Question

what are some of the motivations for one business to purchase stock in another business?

Answer 1

Some of the motivations for one business to purchase stock in another business are as follows"-

1. Control

a. The complete ownership of all stock outstanding as in a wholly owned subsidiary this is not inter business financing but a method of company organization

b. Majority ownership of an operating subsidiary complete control is either exercised or possible if necessary

c. Minority ownership with the objective of gaining control

2.   Companies Invest in other companies to eliminate or reduce the risk of their businesses .e.g . a company for steel production can invest in Iron Extraction . or Energy companies to eliminate the raw material price soaring.

3. Minority ownership as an investment for the holding company.

4. Eliminate Competition : Company get control or influence on other company to prevent this company from compete the same economic activities e.g. Microsoft bought apple shares in order not to Macintosh to compete with Windows same desired Sectors.

5. Ownership for the purpose of extending equity financing this may be either a majority or minority interest a permanent or temporary investment and may involve temporary control. Because of the many reasons for stock ownership other than extending aid to an independent business as per the definition of interbusiness finance an estimate from aggregate data would be meaningless Even though the magnitude of this type of interbusiness financing is difficult to isolate equity financing probably follows the pattern of interbusiness financing as measured by accounts payable and flows from large business to small