Innovation, Change

&
Entrepreneurship

SESSION VIII
Chapter II – Challenges of Entrepreneurship

SUDHIR BHATNAGAR
Accessing Resources for Growth
from External Sources - II

Joint
ve n tu re ,
M er ge r s
and
u i s i ti on s
a cq
(M&A)
Joint Venture
A joint venture is a strategic alliance where two or more people or
companies agree to contribute goods, services and/or capital to a
common commercial enterprise.
Joint venture may be described as a temporary partnership
between two or more persons without the use of firms name, for a
limited purpose.
Venture may be for the construction of a building or a bridge, for
the supply of certain quantity of materials or labor and even for
the supply of technical services.
Joint ventures can occur between a wide variety of partners that
may include universities, non-profit organizations, business
houses, public sector undertakings etc.
Whenever close relationship between two companies are being
developed, concerns about the ethics and ethical behavior of
potential partners need to be settled.
 Features of joint venture
1. It is short duration special purpose partnership.
2. Parties in venture are called co -venturers.
3. Co- venturers may contribute funds for running
the venture or supply stock from their regular
business.
4. Co- venturers share profit/loss of the venture at
an agreed ratio likewise partnership.
5. Generally profit/ loss of the venture is computed
on completion of a venture.
Distinction of JV with Partnership
Basis of Joint venture Partnership
`
difference
Scope- It is limited to a It is not limited to a
specific venture. specific venture.

Persons The persons The persons carrying

involved carrying on business on business are
are called co- individually called
venturers. partners.

Act governing No specific act is Partnership act are

there. governed by Indian
Partnership act,1932

Name There is no need of A partnership firm

firms name. always has a name.
Types of Joint Ventures
 Although there are many varieties of joint ventures arrangements,
the most common is still between two or more private-sector
companies. Reasons for business joint ventures could be -
 Cost cutting by sharing technology,

 Entering new markets,

 Raising capital and expanding markets.

 Some joint ventures are formed to do cooperative research. This

kind of joint venture has scientists loaned from participating
organizations; share their research efforts for profit or non profit
purposes.
 Industry-University agreements created for the purpose of
research are another type of joint venture.
 One non profit research organization, Semi Conductor Research
Corporation, established in USA with the efforts of several private
companies sponsors basic research and trains professional
scientists and engineers to be future industry leaders.
 International joint ventures are on increase due to their
relative advantages. Not only do both the participating
companies share in the profits, but the joint venture has a low
cash requirement if the knowledge or patents are capitalized as
a contribution to the venture.
 This joint venture provides ready access to international
market also.
Drawbacks of Joint Venture
 The business objectives of the joint venture partners can be
quite different, which can result in problems in the direction of
growth of the new entity.
 Cultural differences in each company can create managerial
conflicts in the new joint venture.
 Government policies can sometimes have a negative impact on
the direction and operations of the international joint venture.
 ACQUISITION
An acquisition, also known as a takeover or a buyout, is
the buying of one company (the ‘target’) by another.
When one company takes over another and clearly
establishes itself as the new owner, the purchase is called
an acquisition.
Companies choose to grow by acquiring others to
increase market share, to gain access to promising new
technologies, to tap well-developed distribution channels,
to obtain control of undervalued assets, and a myriad of
other reasons. But acquisition can be risky because many
things can go wrong with even a well-laid plan to grow by
acquiring. Still, perhaps because of the appeal of instant
growth, acquisition is an increasingly common way to
expand.
Example of acquisition
Tata steel takeover Corus known as Anglo Dutch
steel making Corus deal 7.6 billion take bid from
Tata steel ,this is brazilin steel company.
Another example is in 18 Jan 2010 Tata Steel took a
acquisition of Tata steel processing and
distribution ltd. Earlier name was Tata ryesson in
500 cr.
Vodafone acquired Hutch
Why Acquisition ?
•Quicker way to growth.
•Accessing new markets.
•Taking on the global competition.
•Improving operating margins and efficiencies, and
•Acquiring visibility and international brands.
•Buying cutting-edge technology rather than importing it
•Developing new product mixes
Advantages of an Acquisition
For an entrepreneur, there are many advantages to acquiring an existing
business –
 Established business – If the acquired firm has an established image &
track record, has been profitable, entrepreneur only to continues its
current strategy & operations to be successful with the existing customer
base.
 Location – Customers are already familiar with the location.

 Established marketing structure – Existing channels & sales structure,

known suppliers, wholesalers, retailers & manufacturers are important
assets to the entrepreneur.
 Cost – Actual cost of acquisition is generally lower than other methods of
expansion.
 Existing employees – Expertise of trained and experienced employees
in running the business, relationship with customer base, suppliers &
channel members can be immense use.
 More opportunities to be creative – Since customers, supply
&distribution channels are in place, entrepreneur will have time to
concentrate more on assessing new opportunities.
Disadvantages of an Acquisition
Although there are many advantage of acquiring an existing business,
there are disadvantages also. Entrepreneur must weigh between the
advantages and disadvantages before going in for acquisition.
 Marginal success record – Most ventures that are for sale have an
erratic, marginally successful or even unprofitable track record.
Entrepreneur may still go for it if he finds something useful that fits
in his strategy of expansion.
 Overconfidence in ability – Some times an entrepreneur may feel
overconfident of his ability to turn a loss making venture into a
success. This may not be true always. A critical self-evaluation and
opportunity assessment is imperative before entering such an
acquisition process.
 Key employee loss – Often when a business changes hand, key
employees also leave. This could be disastrous for the company & is
more evident in a service business. During the acquisition process, it
is very helpful to speak to the key employees individually and get to
know of their mind.
 MERGER
 A merger occurs when two companies combine to form a single
company.
 A merger is very similar to an acquisition or takeover, except that in the
case of a merger existing stockholders of both companies involved retain
a shared interest in the new corporation. By contrast, in an acquisition
one company purchases a bulk of a second company's stock, creating an
uneven balance of ownership in the new combined company.
 For example, in the 1999 merger of Glaxo Wellcome and SmithKline
Beecham, both firms ceased to exist when they merged, and a new
company, GlaxoSmithKline, was created.
 Tata Fertilizers merged with Tata Chemicals
 New bank of India merged with Punjab National Bank
 Difference Between Merger And Acquisition
Merger Acquisition
In the case of a merger, two However, with acquisition, one
firms together form a new firm takes over another and
company. After the merger, the establishes its power as the single
separately owned companies owner. Generally, the firm which
become jointly owned and obtain a takes over is the bigger and
new single identity. When two stronger one. The relatively less
firms merge, stocks of both are powerful, smaller firm loses its
surrendered and new stocks in the existence, and the firm taking
name of new company are issued. over, runs the whole business
Generally, mergers take place with its own identity. Unlike the
between two companies of more or merger, stocks of the acquired
less same size. In these cases, the firm are not surrendered, but
process is called Merger of Equals.  bought by the public prior to the
acquisition, and continue to be
traded in the stock market. 
Why should an entrepreneur merge?
 There are both defensive and offensive strategies for
a merger, as shown in the fig 8.1. Merger
motivations range from survival to protection to
diversification to growth.
 When some technical obsolescence, market or raw
material loss, or deterioration of the capital
structure occurs in entrepreneurial venture, a
merger may be the only means for survival.
 Merger can also protect against market
encroachment, product innovation or an
unwarranted takeover. A merger can provide a great
deal of diversification as well as growth in market,
technology and financial and managerial strengths.
Figure 8.1 MERGER MOTIVATIONS
DEFENSIVE OFFENSIVE
(Passive) (Active)

Survival Protection Diversification Gains in ..

requirement against .. • Market position
• Capital structure • Market
• Countercyclical
deterioration infringement • Technological
• Counterseasonal edge
• Technological • Lower cost
obsolescence position of a • International • Financial strength
competitor operations
• Loss of raw • Managerial talent
materials • Product • Multiple stage
innovations by plans
• Market loss to others
superior products
• An unwanted
takeover
How does a merger take place?
 It requires sound planning by the entrepreneur. The merger
objectives, particularly those dealing with earnings, must
be spelled out with the resulting gains for the owners of
both companies delineated.
 The entrepreneur must carefully evaluate the other
company’s management to ensure that, if retained, it would
be competent in developing growth and future of the
combined entity.
 Value and appropriateness of existing resources should also
be determined.
 In essence it involves a careful analysis of both companies
to ensure that the weaknesses of one do not compound
those of the other.
 Finally the entrepreneur should work towards establishing a
climate of mutual trust to help minimize any possible
management threat or conflict.
 LEVERAGED BUYOUT
 A leveraged buyout (LBO) occurs when an entrepreneur or a
group of employees use borrowed funds to purchase an
existing venture for cash.
 Most LBOs occur because the entrepreneur purchasing the
venture believes that he could run the company more
efficiently than the current owner. The current owner is
generally an entrepreneur who wants to retire.
 The owner may also be a large corporation desiring to divest
itself of a subsidiary that is too small or that does not fit in
his long term strategic plans.
 The purchaser needs a substantial amount of external
funding. In this case capital is acquired in the form of long-
term debts and the assets of the firm being acquired act as
collaterals.
 Banks, venture capitalists, insurance companies are the most
active providers of this kind of funding.
 How does the entrepreneur determine whether a specific
company is a good candidate for an LBO?
This can be determined through following evaluation process –
 Entrepreneur must determine whether the present owner’s
asking price is reasonable. Subjective evaluation need to be
made of -
 Competitiveness of the industry & the competitiveness of
the firm in that industry,
 The uniqueness of the offering of the firm & the stage in
the product life cycle and
 The abilities of management & other key personnel
remaining with the firm.
 Quantitative techniques are used to evaluate the fairness of
the asking price.
 The entrepreneur must assess the firm’s debt capacity.

 This is particularly critical since the entrepreneur wants to

raise as mush of the capital needed as possible in the form
of long-term debts.
 The cash flow must cover the long-term debt required to
finance the LBO.
 The entrepreneur must develop the appropriate financial
package. The financial package must meet the needs &
objectives of the providers of funds as well as company’s &
entrepreneur’s situation.
 An essential skill for all the alternatives of expanding
business is the ability of the entrepreneur to negotiate. Good
negotiation involves two tasks.
 The first task involves determining how the benefits of
the relationship are going to be distributed between the
parties.
 The second task is exploring the mutual benefits that
can be gained from the relationship.
 To negotiate in a way that maximizes benefits requires the
entrepreneur to use information about one’s own
preferences and those of the other party and the use of
strategies to elicit more information during the negotiation
process to better inform those initial assessments.
T H A NK
Y O U