In the world of Corporate business and finances, two terms are very common and familiar if you want to expand your business or want to gain advantages, technical resources, and money.
Mergers and Joint Ventures are the terms that help to grow the business successfully, and often, these two terms are being confused with one other. Mergers can be divided into public and private depending upon the company with which it is merging with.
Mergers vs Joint Ventures
The main difference between mergers and joint ventures is that a merger occurs in the company when two different companies function as one single company. A joint venture is something when two different business ventures decide to form a third entity. But the identity of both businesses exists separately. Mergers in a company happen for a long period of time, whereas joint ventures happen for a short period of time.
Mergers mean when two companies both of the same size join together to form one company. Both the companies surrender their stocks to function as one. Mergers are often called consolidation or amalgamation to form a new entity altogether. There are various types of mergers like horizontal, cogeneric, vertical, etc. Mergers can help to grow or degrade the businesses and can change the nature of the enterprises. It can be both private and public.
A Joint Venture is shared ownership where two companies are owners at the same time and share profits, returns, risks, and governance. Companies usually pursue joint ventures when they want to acquire a new market, i.e. emerging, trending, and have a scope to grow in the future. The partnership between the two companies is temporary. Joint ventures have very little risk to fail. Two parties or entities are called co-venturers.
Comparison Table Between Mergers and Joint Ventures
|Parameters of Comparison||Mergers||Joint Ventures|
|Commitment||Mergers require a lot of commitment to operating the entity efficiently.||Joint Ventures require less commitment when compared to mergers.|
|Term||Mergers are for long terms.||Joint Ventures are for the short term and are formed for short projects.|
|Ownership||In a merger, ownership of a new entity lies with both the companies’ owners.||In a joint venture, ownership is owned by the company that started it.|
|Scope||Mergers have a larger scope to grow.||Joint ventures have minimal scope to grow.|
|Motive||In mergers, the motive is to create opportunities and benefits for the company.||In a joint venture, the only motive is to reach a certain goal or an objective.|
What are Mergers?
Mergers or acquisitions are the transfer of all the units, ownerships, and entities that are amalgamated into one entity or business. Mergers can be very risky. Almost 50% of mergers fail, according to a study. Mergers can make your company grow or downsize.
Whatever be the result, it changes the nature of your business. Mergers happen legally, whereas acquisition happens when a big company takes over all the assets of a small firm.
There is not much difference between a merger and acquisitions because both result in a consolidation of stocks and assets to form one enterprise. There can also be a reverse merger when a private company is listed publicly for a short period of time. This happens when a private company that is stronger buys a public company with no business or profits.
There are various types of mergers. A horizontal merger takes place when two companies are rivals to each other and share the same market. Cogeneric Mergers take place between two businesses when they have the same customer base. A Vertical Merger is when an entity and provider come together for a merger. Conglomeration is when two different companies with no common background join together to become one. A product extension merger is when two different companies are selling or dealing with the same product but in different markets join.
What are Joint Ventures?
A joint venture is a term that describes ownerships, risks, profits between two companies. It happens when a company wants to acquire a new market with the help of another company. It is for a short period of time. It has a certain or ultimate objective, and after that is achieved, a Joint Venture may be dissolved. When two people come together to form a temporary partnership for a specific project, then it can be called a joint venture, and partners are called co-venturers.
Joint ventures happen when companies want more resources such as knowledge or technology and which is far reach from an individual entity. It happens because to carry out a strategy that may be beneficial to all the companies involved in it. In Europe, Joint Ventures are a legal term and under company law. In different companies, different rules apply to joint ventures.
Joint ventures involve a dark side like negative outcomes, unethical behaviors by companies and organizations with evil intentions. In India, there are no separate laws regarding Joint ventures, and it is treated at par with domestic companies only. Private companies with 2500$ capital can form a joint venture. But public companies have limited restrictions.
Main Differences Between Mergers and Joint Ventures
- Mergers require a lot of commitment to operating the entity or businesses efficiently. Joint Ventures require less commitment when compared to mergers.
- Mergers are for long terms. Joint Ventures are for the short term and are formed for particular projects.
- In a merger, ownership of a new entity lies with both the companies’ owners. In a joint venture, ownership is owned by the company that started it.
- Mergers have a larger scope to grow. Joint ventures have very limited scope to grow.
- In mergers, the motive is to create opportunities and benefits for the company. In joint ventures, the only motive is to reach a certain goal or an objective.
Both Mergers and Joint ventures are formed to gain benefits in the business. Apart from these, both mergers and joint ventures have their pros and cons. For instance, Mergers are very much expensive in nature, and it consumes a lot of time. But the advantage is that through mergers, the stakeholders in the company can increase their net worth.
There is a reduction of competition when mergers are done and also an increment in the market share. Whereas in a joint venture, as you have shared ownership, you have to share the profits, and also very little control is there as an owner.
Sometimes there is an undesired outcome or uncontrolled increase in the operating cost. If we count pros, it widens the scope very fastly. You can have access to an additional source, which helps to build important contacts within the industry. We can say that both are good in their own ways.