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NAVIGATING STRATEGIC COLLABORATIONS: CHOOSING BETWEEN MERGERS AND JOINT VENTURES FOR BUSINESS GROWTH
While both involve collaboration between separate entities, they differ in structure and purpose. This can lead to confusion and difficulties in determining the most suitable approach to adopt for the business.
Mergers:
A merger involves combining two or more companies into a single entity. This approach is typically pursued to achieve operational efficiency, expand market reach, and enhance competitive positioning. The consolidation aims to create a larger and more powerful entity that can leverage combined resources for more significant market influence and operational synergies.
Different Forms of Mergers:
There are several types of mergers with distinct characteristics. The most suitable for a business will depend on its business objectives. A brief summary of the most common forms of mergers is as follows:
Author: Yousif Al Kalisy & Yasmeen Hakeem Link: https://mandcolegal.com/navigating-strategic-collaborations-choosing-between-mergers-and-joint-ventures-for-business-growth/
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- Horizontal Mergers: This involves companies operating in the same industry and competing directly with one another. This presents a unique opportunity for market dominance. For instance, two competing smartphone manufacturers merging can increase their market share, reduce competition, and achieve economies of scale. This type of merger helps consolidate market presence, making the new entity a dominant player in its sector.
- Vertical Mergers: This type involves companies operating at different stages of the supply chain within the same industry for a common good or service. Such mergers offer significant cost-saving potential for business. An illustrative example is a car manufacturer merging with a tire supplier. The primary business objective is to ensure a steady supply of essential inputs, improve supply chain coordination, and reduce overall costs. In such an example the vertical merger would enhance the business’s operational costs and efficiency by integrating the production process from raw materials to finished products. Generally, vertical mergers assist with achieving economies of scope.
- Conglomerate Mergers: This type involves combining companies operating in unrelated industries. For instance, a food company merging with a tech firm aims to diversify business risks, enter new markets, and leverage different expertise. Conglomerate mergers allow companies to spread their risks across various sectors, enhancing their overall stability and growth prospects. Naturally, a risk of such a merger is the potential risk of losing internal efficiency and moving away from the entities’ respective core businesses.
- Market-Extension Mergers: This involves companies that sell the same products but operate in different markets. A typical example is a US-based bank merging with a European-based bank in order to enter a new geographical region, resulting in the expansion of market reach and an increase in the customer base.
- Product-Extension Mergers: This form of merger combines companies that sell related products within the same market. For example, a soft drink company merging with a snack food company seeks to diversify product offerings and leverage existing distribution channels to enhance market penetration. This new entity would boost product and/or service lines, reduce costs and utilise common resources more efficiently.
Author: Yousif Al Kalisy & Yasmeen Hakeem Link: https://mandcolegal.com/navigating-strategic-collaborations-choosing-between-mergers-and-joint-ventures-for-business-growth/