Amidst geopolitical tension and economic turmoil, 60% of business executives see joint ventures as a more resilient vehicle for growth than a traditional merger or acquisition.
This is because any large-scale change in business development is at the mercy of many external factors, and executives are naturally drawn to those with lower risk. But low risk doesn’t always bring the biggest rewards. So how do you know which tool to use: merger, acquisition, or joint venture, and when?
This article compares M&A vs joint venture, identifies key differences between each, and provides insights on what type of partnership to choose depending on your business needs.
What are joint ventures, mergers, and acquisitions?
Let’s start with definitions.
Merger
A merger is when two or more companies come together to form a single new company. They combine their resources, employees, and operations, and the original companies no longer exist as separate businesses.
For instance, if two clothing brands merge, they become one larger brand, sharing their stores, products, and management to work more efficiently or compete better in the market.
A good real-life example of a merger is the deal between Disney and Pixar. After the merger in 2006, Pixar continued to operate under its original name, Pixar Animation Studios, but as a part of The Walt Disney Company. Pixar became a subsidiary of Disney, and its films and projects are now released under the Disney-Pixar brand.
Acquisition
An acquisition is when one company buys another and takes control of it. The company that is bought may continue to operate under its name or become part of the buying company.
For example, if a big tech company buys a smaller software company, the bigger company owns it and might use its technology or team to improve its own products and services. A well-known real-life example of acquisition is the deal between Facebook (now Meta) and Instagram. After the acquisition, Instagram continued to operate as a separate app, but Facebook now owned it and could integrate its features and resources.
Explore more distinctions between a merger and acquisition in our dedicated article.
Joint venture
A joint venture is when two or more companies work together on a specific project or goal, but they stay separate. Sometimes, they create a new business just for this partnership.
For instance, if a car manufacturer and a tech company team up to make self-driving cars, they pool their expertise and resources to achieve the goal together.
A real-life example of a joint venture agreement is the Sony Honda Mobility Inc. joint venture in 2022. This partnership combines Sony’s expertise in technology, software, and entertainment with Honda’s automotive manufacturing and engineering skill to create advanced electric vehicles and mobility services. Their first electric car, which will focus on cutting-edge features like partial automation, augmented reality, and integrated entertainment, is set to launch by 2026.
It’s worth noting that a joint venture isn’t the same as a strategic partnership. The main difference lies in the formality of the agreement. In a joint venture, two or more companies create a new, separate business to work on a specific goal, sharing ownership, risks, and profits, which makes it a legal partnership. In a strategic alliance, companies simply agree to work together on a shared goal without forming a new company.
Joint venture vs acquisition and merger
How does a joint venture differ from a merger and acquisition? Take a look at the key distinctions.
| Aspect | Joint venture | Merger | Acquisition |
|---|---|---|---|
| Goal | To share resources and expertise for specific, often temporary, reasons | To achieve long-term strategic goals, like expansion to new markets, gaining bigger market share, or cost reduction | To gain ownership of assets, market share, expertise, or knowledge transfer |
| Control | Shared as per the agreement, and each company retains independence outside the venture | Participating companies share control | The acquirer gains full control over the acquired company |
| Duration | Typically temporary or project-specific, though it can be extended | Permanent, creates a new, lasting organization | Permanent, the acquiring company owns the target company |
| Ownership | Shared as per the agreement, often equally or proportionally | Transfers fully to the new entity | Ownership of the acquired company is transferred to the acquirer |
| Legal entity | Creates a separate legal entity, or may be contractual without a new entity | Forms a single legal entity | The acquired company ceases to exist as an independent entity |
| Decision-making process | Governed by the joint venture agreement | Managed by the merged entity’s leadership | The acquirer makes all major decisions for the entire entity |
| Integration | No full integration, companies work together only for the joint venture | Full integration, the original companies cease to exist as independent entities | The acquired company may be absorbed or operate as a subsidiary |
| Risk sharing | Risks and benefits are shared according to the joint venture agreement | Risks and benefits are fully combined under the new entity | The acquiring company assumes most of the risks |
| Regulatory scrutiny | Less intense, depending on the scope and industry | Significant, often subject to antitrust reviews | Significant, especially in antitrust matters |
Explore our blog to learn more types of M&A deals such as tuck-in acquisitions, conglomerate mergers, and reverse triangular mergers.
When to choose a joint venture, merger, or acquisition?
This is about knowing your business needs and current resources, and understanding what you want to achieve.
Select a joint venture when two companies target the following:
- Shared resources and risks
If a business wants to collaborate on a specific project or foreign market entry without giving up full control or bearing all the risks alone, a joint venture can help share responsibility and risks.
- Access to new markets and expertise
If a business wants to expand into a new geographical area but lacks local knowledge, a joint venture can offer access to local partners with expertise.
- Flexibility
Joint ventures can be more flexible and lower-risk, as the two businesses share both costs and profits for a limited time.
A merger might be a good option when companies seek:
- Scale or market power
Mergers are ideal when two companies want to combine to create a larger entity, benefitting from increased market share and reduced competition.
- Share of complementary strengths
If two businesses have complementary strengths (e.g., one with strong operations and the other with strong distribution in the same industry), a merger can bring greater synergy and efficiency.
- Cost efficiency
Mergers can help eliminate redundancies, reduce operational costs, and maximize profits.
Acquisition is the best choice when companies want:
- Competitive advantage
Acquisitions are ideal when a company wants to eliminate a competitor or obtain critical assets (such as patents or a new/wider customer base).
- Quick market entry
If a business wants to quickly enter a new market or gain access to new products or technologies, an acquisition can provide a faster route than developing these internally.
- Strategic realignment
If a business wants to shift its focus or diversify, acquiring a company in a different industry or sector can allow for strategic repositioning.
Regardless of the partnership type, a comprehensive due diligence process is always key to its success. Explore more about the role of due diligence in deal-making in our dedicated article.
Key takeaways
- A merger is when two or more companies come together to form a single new company.
- An acquisition is when one company buys another and takes control of it.
- A joint venture is when two or more companies work together on a specific project or goal, but they stay separate businesses. Sometimes, they create a new business just for this partnership.
- The key acquisition and merger vs joint venture differences lie in their goal, duration, ownership, control, ownership, type of legal entity formed, integration, risk sharing, decision-making process, and regulatory scrutiny.
