The following paragraphs will discuss week four’s readings that covered vertical mergers, horizontal mergers, conglomerates, and joint ventures. Companies use mergers and joint ventures to increase profitability and efficiency. The following paper will go over the three alliances as well as a joint venture and how it differs from the mergers. Each business arrangement is used to attempt an improvement for the company, the important thing to remember is which will be most beneficial and why.
A horizontal merger occurs when two competing companies in the same market joins together to become one firm or one identity. The two companies could have an influence on the competitive market if the companies have a large percentage of that market. The result of the two companies combine will be an increased advantage over their competitors. If the two groups are joining together are small businesses, they could have little to no advantage over their competitors in the market.
For example, if two unknown mobile cellular companies merge to increase their services and products, the affect on the existing market could be minimal. If two well-known mobile providers such as “Apple and Samsung” combine in the market of mobile cellular phones and different accessories, it would give them an advantage over their competitors because of their popularity. The companies have a larger impact on the market at this time with the latest IPhone and Samsung Galaxy. Therefore; a competitor has a large percentage in the market would decrease barriers of entry for new competitors.
A vertical merger occurs when two companies that are next to each other on the supply-chain decide to become one entity and use it as a way to gain a competitive advantage within the marketplace. For instance, a manufacturer merging with a supplier of essential components or raw materials or with a distributor or retailer that sells its products. The goal of vertical mergers is to improve efficiency or reduce costs. Vertical mergers can help to secure access to critical supplies and help to reduce overall costs by eliminating the costs of finding suppliers, negotiating deals, and paying full market prices.
It can improve efficiency by synchronizing production and supply between the two groups and ensuring that supplies are available when you need them. A vertical merger can help deal with competitors by making it difficult for competitors to obtain vital supplies, therefore, weakening existing competitors and increasing barriers to the entry of new competitors. Let’s take a look at the technology advancement implemented for the creation of a new iPhone. Apple will merge with the suppliers and distributors for the benefit of having the production accessible for the company when manufacturing and distributing the product.
In the world of business, there are times when companies can merge in order to expand their operations in other markets, and possibly lower the risk of the company by doing so. Combining activities, which in turn, will increase their efficiency, can eliminate redundancy between the two organizations. At times, this merger can involve corporations that offer entirely different services or products. These types of mergers are referred to as conglomerate mergers. A conglomerate is “a corporation that is made up of a number of different, seemingly unrelated activities. In a conglomerate, one company owns a controlling stake in a number of smaller companies, which conduct business separately.
Each of a conglomerate’s subsidiary companies runs independently of the other business divisions, but the subsidiaries’ management reports to senior management at the parent company.” (investopedia.com). Some examples of conglomerate mergers viewed between Proctor & Gamble and Gillette, Walt Disney and the American Broadcasting Company, and ITT, Avis Rent-a-Car, Sheraton Hotels and Continental Baking. To the typical consumer, mergers like the ones listed above do not make sense, but it the world of business; there are positive benefits for all parties involved.
Unlike a merger, a joint venture does not require dissolution of their original business or change the organizational structure, but rather two business entities join forces to undertake a single project or aspect of business. The only similarity between the two is that they both include two business entities joining together. A joint merger is a short-term partnership in which the persons jointly undertake a transaction for mutual profit as well as each person contributes assets and share risks.
Joint ventures can also be used by companies to gain entrance into foreign markets. Microsoft entered into a joint venture with NBC to create MSNBC. The two companies ventured to bring business news to the television and online. While the two are joins as one for MSNBC, Microsoft and NBC have their companies. Microsoft has their business market in online products and technology. NBC has their television broadcasting network. The two businesses do not affect each other. The two companies maintain ownership of the entity.
When two or more companies agree to combine into one entity, it will be referred to as a horizontal, vertical, or conglomerate merger. On the other hand, when two or more businesses enter into a joint venture for a specific object will not incorporate the companies as one. The companies will be able to work together for the new entity, but their overall concept of their business will remain the same. Meaning the companies can perform their business separately from the joint venture.
Joint venture, (n.d.). Retrieved from http://www.law.cornell.edu/wex/joint_venture
Mergers vs. Joint Ventures: What’s the Difference? (2012). Retrieved from
Kim, E. (2012), CNNMoney: Retrieved by http://money.cnn.com/2012/07/16/technology/microsoft-nbc-split/index.htm
Scilly, M. (2014), Houston Chronicle: Difference between Mergers and Joint Ventures, Retrieved from:www.smallbusiness.chron.com