In the business world, different terminology can be used to describe a situation where companies combine to form a new organization. These are: merger, acquisition and joint venture. Each, however, has its particularities.
What does merger mean
In a merger, two companies come together and become one organization. In this case, normally both companies surrender their shares, the new company is then formed and new shares are issued. There are several types of mergers:
Horizontal mergers: These take place between two companies that are direct competitors and share the same markets and product lines.
Congeneric mergers: These happen between two companies that have the same customer base, albeit in different ways.
Vertical mergers: They happen between a company and a customer or a company and a supplier.
Conglomeration: A conglomerate occurs when two companies with no common areas of business come together to become one. In this category, there are purchase and consolidation mergers.
Product Extension Merger: This is a situation where two companies dealing with the same product in different markets merge.
Market Extension Merger: This is a merger between two companies that sell the same product in different markets.
What is an acquisition
An acquisition is when one company takes over another, usually with the intention of adding the acquired organization as a subsidiary to its business portfolio.
What is a joint venture
A joint venture is a scenario where two companies form a new organization, but the identity of the two companies still exists, albeit separately. There are several reasons that may necessitate the need for joint ventures: need for more resources that are beyond what each company has; need for knowledge sharing; best technology.
The similarity between all of them is that both the merger, the acquisition and the joint venture happen with the union of two companies.
The American publication “Harvard Business Review” explains that “acquisition agreements are competitive, based on market prices and risky, while alliances are cooperative, negotiated and not so risky”.
An M&A deal, the publication says, makes sense in a situation where operational redundancies can be eliminated and the best parts of both businesses survive and thrive. In a joint venture, the relationship is for a negotiated period of time. A merger or acquisition is, at least in theory, forever.
Which is better: M&A or joint venture?
Figures show that joint ventures deliver long-term value. A study by consultancy Bain & Company showed that joint ventures outperformed mergers and acquisitions in terms of delivering financial rewards. The survey analyzed deals over a 20-year period – from 1995 to 2015 – and found that “the value of joint ventures grew by 20% per year, twice the rate of M&A deals”. Bain’s survey of more than 250 companies found that, in terms of accelerating growth, 60% of respondents said their joint venture has “exceeded expectations and created value” in the past five years.
This is not to say, however, that a joint venture is better or worse than a merger or acquisition. In some ways, the two operations overlap in terms of function, but in others, they achieve completely different business objectives.
With any approach – merger, acquisition or joint venture – it is critical to perform proper due diligence. During this process, it is even possible to change course and consider alternative solutions.
When talking about partnerships such as joint ventures, Bain warns that they are “hard to do well”, as they require a lot of focus and cooperation, as well as a manual that differs in some fundamental aspects from traditional mergers and acquisitions. “Companies need to carefully address these differences,” says the consultancy.
Digging deeper into joint ventures, the consultancy says that the difference between winners and losers is in execution. “Clear value creation/economy and strategy are the main (and nearly equal) contributors to success, according to our survey of 281 professionals, and a lack of these dimensions contributes to failure,” Bain wrote in an article.
However, the main reasons for failure are related to execution: poor cultural fit and lack of strong commitment from top management. Execution, the consultancy warns, is an ongoing process that requires initial diligence and strong commitment throughout the life of the partnership. Having an effective partnership playbook can go a long way toward delivering effective execution and avoiding the fate of sinking into the bottom third of value-destroying partnerships.
