Theory question 102
Business Combinations(a) Differentiate between the following terms: (i) cartel and consortium; (ii) holding company and subsidiary company.
(b) Abu and Saul are sole proprietors. Abu suggested to Saul for their businesses to be merged into a partnership. (i) List four sources of finance that could be available to the partnership. (ii) State four reasons Saul may be reluctant to accept the merger.
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(a)(i) A cartel is an association of independent firms producing the same product that agree to restrict output and fix prices; a consortium is a temporary combination of firms that pool resources and skills to carry out a large project too big for one firm (e.g. building a dam).
(ii) A holding company owns enough shares (usually over 50%) in other companies to control them; a subsidiary company is a company controlled by a holding company that owns most of its shares, though it keeps its own name.
(b)(i) Any four: partners' capital contributions; admitting new partners; bank loans and overdrafts; trade credit; hire purchase; ploughed-back profits; loans from friends and relatives; cooperative/microfinance loans.
(ii) Any four: loss of sole control and independence; profits must be shared; unlimited liability for the partner's debts and actions; slower decision making; possible disagreements; lack of trust or confidence in Abu; partnership ends on death or withdrawal of a partner; difficulty withdrawing his capital.
Cartel restricts output; consortium pools resources for a project.