When a business that one runs is limited by size and scope, there are limited opportunities for growth to get to the next level. Therefore, it is essential that companies always look to grow in size, and one of the ways to do so is by working together with a fellow company. This can be done by means of a merger, or by acquiring the other company, or through a joint venture.
Now, these three terms – mergers, acquisitions and joint ventures are closely related and often used interchangeably with each other. However, there are key differences that lead to a need to better understand them to decide on which option to undertake to ensure growth of one’s company.
What is a merger?
A merger is one of the most common ways of growing the size of one’s business. It is nothing but a combination or a joining of forces of two separate firms which are similar in size. These two firms come together to become one single entity.
What is an acquisition?
An acquisition is largely similar to a merger. It is the ‘taking over’ of an entity by a larger one which leads to controlling all assets, capital and liabilities of the acquired entity. The intention is to add the target entity as a subsidiary.
What is a joint venture?
A joint venture is one where two companies or entities decide to share their control and profits for a particular purpose. For the said purpose of the venture, the two companies are considered to be one entity separate from their company interests.
The three terms signify more or less similar things – two entities coming together, but the difference lies in how they come together. In a merger, two similarly sized firms come together to become one entity whereas in an acquisition, a larger entity takes over a smaller entity completely. A joint venture is markedly different in this sense, as it involves two companies coming together as one entity for a purpose. There is usually dissolution of the venture once this particular purpose is accomplished. So, a joint venture is more or less a temporary arrangement whereas an acquisition and merger is permanent.
How to choose between mergers, acquisitions and joint ventures?
Mergers, acquisitions and joint ventures are all quite competitive actions and deals that involve a lot of thinking. There aren’t high risks involved, but it is always necessary to stay cautious and to choose rightly. Choosing between the three depends on the needs of one’s company.
If there is just one particular object that must be accomplished in association with another company and nothing else, joint venture is the way to go. It is a temporary relationship and with a proper exit strategy, it can be dissolved with ease. On the other hand, mergers and acquisitions are forever and therefore, need careful analysis of the market conditions and the risks involved. Things that must be in the forefront while making such an analysis include the capacity of one’s company, the level of control needed, costs involved, accurate future projections, and in ensuring that all parties involved are satisfied and better off.
As of now, joint ventures are becoming more and more common and rightly so. In fact, studies have shown that in terms of providing immediate reward as well as long-term success and value, joint ventures pip mergers and acquisitions. Further, thanks to the temporary nature of things and flexibility, it is only right that companies lean towards it. However, that shouldn’t mean that joint venture is a better option as such than mergers and acquisitions. It all boils down to what the companies need and the situation at hand.
Whether one opts for mergers or acquisitions or joint ventures, the key thing to note is that there must be due diligence and one must decide solely based on the nature and situation of the companies concerned. Choosing the right form of takeover or joint operation for one’s company can go a long way in ensuring short-term and long-term success and that is exactly why a company must decide by weighing all options before deciding.