Joint Ventures and Strategic Alliances

Joint Ventures
and Strategic Alliances
Tripurari Pandey
… are more and more
corporations getting involved in
strategic alliances and joint
ventures?
Growing a Company
 There’s only four ways a company can grow and/or
increase in scale, scope or capacity:
 Organic Growth (growth from within)
 Strategic Alliance
 Joint Venture
 Merger/Acquisition
Basic Components of a Strategic
Alliance
What is a Strategic Alliance?
 The mutual coordination of strategic planning and
management that enable two or more organizations to
align their long term goals to the benefit of each
organization – generally, the organizations remain
independent.
 Bottom line, strategic alliances are partnerships that
stress mutual problem solving.
 Each party in the alliance maintains autonomy.
Basic Components of a Strategic Alliance
 Confidentiality agreement
 Mission, vision, values statements
 Long-term goals and objectives
 Plan for implementation of activities
 Plan for managing the process and measuring
success
 Exit strategy
Other Characteristics of a Strategic Alliance
 May or may not be a  Business Process Re-

contractual arrangement, but engineering
this is always recommended.
 Focus on Significant Value-
 Long Term Relationship Addition
 “Open Book”  Mutual Dependency
 High Level of Trust  Strategic Framework in Place
 Win/Win (Mutual Advantage)  High Level of Commitment
 Top Management Interchange  Increased

Capabilities/Capacities
 Continuous Exchange of
 Enhanced Business
Ideas
Opportunities
 Improving Shareholders’ Value
Examples of a Strategic Alliance
 Cooperative agreement
 McDonalds and HAVI - sourcing, transportation,
distribution
 Banking ATM Machines - service, maintenance,
collecting
 Outsourced arrangement
 Licensed arrangement
Examples of Best Practices for
Strategic Alliances
Cultivating Strategic Alliances
Objective:
To cultivate Strategic Alliances STRATEGIC ALLIANCE
with selected WBE suppliers. • Mutual Dependency
• Strategic Framework in Place
• High Level of Commitment
• Increased Capabilities/Capacities
• Enhanced Business Opportunities
ALLIANCE • Improving Shareowner Value
• Long Term Relationship
• “Open Book”
• High Level of Trust
• Win/Win (Mutual Advantage)
PREFERRED • Top Management Interchange
• Continuous Exchange of Ideas
SUPPLIER • Business Process Re-
• Longer Term Relationship engineering
• Trust Earned • Focus on Significant Value-
VENDOR • Some Differentiation in
• “Closed Book” Added
Products/Services
• Little Differentiation in • Quality Programs Implemented
Product/Service • Price & Quality Considered
• Minimum Contract Life • Begins to Focus on Total Value
• Contract Drive
• Focus on Lowest Price
Basic Components of a Joint
Venture
What is a Joint Venture?
 A “union” of two or more parties who contractually
agree to contribute to a specific venture which is
usually limited to a specific task for a specific period
of time.
 A joint venture is a separate legal entity generally
governed under partnership law—which varies from
country to country.
 The JV parties can be individuals, partnerships or
corporations that continue to operate independently
from the other except for activities related to the Joint
Venture.
Basic Components of a JV Agreement
 The Union
 The contract can be viewed as a pre-nuptial
agreement
 The alliance is the union
 The new legal entity can be viewed as the child.
 The Separation
 Separation is inevitable because JVs generally
have a limited life and purpose.
The Union
 Clearly define common objectives on the kind of business and
specific activity to be undertaken
 Establish measures of success; how they are to be quantified and
monitored
 Every party need to know why they are a part of the venture and
what they plan to get out of it. These expectations should be
detailed in a legally binding agreement to which all parties agree.
Need to get legal representation involved early on. The more
detailed and comprehensive the agreement, the better.
 The agreement should clearly define objectives and purpose of
the JV, the roles of each party, and ownership, legal, financial and
tax considerations.
 Key performance indicators should be established, mutually
agreed upon, and documented
Ownership Considerations
 Ownership stake
 Management allowances/restrictions
 Resource sharing
 Housekeeping
 Bickering
Legal Considerations
 Structure
 Liability sharing and insurance
 Rights, duties, and restrictions
 Increase or decrease in JV scope
 Ownership/licensing of intellectual properties
 Country/local laws/regulations
 Withdrawal from JV
Financial Considerations
 Maintenance of accounting records
 Control of bank accounts
 Obtaining loans
 Allocation of profits
 Allocation losses
 Withdrawal of funds
Tax Considerations
 Fiscal year end
 Inventory valuation
 Capital gains tax
 Accounting treatment
The Separation
 When will the union end?
 On what grounds will separation be allowed?
 Who gets what?
 Assets/liabilities
 Intellectual properties
 Proceeds from sales
 Distribution of profits/losses
Problems Inherent in a JV
 Each party is responsible for the actions of the JV and
one another
 The best JV agreement cannot insulate the JV and
parties from all risks
Differences Between Joint
Ventures and Strategic Alliances
JV vs. Strategic Alliance
Joint Venture Strategic Alliance

 Contractual  May or may not be
contractual
 Separate legal entity
 Generally, not a separate
 Significant matters of legal entity
operating and financial
policy are predetermined  Significant matters of
and “owned” by the JV operating and financial
policy may or may not be
predetermined but are
“owned” by the individual
participants

 Exist for a specific time  Indefinite life or a specific
time
 Exist for a specific project
or purpose  Fluid and allows for
greater amounts of
 Limited with respect to ambiguity
future expectations
Joint Venture vs. Strategic Alliance
 A joint venture is a contractual arrangement whereby
a separate entity IS created to carry on trade or
business on its own, separate from the core business
of the participants.
 A strategic alliance is generally an arrangement
whereby a separate entity IS NOT created.
Participants engage in joint activities but do no create
an entity that would carry on trade or business on its
own.
C A
A B
A B B
Companies A and B
combine to form a Companies remain
new company C independent
 A strategic alliance is usually easier to get in/out of
due to due lack of combined legal structure
 A strategic alliance is generally viewed as being less
risky
Mergers
27
Acquisitions
 Friendly
 Hostile
 Cogeneric : in same industries and taking place at the
same level of economic activity- exploration,
production or manufacturing wholesale distribution or
retail distribution to the ultimate consumer.
Conglomerate : between unrelated business.
(a) Horizontal merger (b) Vertical merger
 Conglomeration - Two companies that have no
common business areas.
28
Takeover
29

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Joint Ventures and Strategic Alliances

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Joint Ventures

and Strategic Alliances

 May or may not be a  Business Process Re-

 “Open Book”  Mutual Dependency

 High Level of Trust  Strategic Framework in Place

 Win/Win (Mutual Advantage)  High Level of Commitment

 Top Management Interchange  Increased

Joint Venture Strategic Alliance

Joint Venture Strategic Alliance

Joint Venture Strategic Alliance

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