TRADE ASSOCIATIONS AND OTHER ENTERPRISES

WEEK 4

SUBJECT:     SS 2 

TOPIC:     TRADE ASSOCIATIONS AND OTHER ENTERPRISES 

CONTENT:   

1. Consortium 
2. Cartel 
3. Amalgamation/merger/combine 
4. Trust 
5. Holdings 

SUB-TOPIC 1: CONSORTIUM 

Meaning of consortium: 

It is an association of firms that pool their financial resources together to finance a project they cannot embark upon individually as a result of the project complexity or financial requirement. 

Resources for forming a consortium 

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

EVALUATION 

What is a consortium?

SUB-TOPIC 2: CARTEL 

Meaning of cartel 

A cartel is the association of firms, producers etc, in the same line of business formed to acquire or possess a monopoly business power. Cartel will arise where there are very few sellers or firms in one line of trade. Cartel was first developed in Germany. 

The main purpose of cartel is to 

1. Regulate the prices of their products by controlling output of members.
2. To ensure higher profit for members.
3. To reduce waste by eliminating competition

An example of cartel is the Organisation of Petroleum Exporting Countries (OPEC) of which Nigeria is a member. 

Features of a Cartel 

1. The members engage in the same line of business 
2. Each member organisation is an independent seller or producer of the product i.e. it is monopolistic in nature
3. Production of output is restricted to the quota allocated to each producer or member of the cartel. 
4. Member organisations do not compete with one another on the issue of price or output. 
5. Cartel divides each member output quota periodically based on the economic situation at that time. 

EVALUATION 

1. What is a cartel? Give an example of a cartel. 

SUB-TOPIC 3: AMALGAMATION/MERGER/COMBINE

Meaning: 

This is when two or more companies are fused together and the companies involved lose their independency, individuality and identity. It is also called amalgamation or merger or combine. It entails previously independent companies coming together to form one large firm.

Merger could be vertical or horizontal. Vertical merger is the coming together of companies at different stage of production e.g. a combination of firms producing cotton with a textile form. 

Horizontal merger is the coming together of different firms at the same stage of production process e.g. a merger between two banks. 

Reasons for merger and amalgamation

1. Efficiency in management 
2. Diversification of the firm’s activities into order areas
3. Elimination of competition
4. To obtain raw materials
5. Larger market square
6. To reduce overhead cost by eliminating duplication of facilities
7. To enjoy economies associated with large scale production and to increase profit.

DISADVANTAGES OF MERGER

• Monopoly

• Unemployment

• Discourages specialization.

• Low quality due to lack of competition

EVALUATION:

1. List and explain the two types of merger. 
2. Outline 5 reasons for merger
3. List 4 disadvantages of merger.

SUB-TOPIC 4: TRUST

Meaning of trust 

This is a large-scale amalgamation of firms or producers in different lines of business under a single control. The amalgamation is set-up for the following reasons. 

1. To bring the merging firms or sellers under central control. 
2. To increase production efficiency 
3. To eliminate competitions and waste 
4. To maximise profits. 

Trust originated from America 

Difference between a Cartel and a Trust 

1. Firms under cartel maintain their identity and independency while in trust they lose their identity and independency. 
2. Membership of cartel is voluntary and the members may decide to withdraw, unlike under trust. 
3. Cartels are usually of a horizontal structure while trusts are of a vertical structure. 

EVALUATION

State 3 aims of trust 

Sub-Topic 5: Holding Company 

Meaning of Holding 

A holding company is any company that acquires the whole or an equity interest in another company or companies (by acquiring 51% and above) with the objective of actively controlling such company or companies. 

The companies so acquired, are called subsidiary companies while the holding company is also called parent company.  

EVALUATION

What is a holding company? 

GENERAL EVALUATION

Objective Test 

1. A company will possess a holding company’s status if it acquires ____ of equity interest in another company (a) ≤ 50% (b) 50% (c) ≥50% (d) <50%  
2. An association of sellers of a commodity formed in the market is called ______ (a) cartel (b) Trust (c) parent company (d) merger 
3. The coming together of firms at different stages of production is called ____ (a) horizontal integration (b) vertical integration (c) absorption (d) liquidation 
4. A _____ company that acquires shares that attract more than 50% of the voting rights in another company is called a: (a) holding company (b) cartel (c) trust (d) subsidiary 
5. Where two or more companies agree to work on a project too large for one of them, this is called a (a) consortium (b) merger (c) combination (d) cartel

WEEKEND ASSIGNMENT

Read Commerce for Senior Secondary Schools Book 2 by P.S. Onuka et al page 57-65. 

Pre-Reading Assignment

Read about Limited Liability Companies – Shares 

WEEKEND ACTIVITIES 

List the various source of fund for limited liability companies 

Reference Tests 

1. Commerce for Senior Secondary Schools book 2 by P.S. Onuka et al. 
2. Senior Secondary Commerce Book 2 by M.O. Odedokun et al.