Question

Identify the most important differences between a merger and a strategic alliance. In what circumstances might an alliance be preferred to a merger?

Answer 1

Merger :- A merger refers to the coming together of two or more companies to form a new entity or one or more entities merging into other entity. Thus, there is equal control over the combined entity and no one company dominates the other. Usually, the management of both companies shares the control of the resultant company and names of both companies are retained for the resulting companies. There are many high profile examples of mergers- AOL time Warner, Glaxo Smith Kline ( the second largest pharmaceutical company in the world after Pfizer ), Hero Honda ( the leading motorcycle brand in India ) and many others. In each of these cases, names and management of both companies were retained in order to leverage the equity of both brand names. Thus, mergers result into a new organization of more or less equal stature and where all resources are pooled.

Alliances:- Alliance is an approach in which two or more companies agree to pool their resources together to form a combined force in the marketplace. Unlike a merger, an alliance does not involve the emergence of a new combined entity. Each participant in the alliance retains their individual entity but choose to compete against competitors as a united business force. The joint venture is a very popular form of an alliance. Recently, the world's largest retailer Wal- Mart entered into a joint venture with India's Bharti enterprises to get a toehold in the booming Indian retail market. As such, defined simply, alliances are less risky than acquisitions because they are negotiable, co-operative and easier to walk away from. They bring two firms together with mutual interests but different strengths to work on particular projects that offer benefit to both.

In following circumstances, an alliance might be preferred to a merger :-

1. Any merger transaction involves the creation of almost permanent relationships. Thus, in situations when companies are desirable of having short to medium term relationships strategic alliances can be a better option since the parties to the alliance can decide the tenure of the relationship.

2. Alliances can be an extremely effective way to embrace new strategic opportunities, pursue new sources of growth and contribute to the upside of the business. They are particularly useful in situations of high uncertainty and in markets with growth opportunities that a company either cannot or does not want to pursue on its own.

3. Merger involves huge transaction costs and is practically irreversible. In today's dynamic world company's growth strategies may keep on changing and they may be on a lookout for a nimble footed alliance where the unwinding work if required can be done without significant additional costs and time.