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JOINT VENTURES

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STRATEGIC PARTNERSHIP

The alternative to M&A is strategicpartnership wherein two or more firmsdevelop a relationships that combines theirresources, 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 ormore companies jointly share resources,capabilities or distinctive competencies toachieve some business goals. These alliances

may be aimed at world market dominancewithin a product category. While the partnersco-operate within the boundaries of thealliances relationship, they often severely

compete in other parts of their businessoperations.

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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 ormore firms enter a legal contract for aspecific business purpose. Long termcontracts are common between a buyer and

a supplier. Many strategies consider longterm contracts more flexible and lessinhibiting than vertical integration.

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JOINT VENTURES

Joint ventures involve the creation of a thirdentity, representing the interests and thecapital of partners involved.

Such partnerships are typically focused on aspecific market objective.

As a part of the joint venture agreement,ownership, operational responsibilities andfinancial 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.7

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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 ofarrangement for managing the joint venturecompany.

Clear assignment of responsibilities to all fulltime directors.

BODs should be nominated by the majorityshareholders.

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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 expansioncosts.

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ISSUES REGARDING TRANSFER OFSHARES

Degree to which the participation of thepartners is transferable in terms ofshareholding.

Issues related to pre-emptive rights in caseof transfer of shares to a third party.

Transfer of shares if the joint ventures windsup in case one of the parties intends to sellthe whole shares.

Intra- group transfer issues.

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Issues relating to the transfer of shares incase one of the parties turns out to beinsolvent.

Transfer of shares if one of the partnersbecome liable for breach of the joint ventureagreement.

Price of shares in case of transfer.

Issues related to naming the joint venture incase of change in shareholding pattern.

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ISSUES RELATED TO TERMINATION

Recognizing situations in which the jointventures is automatically terminated or caseswhere one of the partners is entitled toterminated the joint venture.

Preparation for termination.

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CONTINGENCY ISSUES

Alternation in government regulations andpolicies.

Changes in competition scenario and marketforces.

Requirement of more funds.

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COMMERCIAL ISSUES

Limitation and scope of activity location andspread, offices under consideration,operation of office activities, profit centers,etc.

Rights of exports and imports.

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REASONS FOR FAILURE OF JOINTVENTURE

The expected technology never developed.

Inadequate preplanning and lack of time andcommitment in implementing the project.

Agreements could not be reached onalternative approaches to solve the basic.

Managers with experience in one companyrefuse to share knowledge with theircounterparts in the joint venture.

Management difficulties may becompounded because of inability of parentcompanies to control or compromise ondifficult issues.

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Critical issues of public policy and long-termstrategies of individual business firms mayarise in joint ventures.

Profitability of foreign operations.

Taxability characteristics of joint ventureproducts.

Importance of financial and other conflictsand above all inability of the parentcompanies to share control or compromisedifficult issues.

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