Joint Ventures

JOINT VENTURES

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STRATEGIC PARTNERSHIP The alternative to M&A is strategic partnership wherein two or more firms develop a relationships that combines their resources, capabilities and core competencies for certain business purposes.  There are four type of strategic partnerships: 

 Strategic

alliances.  Long term contracts.  Equity partnerships.  Joint ventures. 2

STRATEGIC ALLIANCES 

In this form of strategic partnership, two or more companies jointly share resources, capabilities or distinctive competencies to achieve some business goals. These alliances may be aimed at world market dominance within a product category. While the partners co-operate within the boundaries of the alliances relationship, they often severely compete in other parts of their business operations. 3

TYPES OF STRATEGIC ALLIANCES Partnership with supplier.  Pooled purchasing.  Partnering with distributors.  Franchising and licensing contracts. 

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LONG TERM CONTRACTS 

In this form of strategic partnerships, two or more firms enter a legal contract for a specific business purpose. Long term contracts are common between a buyer and a supplier. Many strategies consider long term contracts more flexible and less inhibiting than vertical integration.

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JOINT VENTURES Joint ventures involve the creation of a third entity, representing the interests and the capital of partners involved.  Such partnerships are typically focused on a specific market objective.  As a part of the joint venture agreement, ownership, operational responsibilities and financial rewards and risks are allocated to each participant. 

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RATIONALE BEHIND JOINT VENTURES Pooling of complementary resources.  Access to raw materials.  Access to new materials.  Diversification of risks.  Economies of scale.  Cost reduction.  Purchaser- Supplier relationships.  Joint manufacturing.  Tax shelter.  Equity partnerships. 

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KEY ISSUES IN JOINT VENTURES Management issues.  Financing issues.  Issues regarding transfer of shares.  Issues related to termination.  Contingency issues.  Commercial issues. 

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MANAGEMENT ISSUES The agreement should be clear in terms of arrangement for managing the joint venture company.  Clear assignment of responsibilities to all full time directors.  BODs should be nominated by the majority shareholders. 

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FINANCING ISSUES Provision for funds on a regular basis.  Meeting day to day funds.  Losses incurred by joint ventures.  Expansion and development costs.  Proportion of contribution of the partners vis a vis the original investment.  Issues related to the inability of the minority partner to subscribe to future expansion costs. 

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ISSUES REGARDING TRANSFER OF SHARES Degree to which the participation of the partners is transferable in terms of shareholding.  Issues related to pre-emptive rights in case of transfer of shares to a third party.  Transfer of shares if the joint ventures winds up in case one of the parties intends to sell the whole shares.  Intra- group transfer issues. 

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Issues relating to the transfer of shares in case one of the parties turns out to be insolvent.  Transfer of shares if one of the partners become liable for breach of the joint venture agreement.  Price of shares in case of transfer.  Issues related to naming the joint venture in case of change in shareholding pattern. 

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ISSUES RELATED TO TERMINATION Recognizing situations in which the joint ventures is automatically terminated or cases where one of the partners is entitled to terminated the joint venture.  Preparation for termination. 

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CONTINGENCY ISSUES Alternation in government regulations and policies.  Changes in competition scenario and market forces.  Requirement of more funds. 

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COMMERCIAL ISSUES Limitation and scope of activity location and spread, offices under consideration, operation of office activities, profit centers, etc.  Rights of exports and imports. 

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REASONS FOR FAILURE OF JOINT VENTURE The expected technology never developed.  Inadequate preplanning and lack of time and commitment in implementing the project.  Agreements could not be reached on alternative approaches to solve the basic.  Managers with experience in one company refuse to share knowledge with their counterparts in the joint venture.  Management difficulties may be compounded because of inability of parent companies to control or compromise on difficult issues. 

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Critical issues of public policy and long-term strategies of individual business firms may arise in joint ventures.  Profitability of foreign operations.  Taxability characteristics of joint venture products.  Importance of financial and other conflicts and above all inability of the parent companies to share control or compromise difficult issues. 

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