C. You have decided to set up your own business together and have approached the bank for advice. They have asked you to prepare a business plan.

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C. You have decided to set up your own business together and have approached the bank for advice. They have asked you to prepare a business plan.

Module 2 Alliances

Strategic alliances enable companies to share resources. This creates synergies or advantages and leads to increased market share and greater competitiveness. Public companies hope to increase shareholder value when they form alliances. There are many kinds of corporate alliances. Corporate partnerships or joint ventures are formed when two or more companies decide to cooperate on one particular projector mission. When companies join together it is called a merger. When one company makes a successful takeover bid to buy another one, it is referred to as an acquisition.

Reading 1: Mergers and Acquisitions

One plus one makes three: this equation is the main idea of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.

Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.

In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable.

A purchase deal will also be called a merger when both CEO’s agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition.

Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.

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