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.

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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.

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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
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difficult issues.
 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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