Merger vs Joint Venture
In the corporate world, the terms merger and joint venture are quite commonly used to describe a scenario in which two companies are joined together to act as one. There may be many reasons for two companies to combine their operations, to form new business venture in which either has a competitive advantage, to share company resources and technological knowhow, for strategic business purposes, etc. The following article provides a clear explanation of what is meant by merger and joint venture and outlines how they are different and similar to each other.
Merger
A merger occurs when two firms, usually equal in size decide to continue business as a single firm rather than being owned and operated as separate entities. In order for a merger to happen, both companies should surrender their stocks so that a new company can be formed and new stocks can be issued. A modern example of mergers is when Daimler-Benz and Chrysler decide to go forward as one company and ceased to exist as separate entities. A new company called DaimlerChrysler was formed in the place of the previously independent firms.
Joint Venture
A joint venture is formed through a legal partnership between firms. There could be many reasons for a joint venture such as the need for more resources beyond what each individual firm has, or a strategic business decision that is beneficial to all firms involved. In a joint venture, the two companies will separately exist on their own, and a new separate entity may be formed for the particular division or new business venture. For example, when Microsoft and NBC formed a joint venture they created MSNBC, but the two firms Microsoft and NBC maintained their parent firms and created a new company for the division of business in which the joint venture was formed.
What is the difference between Merger and Joint Venture?
The reasons for which either a joint venture or merger occurs is quite similar, and usually occurs because combined operations can benefit both firms through economies of scale, better technology and knowledge sharing, larger market share, etc. In a merger, one large firm will replace the previously separate entities and will now be in control of both company’s resources and assets. In a joint venture, the parent companies will continue to operate separately and will form one entity for the part of their operations that are being shared. A joint venture requires less commitment than a merger. Therefore, a joint venture can also be used as a way to test the waters and see how two completely different firms work together. Joint ventures can also be formed on a short term basis for short projects. A merger is a larger commitment that is permanently put in place. Mergers are perfect when majority of the two businesses overlap, and they can perform most of their business operations as one entity. On the other hand, a joint venture is formed when two firms do not have such large overlaps and similarities and only have one specific area in which they can work together successfully.
Summary:
Merger vs Joint Venture
• A merger occurs when two firms, usually equal in size decide to continue business as a single firm rather than being owned and operate as separate entities.
• In a joint venture, the two companies will separately exist on their own, and a new separate entity may be formed for the particular division or new business venture.
• The reasons for which either a joint venture or merger occurs is quite similar, and usually occurs because combined operations can benefit both firms through economies of scale, better technology and knowledge sharing, larger market share, etc.
• Joint ventures can also be formed on a short term basis for short projects.
• A joint venture requires less commitment than a merger, which is a larger commitment that is permanently put in place.
• Mergers are perfect when majority of the two businesses overlap, and they can perform most of their business operations as one entity. On the other hand, a joint venture is formed when two firms do not have such large overlaps and similarities and only have one specific area in which they can work together successfully.