Mergers and Joint Ventures
ECO-365
Mergers and Joint Ventures
The purpose of mergers in different industries is for companies to join forces, to work together as one. This allows the businesses to have synergy, sharpening business focus, and possibly even growth. There are three standard types of mergers: Vertical, Horizontal, and Conglomerate mergers.
When two or more business who produce different goods or services merge to produce a single finished good or service it is referred to as a vertical merger (“Vertical Merger”, 2014), Typically the merging firms will individually produce complimentary aspects of a product or will be on different levels of the finished product supply chain. The rationale behind vertical mergers is that the combination of businesses will create operational efficiencies and thereby increase marginal revenue. The advantage of a vertical merger is that it reduces the reliance on a merging supplier and increases profitability by reducing supplier markups and costs ("Vertical Merger," 2014), There are several possible disadvantages of vertical mergers. Chief among them is that the combined companies have decreased flexibility for use of capital in regard future opportunity costs. Another potential disadvantage is diluted competencies or redundancies of management or business operations. Many merging companies struggle with effectively merging management and do not eliminate redundancies or conflicting management styles or systems until significant consequences force actions (Gabler, 2014).
A specific type of merging is the horizontal merger, horizontal merger is an instance where two organizations consolidate within the same industry, producing the same type of goods or offering the same type of services. This type of merger is common in industries with fewer firms, as competition tends to be higher, and the synergies and potential gains in market share be much greater for merging firms in such an industry (“Horizontal Merger”, 2014). Another benefit for two businesses to join forces and serve the same client as a newly formed single entity is that there will no longer be competition but instead a strengthened organization. The horizontal merger is combining two businesses permanently and forming a new organization. In a joint venture, each of the participants is responsible for profits, losses, and costs associated with it. However, the venture is its entity, separate and apart from the participations'' other business another business interest ("Horizontal Merger," 2014). Although joint ventures are not as complete, and in some cases not as permanent as mergers because the newly formed temporary company created to accomplish a task, can easily dissolve when the project is finished, joint ventures should never be taken lightly (Scheid, 2010). A conglomerate merger is between firms that have different business descriptions. The two types of conglomerate mergers are pure and mixed. Pure conglomerate mergers are businesses that have no industry ties to each other, and mixed conglomerate mergers are businesses that seek product extensions or market extensions. Companies can want to merge for a number of reasons: to increase synergy, market shares, cross-selling, diversity, and reduction in risk. There are many risks involved in a merger, such as growing too big from acquiring other businesses, this can cause damage to the company as a whole, for example, the numerous companies that merged in the 1960’s (“Conglomerate Merger” 2014).
A joint venture is where two or more parties form into a partnership to share assets, and intellectual property, knowledge, profits and markets ("About Money," 2014). A joint venture differs from a merger because in a joint venture ownership doesn't change in any way. It is a partnership or collaboration and not a merging of two companies into one, but it is rather two
