Consortium

Consortium

Short-term arrangement in which several firms (from the same or different industry sectors or countries) pool their financial and human resources to undertake a large project that benefits all members of the group. A consortium lasts for a period that is usually shorter than that for a syndicate.

Aims and Function of Consortium

1. The purpose of Consortiums is to create a cooperation platform between its members for to implement projects
2. Joint coordination the activities of members in achieving a set goal.
3. To pool together the resources of members in order to achieve a shared objective

Reasons For Forming a Consortium

1. To finance a project which requires large capital outlay
2. When the project is complex in nature

Cartel

A cartel is an organization created from a formal agreement between a group of producers of a good or service to regulate supply in an effort to regulate or manipulate prices. In other words, a cartel is a collection of otherwise independent businesses or countries that act together as if they were a single producer and thus are able to fix prices for the goods they produce and the services they render without competition. The Organization of Petroleum Exporting Countries (OPEC) is the best example of an international cartel.

Aims and Functions of Cartel

1. The main objectives of cartels is joint profit maximization.
2. Cartels Aiming at the Sharing of the Market.

Reasons for forming a Cartel

1. To keep up the price of their products.
2. To ensure higher profits for members.
3. To reduce waste by eliminating competition.

4 To regulate output.

Amalgamation/Merger

Voluntary amalgamation of two firms on roughly equal terms into one new legal entity. Mergers are effected by exchange of the pre-merger stock (shares) for the stock of the new firm. Owners of each pre-merger firm continue as owners, and the resources of the merging entities are pooled for the benefit of the new entity. If the merged entities were competitors, the merger is called horizontal integration, if they were supplier or customer of one another, it is called vertical integration.

Aims and Objectives of Mergers

1. Economies of scale – bigger firms gains from lower average costs.
2. Market Power. The main benefit of a merger is to gain more market share.
3. More prestige.
4. Risk Avoidance.
5. Other Spheres of Influence.

Reasons for Mergers and Amalgamation

1. It is expected that when two companies merge to form a new bigger company, the value of the new entity will be more than the combined value of two separate companies.
2. Generally, any company has two options to grow, viz. organic growth and external growth. Organic growth is achieved by an increase in sales by making internal investments. External growth is achieved by an increase in sales by buying external resources through mergers and acquisitions.
3. A horizontal merger in a small industry will definitely help in increasing the market share.
4. Not every company can have all the resources or strengths required for a successful growth. There will come a time when the company wants to acquire the competencies and resources that it lacks. This can easily be done through mergers and acquisitions in a very cost effective way as compared to developing the capabilities internally.
5. Diversification of the company’s total cash flows is a reason argued by managers for the mergers.

Trust

Business trust is a form of business organization which is similar to a corporation, in which investors receive transferable certificates of beneficial interest. The trustees are administer it for the advantage of its beneficiaries who hold equitable title to it. They administer the trust based on the terms set forth in the declaration of trust. The beneficiaries receive certificates of beneficial interest as evidence of their interest in the trust, which is freely transferable. Profits and losses resulting from the use and investment of the trust property are shared proportionally by the beneficiaries according to their interests in the trusts.

Aims and Functions of a Trust

1. A trust protects the assets of a business owner against personal creditors, because the assets of the trust belong to the trust alone. This means that creditors can not claim against personal assets
2. The admin costs of a business trust are less than that of a company or CC. For example, a trust is not legally required to hire an auditor, disclose financial statements, pay annual fees to the Registrar, and so on.
3. Taxes related to trusts are less complicated with regards to Income Tax, Capital Gains and the various documents that have to be submitted to FIRS, for example.

Reason for forming a Trust

1. To Protect Separate Property

Trusts are often used when individuals have separate property they do not wish to intermingle with their relationship property. If the separate property is placed in a Trust they no longer own this asset and it can then be kept separate from relationship property. This is particularly important to those people who have just left a relationship or have property and are forming a new relationship.

2. To Reduce Risk of Asset Loss through Business Failure

New Zealand is a country of small businesses and unfortunately some of them do not trade successfully. Placing your house in a Trust may help protect your family in the event of a business failure.

3. To Reduce Risk of Loss of Assets through Legal Action

As a country we seem to be becoming more litigious in nature. If your business is one that could expose you to a legal action through advice or actions, you may wish to protect your family by placing your home into a Trust.

4. For Succession Planning (passing assets from one generation to the next)

Most New Zealanders wish to provide for their families. This may be done by passing on the family farm or business or even just the family home. There are many obstacles to this happening. Using a Trust is a way to plan for the smooth succession of assets from one generation to the next.

5. To Gain Taxation Efficiency

When income is received in a Trust the Trustees can elect to either retain income within the Trust or allocate it to a beneficiary. This decision should be made in conjunction with the Trust’s Accountant.

Holding

A holding company is a company that owns other companies’ outstanding stock. The term usually refers to a company that does not produce goods or services itself; rather, its purpose is to own shares of other companies to form a corporate group.

A holding is a type of business organization that allows a firm (called parent) and its directors to control or influence other firms (called subsidiaries). This arrangement makes venturing outside one’s core industry possible and, under certain conditions, to benefit from tax consolidation, sharing of operating losses, and ease of divestiture. The legal definition of a holding company varies with the legal system. Some require holding of a majority (80 percent) or the entire (100 percent) voting shares of the subsidiary whereas other require as little as five percent.

Price ring

Price rings is an association of a number of competing firms who have agreed to operate a common price policy for their competing products. Price rings advocates uniform price but allows competition among the firms. The firms are loosely associated together.

Syndicate

A syndicate is a temporary professional financial services group formed for the purpose of handling a large transaction that would be hard or impossible for the entities involved to handle individually. Syndication allows companies to pool their resources and share risks. There are several different types of syndicates, including underwriting syndicates, banking syndicates and insurance syndicates.

Exercises

1. Define consortium.
2. What are the main objectives of a business consortium?
3. Explain how cartels are formed.
4. State five (5) reasons for mergers and acquisitions.

5. Differentiate between a holding and a trust