4.2.4 Reasons for joint ventures and mergers

Question 1

Joint venture

Answer 1

• A joint venture is a separate business entity created by two or more parties, involving shared ownership, returns and risks
• Two independent businesses collaborating on a specific project

Question 2

Merger

Answer 2

-A merger is a combination of two previously separate firms which is achieved by forming a completely new firm into which two original businesses are integrated

Question 3

Takeover

Answer 3

-When one business purchases another business

Question 4

Outsourcing

Answer 4

-When a firm pays another business or third party to complete some its business processes

Question 5

Horizontal growth

Answer 5

-When two businesses join together in the same industry from the same stage of production

Question 6

Vertical growth

Answer 6

-When two businesses join in the same industry but from different stages of production

Question 7

Diversification

Answer 7

-When two businesses join together from completely different industries

Question 8

Reasons for JV or mergers

Answer 8

• Spreading risk
• Ability to enter new markets/trade blocs
• Acquiring national and international brand names or patents
• Securing resources/ supplies
• Maintaining/increasing global competitiveness
• Synergy
• Economies of scale are shared from being a bigger business
• Greater market share as you are joining a competitor
• Quick method of growth as control is clear
• Easier to raise finance jointly as a larger business
• increased skills, market knowledge and distribution networks
• access to established brand

Question 9

Risks/negatives of JV and mergers

Answer 9

• Cultural clash risks at management level – could be hostile and therefore very hard to bring existing staff on board
• Objective of partners may evolve and conflict
• Often imbalances level of expertise, investment, asset purchase between partners
• JV may fail – if brands are too different and don’t integrate well
• The acquiring company can create a competitive offer especially if the purchase company is struggling
• reputation is at risk
• diseconomies of scale
• joint venture’s are time constraint
• job insecurity
• risk - cost

Question 10

Reasons for joint ventures and mergers - spread risk

Answer 10

-Spreading risk over different countries
If production is based in several countries, you’ll be less affected by fluctuating economies occurring
Important for sales – the product life cycle

Question 11

Reasons for joint ventures and mergers - Ability to enter new markets/trade blocs

Answer 11

-Ability to enter new markets/trade blocs

Locally based joint venture - Can access local expertise without any loss of control

Question 12

Reasons for joint ventures and mergers - Acquiring national and international brand names or patents

Answer 12

Acquiring national and international brand names or patents
Can give you global credibility and make global awareness – increase market share
Pharmaceuticals and technology patents so you can extend product life cycles

Question 13

Reasons for joint ventures and mergers -Securing resources/ supplies

Answer 13

-Securing resources/ supplies
Increase the supply chain pricing power
Access to economies of scale

Question 14

Reasons for joint ventures and mergers - Maintaining/increasing global competitiveness

Answer 14

-Maintaining/increasing global competitiveness
Scale is important for long term survival
Small market shares will suffer a decline in profitability due to not having access to economies of scale

Question 15

Reasons for joint ventures and mergers - Synergy

Answer 15

Synergy - realise that together they are stronger as one unit rather than standing alone - strategy for market development
Diversification of a business can give it a competitive advantage