Empire building is a term used to describe the process of company amendment with the help of various methods, for example, merger or acquisition.
Factors of Empire Building
Nowadays, the market volume is limited and that is why the competition among corporations is quite high. For small businesses it is even harder to draw the attention of potential consumers. Due to this precise reason many of them might turn bankrops and in order to avoid it firms may integrate with large companies with long-standing world-wide reputation that have occupied a bigger market segment for a long time.
On the other hand, corporations aimed at expansion of their influence on the market are searching for the opportunity to cooperate with smaller businesses as the are usually local and established track record among indigeons.
Types of the Empire Building
There are several categories of the empire building’s ways. They depend on the intentions of both parties and can be divided into separate groups:
- horizontal integrations;
- vertical integrations;
- conglomerate merger.
Merger takes place when two or more companies cease their autonomous existence and merge to form a new legal entity.
Annexation is similar to the merger of business entities but in this type one or more legal entities are terminated and all of their rights and obligations are transferred to another legal entity.
Acquisition. It is a transaction made for establishing control over a business. During the process of acquisition, a company-acquisitor purchases more than 30% of the authorized capital (shares) of the absorbed company. The main difference between the acquisition and the merger is that in the first one absorbed entity remains legally independent from the acquisitor.
Horizontal integration occurs when companies operating in the same industry merge and remain producing the same product or carrying out the same production stages. Through horizontal integrations it is uncomplicated to achieve almost a monopoly and as a result make higher profits. But in order to do so the permission of antimonopoly authorities is usually required.
Vertical integration takes place when companies that operate in different industries merge to control all of the production stages connected with the technological process of producing a finished product. This merge type facilitates reduction of production costs and an increase of the efficiency of company management.
Conglomerate merger. The merger of companies type when businesses that are not connected to each other by any kind of production or sales relationship unite. Normally these firms are not suppliers, customers, nor competitors for each other.
Advantages and disadvantages of the Empire Building
The empire building process results in privileges to merging companies. Some of them are listed below:
- an increase in revenues;
- reduction of costs;
- an increase in profits.
Revenue increase is a result of an increase in the scale of operations.
Costs’ reduction happens due to easier coordination and control over the activities of the merged company.
Profit increases due to the unification of the strengths of the merged enterprises.
However, there are some disadvantages of empire building. Typically they are connected to the conflicts between shareholders and the new company's management team.