Question

Identify the most important differences between a merger and a strategic alliance. In what circumstances might an alliance be preferred to a merger? ( 20 marks)

Answer 1

Answer

Merger

Merger means formation of a new company by joining two or more companies or one or two entities . So any of the company doesn't have a domination over other and there is an equal control over combined new firm.Some of the examples of mergers are Hero Honda , one of the leading motorcycle brand in India, Sony Ericsson, one of the leading manufacturer of mobile phones in the world and many others are there.

Here, in the cases of mergers, names of both companies were retained for the resulting companies. Normally In merger, the management of both the companies shares the control of the new company.

Strategic Alliance

Startegic Alliances means two or more organizations join together to proceed with mutual benefits.But it doesn't involves creation of a new legal entity but collaborate while remaining apart. That is, a startegic alliance is an agreement between two companies to share resources or knowledge to undertake a specific and mutually beneficial project. Strategic alliances aims at acquisition of new customers , more gathering of strengths by reducing weakness, access to new markets and technologies , sharing of risk etc.

Strategic Alliance results in sharing of knowledge, skills , expertise that results in the pool of resources which is more valuable than independent single resources in the particular company . Sometimes collaboration with another company brings many opportunities that helps a company to grow faster and helps in access to some specific markets which is rather difficult while standing alone by a company .

Circumstance were alliance is preferred over merger

In merger , it involves the creation of almost permanent relationships . But startegic alliance can be a better option in some situations when companies wishes for short to medium term relationships since the parties to the allaince can decide the tenure of the relationship.

Merger involves huge transaction costs . Today ,since m companies growth strategies may keep on changing, many of the companies go for allaince strategy in which the work could be done without huge costs.

Normally companies go for allaince strategy is to share risk . Risk can be mainly associated with high cost of investment that is required to proceed a particular opportunity . Sometimes an alliance can even lower those costs .

Sometimes some companies if going through a major technological or business discontinuity may go for alliances to manage the risks associated with uncertainty.In such cases were the future of the companies are uncertain, alliances can be a way to explore new market opportunities without going for too many resources before the future of the company becomes clear .