A Difference Between Mergers and Joint Ventures
When a company seeks to expand or grow its operations, it may choose to join with another company so that it may access additional resources and achieve mutually beneficial goals. While mergers and joint ventures both involve two or more distinct companies working together to achieve a common goal, there are important differences between the two undertakings.
A major difference between the two types of organizational moves is in the number of companies that result. In a merger, two or more companies combine forces and become a new, separate entity. The end result is a third company with a different name, a new board of directors and separate stocks and ownership. The original companies no longer exist. However, in a joint venture, two or more companies combine and share their resources for the purpose of pursuing a specific goal. The original companies remain as separate entities and share joint ownership in a newly formed company, which exists solely to fulfill its function as specified by the joint venture agreement.
The choice to merge or establish a joint venture agreement with another organization depends on a company's goals. In general, a merger creates opportunities for growth and opens up new avenues for claiming market share. The consolidation of assets into one entity increases performance and revenues while decreasing overall costs. As one larger company within the industry, the new organization can claim a larger share of the market and also gain a competitive edge against those companies that remain.
Similarly, in a joint venture two companies come together to give each other a boost in productivity or the availability of resources, but each company benefits separately. Attempting to expand a company by engaging in research, developing products or creating new avenues of distribution is a risky undertaking. However, in a joint venture that risk is shared and spread among the members, thereby reducing the overall risk for everyone involved. Additionally, companies are able to share the costs of their project as well as mutually enjoy the profits. Each company agrees to a percentage of how much they will contribute and receive as part of the initial agreement.
Company cultures and management styles vary so when a merger occurs, personnel must adapt to potentially conflicting methods. New procedures may take the place of familiar practices, and employees must remain flexible, as they adjust to how things are run within the new corporate structure. However, some employees may not be able to retain their positions, as mergers often are accompanied by job cuts.
Likewise, a joint venture may experience difficulties with communication among the member companies. Information and directives must travel across multiple channels, and misunderstandings or delays could potentially result. However, these communication difficulties do not need to be a permanent concern, since joint ventures are temporary setups. Unlike in a merger, in which the relationship is fixed, a joint venture can be formally dissolved once the short term, targeted goal has been reached. The company itself could be sold or one of the partners may choose to buy out the other member's share. Conversely, the companies may choose to continue working together on another venture, if it would benefit each entity to do so. Whatever the result, both companies gained from consolidating their resources and establishing new business contacts.