Joint Venturesand 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 contractual arrangement, but this is always recommended.

Long Term Relationship

“Open Book”

High Level of Trust

Win/Win (Mutual Advantage)

Top Management Interchange

Continuous Exchange of Ideas

Business Process Re-engineering

Focus on Significant Value-Addition

Mutual Dependency

Strategic Framework in Place

High Level of Commitment

Increased Capabilities/Capacities

Enhanced Business 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 forStrategic Alliances

STRATEGIC ALLIANCE• Mutual Dependency• Strategic Framework in Place• High Level of Commitment• Increased Capabilities/Capacities• Enhanced Business Opportunities• Improving Shareowner ValueALLIANCE

• Long Term Relationship• “Open Book”• High Level of Trust• Win/Win (Mutual Advantage)• Top Management Interchange• Continuous Exchange of Ideas• Business Process Re-

engineering• Focus on Significant Value-

Added

PREFERREDSUPPLIER• Longer Term Relationship• Trust Earned• Some Differentiation in

Products/Services• Quality Programs Implemented• Price & Quality Considered• Begins to Focus on Total Value

VENDOR• “Closed Book”• Little Differentiation in

Product/Service• Minimum Contract Life• Contract Drive• Focus on Lowest Price

Objective: To cultivate Strategic Alliances with selected WBE suppliers.

Cultivating Strategic Alliances

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

Contractual

Separate legal entity

Significant matters of operating and financial policy are predetermined and “owned” by the JV

May or may not be contractual

Generally, not a separate legal entity

Significant matters of operating and financial policy may or may not be predetermined but are “owned” by the individual participants

Joint Venture Strategic Alliance

JV vs. Strategic Alliance

Exist for a specific time

Exist for a specific project or purpose

Limited with respect to future expectations

Indefinite life or a specific time

Fluid and allows for greater amounts of ambiguity

Joint Venture Strategic Alliance

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.

JV vs. Strategic Alliance

Companies remain independent

Companies A and B combine to form a new company C

Joint Venture Strategic Alliance

A B

C

A B

A

B

JV vs. Strategic Alliance

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

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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