Why Joint Ventures are Less Risky than Acquisitions

While acquisitions and joint ventures are both viable options for expanding businesses, they are both considerably different and depending on a company’s particular situation, one is after significantly more beneficial than the other. Joint ventures are commonly seen as less risky than acquisitions due to the information barriers during the acquisition process. In addition to being less risky, joint ventures are also attractive because of the style of management after the process, which is often more efficient because of the combination of the firm’s experience and resources.

Because acquisitions are terminal sales, the information provided between both companies is often distorted, as the potentially acquired company has the motive to inflate their assets while downplaying or hiding negative factors in order to artificially increase the value of their company. Even if the company provides accurate information, it is possible that the acquiring company will not interpret it correctly, as it often requires first-hand experience. Although the overall communication between two companies during the process of an acquisition may be insufficient or incorrectly interpreted, it is the only basis for the decision and may lead to the overvaluation of the acquired company.

While there is still a risk of overpayment for joint ventures, the risk is considerably less compared to that of acquisitions. Yet the main advantage of joint ventures compared to acquisitions is the invaluable asset of experience contributed by both companies. A recent article by the IESE Business School explains this particular benefit:

“ [Joint ventures] also have a number of unique features that can help relieve information asymmetries between exchange partners. Specifically, they enable the partners to pool resources in a separate business, which allows a firm to accumulate direct experience with the other’s resources and capabilities. Furthermore, joint ventures are governed by a joint board, which eases control, facilitates knowledge transfer and reduces information asymmetries.”

Rather than all of the communication taking place prior to the deal as in the case of an acquisition, the communication between two companies continues throughout a joint venture and maintains its value. This is especially important for international joint ventures, so companies are not ill informed when doing business globally.

If you would like more information about joint ventures or strategic alliances, contact us.

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