Reasons for global mergers or joint ventures

Question 1

What is a joint venture?

Answer 1

A separate business entity created by two or more parties involving shared ownership, returns and risks

Question 2

Benefits of joint venture

Answer 2

• benefit from each others expertise and resources (e.g market knowledge, customer base, distribution channels, R&D)
• each JV partner might have the option to acquire in the future the JV business based on agreed terms if it proves successful
• reduces risk of a growth strategy- particularly if it involves entering a new market or diversification

Question 3

Drawbacks of joint venture

Answer 3

• risk of clash of organisational cultures- particularly in terms of management style
• objectives of each JV partner may change, leading to a conflict of objectives with the others
• in practice, there turns out to be an imbalance in levels of expertise, investment or assets brought into venture by different partners

Question 4

What is a merger?

Answer 4

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

Question 5

Difference between merger and takeover

Answer 5

M: involves a new firm being created into which two existing businesses are “merged”

T: involves an existing firm acquiring more than 50% of another firm and thereby gaining control of it

Question 6

Rationale for JVs?

Answer 6

1) Risks and return are shared
- expertise and resources are shared
- option to acquire JV in future

2) Strategy for market development
- reduces the risk of growth

Question 7

Reasons for joint venture

Answer 7

1) spreading risks over different countries
2) entering new markets/ trade bloc
3) acquiring national/international brand names
4) securing resources/ supplies
5) maintaining/ increasing global competitiveness

Question 8

What is a takeover?

Answer 8

When one business purchases another business

50% + 1 shares- controlling interest

Question 9

Mergers advantage

Answer 9

• EOS are shared from being a bigger business

- Greater market share as you are joining a competitor

Question 10

Takeovers advantage

Answer 10

• Greater market share as you are eliminating a competitor

- Quick method of growth as control is clear

Question 11

Mergers disadvantage

Answer 11

• hard to integrate the two businesses to work alongside one another culture differences
• often unsuccessful if the brands are too different and don’t integrate well

Question 12

Takeovers disadvantages

Answer 12

• communication problems may occur as staff are receptive to the new owners
• could be hostile and therefore very hard to bring existing staff on board
• may not have any experience of the market in which they are purchasing

Question 13

Meaning of acquisition?

Answer 13

Usually acquire non current assets or a brand

Question 14

What is a global merger?

Answer 14

Two firms from different countries coming together to form a new firm

Question 15

Global mergers disadvantage

Answer 15

• exchange rates
• language barriers- DEOS- communication
• clash in culture/ tastes
• marketing challenges