Mergers vs Strategic Alliances vs Joint Ventures - The Difference
Posted in Finance Articles, Total Reads: 47401
, Published on 30 October 2010
As a business professional or an MBA student, you would have frequently encounter the words like mergers, acquisitions, joint ventures or strategic alliances. But most of us would not know the exact difference between these words. They are used interchangeably in a lot of news items and conversations but in theory they are different and it is essential to understand the difference.
Mergers and Acquisitions :
Mergers and acquisitions are more popular form of partnerships which is more simple to understand. Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. A merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example,Oracle Corporation is very famous for its acquisitions. Oracle acquires companies and not merge with them. Oracle acquired Siebel,BEA,Peoplesoft and more recently SUN through friendly or hostile take overs.
Joint Venture :
A joint venture is a legal partnership between two(or more) companies where in they both make a new (third) entity for competitive advantage. With a JV you will have something more than simple governance; you'll have a completely new entity with a board, officers, and an executive team. Effectively a JV is a completely new organization, but owned by the founding participants. The board of directors generally is constructed with representatives of the founding organizations. This new company will "do business" with the founding entities-usually as suppliers. e.g. Uninor was a joint venture between Unitech(India) and Telenor(France) and KPIT Cummins is a joint venture between KPIT and Cummins Infosystems. In both the above cases,the resulting company is a new independent company with its own set of executives and even name.
Strategic Alliance :
SA is a kind of partnership between two entities in which they take advantage of each other’s core strengths like proprietary processes, intellectual capital, research, market penetration, manufacturing and/or distribution capabilities etc. They share their core strengths with each other. They will have an open door relationship with another entity and will mostly retain control. The length of agreement could have a sunset date or could be open-ended with regular performance reviews. However, they simply would want to work with the other organizations on a contractual basis, and not as a legal partnership. e.g. HP and Oracle had a strategic alliances wherein HP recommended Oracle as the perfect database for their servers by optimizing their servers as per Oracle and Oracle also did the same.
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