What's the Difference Between Mergers and Joint Ventures?
What is a Merger?
A merger, more aptly called a merger of equals, refers to a situation whereby two companies of roughly the same size decide to bring their operations and company structures together for the good of both parties involved. There are several different types of mergers:
- Horizontal Merger - This occurs when two companies that previously were competitors come together to become one larger operation. They join forces to serve the same clients as a newly formed single entity.
- Vertical Merger - This type of merger occurs when two companies that are next to each other on the supply-chain decide to become one entity. If for instance a supplier and customer become one, the output of one arm of the company is fed into the other and synergies occur.
- Conglomeration - This type of merger occurs when two companies that have no relation to each other join forces. The objective in this case is diversification of assets and portfolios rather than direct benefits from synergistic energies.
There are quite a few benefits of mergers as well. One of the most commonly sited examples of a positive side effect of a merger is the synergy between the two companies. This refers to any cost reductions or improvements in process flows that are a result of bringing the companies together. Economies of scale, the need for less staff and, therefore, lower employee costs, are just two of the main results of the presence of synergy.
To get a better picture of the difference between mergers and joint ventures it is only logical to take a closer look at joint ventures next.
What is a Joint Venture?
In stark contrast to a merger, a joint venture is merely the coming together of two business entities to undertake a single project or aspect of business. This does not involve dissolving their original business or changing the organizational structure to the extent that this occurs under a merger.
In a joint venture, a new company may be formed as the vehicle to effect the change or the combined effort. Each company will then take an interest, both operational and financial, in the new company and their share in the profits or losses of the new venture, which will be directly linked to the level of involvement or commitment they put forth from the start.
Although joint ventures are not as complete, and in some cases not as permanent as mergers, (because the newly formed company may be dissolved when the project has ended) this is not to say that they can be taken lightly. Embarking on a joint venture with another company can cast a positive or a negative light on the participating businesses depending on how the project is perceived. So they must be carefully planned out so they do not have a poor effect on the rest of the company’s business.
The difference between a merger and a joint venture is, therefore, clear cut. Although they both involve bringing two entities together, this is often where the similarity ends.
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