Question

1. consider the use of mergers verses corporate alliances in growing a company.
2. 1. Discuss the differences between a merger and a corporate alliance.
   1. In 5 sentences. Explain the pros and cons of both and how taxes influence the use of each approach.

Answer 1

Followings are the differences between merger & a corporate alliance :

i) Merger means coming together of two or more entities to form new entity. Thus there is equal control over the combined entity and no one can dominates the other.

ii) Corporate alliance is an approach in which two or more companies agree together to pool their resources together to form a combined force in the market place. It does not form new combined entity.

iii) Merger involves creation of permanent relationships whereas an alliance is a shirt term relationship.

iv) Merger involves huge transaction costs where as in an alliance work can be done without significant cost and time.

v) Main reason of an alliance is to share risk.

Pros & cons of merger and a corporate alliance:

A) Pros of merger & corporate alliance :

i) Merger is carried out to increase the size of company and boost growth.

ii) Merger is mostly done to eliminate the competition

iii) An alliance helps to reduce costs and risk.

iv) An alliance is useful to create competitive advantages by pooling of resources and skills.

B) Cons of merger & corporate alliance :

i) Merger can leads to job looses by the employees.

ii) Merger leads to dis economies of scale due to increase in size.

iii) An alliance is required to share resources and profit then this can be problematic if they involve trade secrets.

iv) An alliance may create potential competitor.

Tax influence the use of merger & a corporate alliance:

An alliance is most tax benefit strategy than merger because it is taxed as partnership as there is no new formation of entity.