Merger, Acquisition, or Joint Venture?

Joint ventures and consolidation of assets provide an opportunity for rapid growth, obtaining the necessary resources or market share. In this article, we will analyze the main differences and peculiarities of a merger, acquisition, and joint venture processes.

Merger and acquisition: what is the difference?

Mergers and acquisitions (M&A) are sets of actions aimed at increasing the total value of assets through synergies, the benefits of joint activities.

A merger is the creation of a new company as a result of a merger of two equivalent companies, and a merger is the acquisition of an acquiring company by an acquiring company, as a result of which the acquired company ceases to exist and the acquirer increases.

The acquisition is the purchase of the corporate rights of an enterprise, as a result of which the buyer acquires control over the net assets and activities of such an enterprise. As a result of the classic takeover operation, the company – the object of acquisition – retains the status of a legal entity, the existing legal form of business organization, but changes the subjects of control over it.

The difference between M&A is purely technical and relates to the organization of the financial side of the deal and the future legal form of the existence of the combined corporation. So, a merger is a combination of two or more companies by mutual agreement between management and the approval of their shareholders, forming a new legal entity. The acquisition is a business purchase transaction in which a company acquires or completely absorbs a company, or is limited to the purchase of a controlling stake (and the company that is bought becomes a subsidiary).

Let`s analyze the common types of M&A transactions:

  • the merger of companies functionally related in the line of production or sales (product extension merger);
  • merger, which results in a new legal entity (statutory merger);
  • full acquisition or partial acquisition;
  • outright merger;
  • the merger of companies, accompanied by an exchange of shares between participants (stock-swap merger);
  • acquisition of the company with the addition of assets at full cost (purchase acquisition).
  • privatization – when a public company after the takeover is transferred to the legal form of a private company.
  • Joint venture

    M&A deals are relatively radical ways of bringing companies together. Companies often use more “moderate” ways to achieve certain goals. Thus, two or more companies may form a joint venture to develop a project. Such an enterprise can be easily and quickly disbanded if the project is over, or it can continue its activities for many years.

    A joint venture is a situation when two or more individuals or companies agree to pool resources to achieve a specific goal. A joint venture may represent an investment in new business operations or the distribution of certain assets for the mutual benefit of both parties.

    It may happen that to grow further, the company will have to merge with another organization into a joint venture. By pooling their efforts and assets, the two JV companies can achieve growth that would not be possible if they acted separately. For example, one company is looking for an investor to launch a new product line. Moreover, another company has free funds that it invests in promoting this new line to receive payments from sales in the future. The joint ventures share resources (not just financial) that one company has and does not have.

    World experience shows that joint ventures can only exist for a short time, and the recommended maximum period of their life should not exceed four years.