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What is a business combination?

A business combination is a type of event or transaction and occurs when one company gains control (acquirer) over another company (acquiree). The main reason a company would consider a business combination is because the combined business would be stronger than the individual business operating separately.

The acquirer would acquire the other company to obtain control of its assets, people, or its intellectual property (IP). In addition, it may allow the company to enter a new market, geography, or gain on a leg up on its competitors. Business combinations also occur to keep small companies from growing and disrupting the existing players in the space.

There are four main types of business combinations that can occur. They include horizontal (lateral) combinations, vertical combinations, circular combinations, and diagonal combinations:

1) Horizontal combination: A horizontal combination will occur when companies in the same industry join together under single management and are in the same phase of the supply chain. For example, a burger chain acquirers another burger chain to increase the number of stores and presence in the community.

2) Vertical combination: Vertical combinations are describes when the combination of companies that are in different stages of the production process. For example, a burger chain might be a company that supplies burger products to a number of different burger store brands.

3) Circular combination: A circular combination is a business combination of companies that are engaged in different businesses and those producing different products. For example, if a cell phone company bought a car manufacturing company, that would be an example of a circular combination.

4) Diagonal combination: Diagonal combinations are considered those in which a company that produces the primary good combines with a company that providers ancillary support for that primary activity.

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