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Joint venture

Joint venture is a separate business entity


Participants continue as separate firms May be organized as partnership, corporation, or any other form of business Formal long-term contract of 8 to 12 years duration A Joint Venture can be termed as a contractual arrangement between two companies, which aims to undertake a specific task.

2001 Prentice Hall

Takeovers, Restructuring, and Corporate Governance, 3/e

Weston - 1

An entity formed between two or more parties to undertake a specified activity together. Parties agree to create a new entity by both contributing equity, and they then share revenue, expenses, and control of the enterprise. The venture can be for one specific project only or a continuing business relationship Eg: Sony Ericsson.

Unlike mergers and acquisitions, in joint venture the parent companies does not cease to exist.
2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 2

Factors for Joint Venture Success

Accurate assessment of the parties & how best to manage the new entity in light of the ensuing relationships. Symmetry between the partners (co ordination, good relationship). Expectations of the results of the joint venture must be reasonable. Flexible with time as conditions and markets could be a success one year and a failure for the next time.
Other Success Factors in a Joint Venture Good communication, cooperation and coordination among partners Common goals and shared vision among partners Dedication towards the success and long term sustainability of the JV Proper sharing of profits and benefits among partners JV should work towards the benefit of all the partners Proper planning and research prior to the incorporation of the JV
2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 3

Characteristics of joint ventures


Limited scope and duration Generally involve only two firms Each participant offers something of value Joint production of single products Right of mutual control or management of enterprise Right to share in cash flows of the enterprise Limited risk
2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 4

Joint venture is a temporary business activity. In joint venture, profits ans losses are shared in agreed proportion. If there is no agreement regarding the distribution of profit, they will share profit equally. Joint venture is an agreement for pooling of capital and business abilities to be employed in some profitable venture. At the end of venture, all the assets are liquidated and liabilities are paid off: if necessary the assets and liabilities could be shared by co-ventures.

2001 Prentice Hall

Takeovers, Restructuring, and Corporate Governance, 3/e

Weston - 5

Joint Ventures in Business Strategy


Goals/objectives of joint ventures
Risk sharing
Each participant diversifies risk Reduces investment cost of entering risky new area

2001 Prentice Hall

Takeovers, Restructuring, and Corporate Governance, 3/e

Weston - 6

Knowledge acquisition learning experience for both partners


Shared technology Shared managerial skills in organization, planning, and control Successive integration joint venturing as a way to learn about prospective merger partners

Entry into new, expanded, foreign markets


Augments financial or technical capabilities Reduces risk Foreign country may require joint venture with local partner E.g. ICICI & Lombard
2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 7

Financing to raise capital


Share investment expense Small company has product idea but no cash Joint venture with large company that has cash to develop product

Distribution/marketing
To obtain distribution channels To obtain raw materials supply

2001 Prentice Hall

Takeovers, Restructuring, and Corporate Governance, 3/e

Weston - 8

More favorable tax/political treatment


Foreign ventures

Long-run strategic planning spider's web strategy


Provide countervailing power among rivals Small firms in a concentrated industry do multiple joint ventures with dominant firms to form self-protective networks

2001 Prentice Hall

Takeovers, Restructuring, and Corporate Governance, 3/e

Weston - 9

Tax aspects of joint ventures


Contribution of a patent or licensable technology to a joint venture may have better tax consequences than a licensing arrangement with royalties Examples:
One partner contributes technology Other partner contributes depreciable assets Depreciation offsets revenues Joint venture ends up with lower tax rate than any of its partners Partners pay deferred capital gains if/when venture is terminated
2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 10

Other tax aspects


Limitation on operating loss carryovers Partnership status of unincorporated commercial joint ventures Use of equity method in consolidating joint venture into partners' financial statements Benefit of multiple surtax exemptions

2001 Prentice Hall

Takeovers, Restructuring, and Corporate Governance, 3/e

Weston - 11

Reasons for failure


Inflexibility problems similar to other longterm contracts Implementation requires substantial commitments of managerial resources Joint ventures do not last as long as planned
About 70% are disbanded before scheduled maturity On average they do not last as long as one-half the term of years stated in agreement
2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 12

Reasons for disbanding joint ventures


Inadequate preplanning Technology did not develop as expected Disagreement between parties on approaches to joint venture objectives Refusal to share knowledge with counterparts in venture firms wants to learn as much as possible but not to convey too much Inability of parent companies to share control or compromise on difficult issues

2001 Prentice Hall

Takeovers, Restructuring, and Corporate Governance, 3/e

Weston - 13

Advantages of a JV

Helps an organization to enter in to new markets or new product lines Access to increased resources and improved expertise & technology Helps to build credibility with a particular target market by choosing a well established and credible partner in that market Reduces risk involved in business due to sharing of losses and expenses. Exiting from the business in case of failure is easier as compared to solely owned businesses. Partners in Joint Ventures get preference in buying out the shares of other partners and take over the company.
2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 14

Disadvantages of a JV
Entering into Joint Venture agreements may pose certain threats or disadvantages to the participating organizations: It is time consuming and difficult to set up a Joint Venture and poses many challenges. The objectives of the JV may not be clear and understood by all if the partnering organizations do not state and communicate them clearly. Differences in the cultures and management styles of the organizations may lead to a lack of cooperation and coordination. Lack of thorough research and feasibility studies in the beginning of the JV may lead to failure of the JV. The individual partners may not treat the JV as an integral part of their business and may lead to lack of attention being given to the JV There can be an imbalance in levels of expertise, investment or assets brought into the venture by the partners

2001 Prentice Hall

Takeovers, Restructuring, and Corporate Governance, 3/e

Weston - 15

Eg Hero Honda Maruti Suzuki .

2001 Prentice Hall

Takeovers, Restructuring, and Corporate Governance, 3/e

Weston - 16