Joint ventureJoint venture is a separate business entityParticipants continue as separate firmsMay be organized as partnership, corporation, or any other form of businessFormal long-term contract of 8 to 12 years durationA 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

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

Factors for Joint Venture SuccessAccurate 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 VentureGood communication, cooperation and coordination among partnersCommon goals and shared vision among partnersDedication towards the success and long term sustainability of the JVProper sharing of profits and benefits among partnersJV should work towards the benefit of all the partnersProper planning and research prior to the incorporation of the JV

2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston

Characteristics of joint venturesLimited scope and durationGenerally involve only two firmsEach participant offers something of valueJoint production of single productsRight of mutual control or management of enterpriseRight to share in cash flows of the enterpriseLimited risk

2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston

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

Joint Ventures in Business StrategyGoals/objectives of joint venturesRisk sharingEach participant diversifies riskReduces investment cost of entering risky new area

2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston

Knowledge acquisition learning experience for both partnersShared technologyShared managerial skills in organization, planning, and controlSuccessive integration joint venturing as a way to learn about prospective merger partnersEntry into new, expanded, foreign marketsAugments financial or technical capabilitiesReduces riskForeign country may require joint venture with local partner E.g. ICICI & Lombard

2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston

Financing to raise capitalShare investment expenseSmall company has product idea but no cashJoint venture with large company that has cash to develop productDistribution/marketingTo obtain distribution channelsTo obtain raw materials supply

2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston

More favorable tax/political treatmentForeign venturesLong-run strategic planning spider's web strategyProvide countervailing power among rivalsSmall 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

Tax aspects of joint venturesContribution of a patent or licensable technology to a joint venture may have better tax consequences than a licensing arrangement with royaltiesExamples:One partner contributes technologyOther partner contributes depreciable assetsDepreciation offsets revenuesJoint venture ends up with lower tax rate than any of its partnersPartners pay deferred capital gains if/when venture is terminated

2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston

Other tax aspectsLimitation on operating loss carryoversPartnership status of unincorporated commercial joint venturesUse of equity method in consolidating joint venture into partners' financial statementsBenefit of multiple surtax exemptions

2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston

Reasons for failureInflexibility problems similar to other long-term contractsImplementation requires substantial commitments of managerial resourcesJoint ventures do not last as long as plannedAbout 70% are disbanded before scheduled maturityOn 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

Reasons for disbanding joint venturesInadequate preplanningTechnology did not develop as expectedDisagreement between parties on approaches to joint venture objectivesRefusal to share knowledge with counterparts in venture firms wants to learn as much as possible but not to convey too muchInability of parent companies to share control or compromise on difficult issues

2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston

Advantages of a JVHelps an organization to enter in to new markets or new product linesAccess to increased resources and improved expertise & technologyHelps to build credibility with a particular target market by choosing a well established and credible partner in that marketReduces 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

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 JVThere can be an imbalance in levels of expertise, investment or assets brought into the venture bythe partners

2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston

Eg Hero Honda Maruti Suzuki .

2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston