Merger, Acquisition, or Joint Venture? Consider this before you decide.
As we’ve discussed in previous posts, the mergers and acquisitions market is seeing robust growth. In fact Goldman Sachs predicts M&A spending could reach $355 billion in 2018, a 6 percent increase over 2017. This uptick is being driven by such things as tax reform, digital strategies and M&A technology tools. But a merger or acquisition isn’t the only option when it comes to expanding into a new market, adding key products/services or building a customer base. In fact, strategic alliances and joint ventures are becoming increasingly popular for a variety of financial, operational and logistical reasons.
What is the difference between a Merger, Acquisition, and Joint Venture?
Before we go into the nuances and pros and cons of each deal type, it’s important to understand the key differences of each:
- Merger: A merger is when two separate companies combine with one another to create a newly formed organization.
- Acquisition: An acquisition is when one business entity takes over another, usually with the intent of adding the acquired entity as a subsidiary to its business portfolio.
- Joint Venture: A joint venture involves two separate entities undertaking a company or business together, sharing its profit, loss and control. The venture is maintained as its own entity, separate from the other parties’ companies business interests.
Choosing Between a Merger & Acquisition or Joint Venture
The Harvard Business Review explains that “acquisition deals are competitive, based on market prices, and risky; alliances are cooperative, negotiated, and not so risky.” An M&A deal makes sense in a situation where operational redundancies can be eliminated and the best parts of both businesses survive and hopefully thrive. In a JV, the relationship is for a negotiated period of time. A merger or acquisition is, at least in theory, forever.
According to PricewaterhouseCoopers, the decision making process between a joint venture or an M&A deal often comes down to looking at six key areas.
- Capabilities: Filling a gap or building on strengths
- Control: Weighing investment, access and ownership
- Cost: Determining the business ROI
- Conditions beyond a company’s control: Predicting success based on external factors
- Keeping the right pieces: The role of divestitures in growth decisions
- Best of both worlds: When a partnership and M&A make sense
Why are Joint Ventures Becoming So Popular?
According to a 2016 interview with Michael Armstrong, a director at Deloitte’s Corporate & Business Unit Strategy group, “We’ve definitely seen an uptick in the marketplace with a lot of companies favoring JVs (joint ventures) over traditional M&A.” So what is it about joint ventures that make them increasingly popular?
The management consulting firm Bain, in their 2016 “Joint Ventures Survey,” said these alliances are often the only way for some firms to get access to rapidly-growing markets including China, India and Russia. Not only that, but Bain and Deloitte’s Armstrong believe companies benefit from the flexibility that JVs offer. As Bain notes, “Joint venture partners [can] combine business units, assets or capabilities to generate economies of scale.”
Which is better – Merger or Acquisition or Joint Venture ?
While some might be skeptical, the numbers certainly show that JVs are delivering long-term value. In fact, a study by Bain showed that JVs actually beat out M&As in terms delivering financial rewards. In a 20-year study from 1995-2015, the firm found that “the value of joint ventures grew 20% annually…twice the rate of M&A deals.” Bain’s survey of more than 250 companies found that on the subject of accelerating growth, 60 percent of respondents said that their joint venture “exceeded expectations and created value” over the last five years.
Now this is not to say that a joint venture is better or worse than a merger or acquisition. In some ways they very much overlap in terms of function, but in other ways they accomplish completely different business objectives.
With either approach, it’s critical to conduct due diligence. In fact, during this process, you might determine to change course and consider alternative solutions. One piece of technology that businesses are increasingly using during their due diligence process is the virtual data room. VDRs like SmartRoom help streamline due diligence with everything from real-time content management to workflow resources. It’s a user-friendly platform that allows for safe and secure review of materials like employee information, financial documents and contracts. They help deliver the full picture executives require when considering a major directional shift for the future of their business.