.||It is voluntary and members |
|It has a vertical structure.||It has a horizontal structure.|
|Certificates are issued.||No certificate is issued.|
|There is no quota system.||Producers are given quotas.|
A holding company is a company which uses its financial strength to acquire and therefore control another company where it owns more than 51% of the issued share capital of the company. The firm being acquired is called a subsidiary and the parent company is called a holding company.
U.A.C Nigeria Limited is an example of a holding company because it owns more than 51% of Mr. Biggs and UTC Motors.
A price ring is an association of a number of competing firms who have agreed to operate a common price policy for their competing products. Price rings advocate uniform prices but allow competition among the firms. The firms have a loose association.
A syndicate is an association of organizations that work together for a common aim while retaining their independence. It is voluntary, e.g. underwriters at Lloyds work in syndicates.
Amalgamation / Merger / Combine:
This is referred to as the merging of firms. It is the coming together of two or more companies to form one large company. Their former identities are dropped and new ones are taken.
1. Briefly explain the following;
2. Differentiate between consortium and holding company.
3. (a) What is a merger?
b. state five reasons for forming a merger.
4. Differentiate between cartel and a trust.
5. (a) State five functions of a chamber of Commerce.
(b) Explain five functions of a trade association (WASSCE June, 2006)