JOINT VENTURE

A joint venture (JV) is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets. When two companies invest funds into creating a third, jointly owned company, that new subsidiary is called a joint venture. Because the joint venture can access assets, knowledge and funds from both of its partners it can combine the best features of those companies without altering the parent companies. The new company is an ongoing entity that will be in business for itself, but profits are owned by the parents. There are other types of companies such as JV limited by guarantee, joint ventures limited by guarantee with partners holding shares. With individuals, when two or more persons come together to form a temporary partnership for the purpose of carrying out a particular project, such partnership can also be called a joint venture where the parties are "co-venturers". Some major joint ventures include Dow Corning, MillerCoors, Sony Ericsson, Penske Truck Leasing, Norampac, and Owens-Corning. A joint venture takes place when two parties come together to take on one project. In a joint venture, both parties are equally invested in the project in terms of money, time, and effort to build on the original concept. While joint ventures are generally small projects, major corporations also use this method in order to diversify. A joint venture can ensure the success of smaller projects for those that are just starting in the business world or for established corporations. Since the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project, as well as the resulting profits. Since money is involved in a joint venture, it is necessary to have a strategic plan in place. In short, both parties must be committed to focusing on the future of the partnership, rather than just the immediate returns. Ultimately, short term and long term successes are both important. In

order to achieve this success, honesty, integrity, and communication within the joint venture are necessary.

Advantages and Disadvantages of Joint Venture

Entering a joint venture is a complex, and sometimes, time consuming process. As any type business structure, it holds a good opportunity for anyone to grow and make money fast; but just like any other business type, joint venture also holds threat to anyone who wants to enter. Discussed below are the advantages and disadvantages of entering a joint venture.

Advantages of Entering a Joint Venture: Accessing additional financial resources - Asset sharing is one of the best advantages about joint venture. Since, you are able to use larger funds to facilitate the production and operation of projects and products, you facilitate growth. In other words, you increase profit margin and increase your revenue potential. Sharing the economic risk with co-venture - It pays to have someone sharing the responsibility with you in case you end up in deep troubles. This is also true with joint venture. Since you are sharing assets, the risk of losing a great deal of money is divided to both parties.

Widening economic scope fast Building reputation is often difficult, not to mention time consuming and expansive. At a joint venture, you are able to widen your economic scope without spending too much money and waiting for a long time. Tapping newer methods, technology, and approach you do not have In order to grow and expand, you need resources in the forms of methods, technology, and approach. For that matter, it would help a lot if you will be able to partner with an entity that presently has the things you dont and the things you need. Joint venture opens up the venue for such need.

 Building relationship with vital contacts Aside from economic territory, another advantage of joint venture is the ability to give you business relationships with vital contacts. This is just like automatically befriending your partner's influential friend that can give you access to lots of things such as business opportunities and a pass to vital information.

Disadvantages of Entering a Joint Venture: Shared profit Since you share assets, you also share the profit. The profit of both parties usually depends on the size of the share to the venture or may be defined on the agreement. Diminished control over some important matters - Operational control and decision making are sometimes compromised in joint ventures. Since there is an agreement that divides which one will take over a particular operation, the other may not be satisfied with how the things are worked out with another. This leads us to another disadvantage of a joint venture... Undesired outcome of the quality of the product or project Since one party may not have control on the supervision of the production or the execution of one part of the system, this can happen. This often leads to disputes and lawsuits. To avoid this, both parties agree on specific details about the whole operation process. Uncontrolled or unmonitored increase in the operating cost Again, defined control over the operation may lead to this disadvantage. It is important therefore to make sure that all things are clarified on the paper before singing in the joint venture agreement.

Making money by entering a joint venture is easy provided that you know exactly what you are doing. With these advantages and disadvantages presented, you are clearly aware of the things that await you.

Examples of Joint Venture

Sony-Ericsson is a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones. The stated reason for this venture is to combine Sony's consumer electronics expertise with Ericsson's technological leadership in the communications sector. Both companies have stopped making their own mobile phones. This joint venture agreement is no more available.

Virgin Mobile India Limited is a cellular telephone service provider company which is a joint venture between Tata Tele service and Richard Branson's Service Group. Currently, the company uses Tata's CDMA network to offer its services under the brand name Virgin Mobile, and it has also started GSM services in some states.

STRATEGIC ALLIANCE

A strategic alliance is an agreement between two or more parties to pursue a set of agreed upon objectives need while remaining independent organizations. This form of cooperation lies between Mergers & Acquisition M&A and organic growth. Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization, shared expenses and shared risk. When companies want to quickly gain a new area of expertise or access to new technology or markets, they usually have two options: buy a smaller company with those assets or form a strategic alliance with another company that would benefit equally from the partnership. These agreements often have a limited scope and function, such as trading access to a strong brand for access to an emerging technology.

Types of Strategic alliance

One typology of strategic alliances conceptualizes them as horizontal, vertical or inter-sectoral:

Horizontal strategic alliance: Strategic alliance characterized by the collaboration between two or more firms in the same industry, e.g. the partnership between Sina Corp and Yahoo in order to offer online auction services in China;

Vertical strategic alliances: Strategic alliance characterized by the collaboration between two or more firms along the vertical chain, e.g. Caterpillar's provision of manufacturing services to Land Rover;

Intersectoral strategic alliances: Strategic alliance characterized by the collaboration between two or more firms neither in the same industry nor related through the vertical

chain, e.g. the cooperation of Toys "R" Us with McDonald's in Japan resulting in Toys "R" Us stores with built-in McDonald's restaurants.

Another typology distinguishes between four forms of strategic alliances: joint venture, equity strategic alliance, non-equity strategic alliance, and global strategic alliances:

Joint venture is a strategic alliance in which two or more firms create a legally independent company to share some of their resources and capabilities to develop a competitive advantage.

Equity strategic alliance is an alliance in which two or more firms own different percentages of the company they have formed by combining some of their resources and capabilities to create a competitive advantage.

Non-equity strategic alliance is an alliance in which two or more firms develop a contractual-relationship to share some of their unique resources and capabilities to create a competitive advantage.

Global Strategic Alliances working partnerships between companies (often more than two) across national boundaries and increasingly across industries, sometimes formed between company and a foreign government, or among companies and governments.

Advantages and Disadvantages of Strategic alliance

The advantages of forming a strategic alliance include:

Allowing each partner to concentrate on their competitive advantage. Learning from partners and developing competencies that may be more widely exploited elsewhere.

Adequate suitability of the resources and competencies of an organization for it to survive. To reduce political risk while entering into a new market.

Disadvantages of Strategic alliance:

Risk of losing control over proprietary information, especially regarding complex transactions requiring extensive coordination and intensive information sharing.

Coordination difficulties due to informal cooperation settings and highly costly dispute resolution.

Agency costs: As the benefit of monitoring the alliance's activities effectively is not fully captured by any firm, a free rider problem arises (the free rider problem seems to be less pronounced in settings with multiple strategic alliances due to reputational effects).

Influence costs because of the absence of a formal hierarchy and administration within the strategic alliance.

Overview of Microsoft and Nokia Strategic alliance for Mobile development

In recent decades technology has reached on its boom, world saw various new gadgets in previous years. Ranging from Tablets to Smart phones there are several techno devices to talk about. Coming towards the mobile development platform, Nokias Symbian was a name that along with BlackBerry OS remained hot for quite a long tenure. Apples iPhone and Googles Android development platforms captured attention of the world in last 5 years and marginally snatched the mobile market share from Symbian, BlackBerry and other mobile development platforms. Broad changes were noticed in recent years that changed the mobile app development sector all together. While iPhone is the widely-and-wildly-loved Smartphone, Android based Smart phones on the other hand are famous for the usage of open source development technology along with availability of affordable apps. Microsoft also entered into mobile development sector in recent years and tried to capture market share which somehow couldnt be done as it was supposed to. Various researches and surveys around the globe have already proved that peoples love for Smartphone has been increased marginally and it will keep rising in upcoming years. These trends helped mobile app development industry to generate quite handsome revenues. Recent

strategic alliance of Microsoft and Nokia has opened a brand new chapter in the history of mobile app development. Microsoft and Nokia expect to create a new global mobile ecosystem; to compete the most famous Android and iPhone mobile app development platforms to talk in simple words. By this new alliance Windows Phone technology will be adopted by Nokia as its principal Smartphone strategy. This again opens a new horizon for mobile app developers. Demand for Windows Phone mobile apps will marginally increase now; giving a chance to mobile app developers to provide quality Windows Phone app development services for earning lucrative amount. This can really be proved as a new mobile development trend setter strategy. To be successful in this new alliance Microsoft and Nokia should adopt particularly 1 main thing from each Android and Apple development environments: Consistency from Apple and Affordable rates from Android.

Difference between Joint Venture and Strategic alliance

A union of two or more parties who contractually agree to contribute to a specific task for specified time period. Under JV two firms join and form a separate legal entity and operate as per partnership Act. The JV can be between individuals or corporations. While Strategic Alliance is mutual Coordination of strategic planning and management in order to achieve long term objectives between two organizations. Under this, each organization will work independently and no separate entity is formed. SA is considered as less risky due to less legality.

Joint ventures and strategic alliances allow companies with complementary skills to benefit from one another's strengths. They are common in technology, manufacturing and commercial real estate development, and whenever a company wants to expand its sales or operations into a foreign country. In a joint venture, the companies start and invest in a new company that's jointly

owned by both of the parent companies. A strategic alliance is a legal agreement between two or more companies to share access to their technology, trademarks or other assets. A strategic alliance does not create a new company.

Uses

Both forms of partnership can be used to transfer technology, assets and knowledge between complementary companies. Strategic alliances are usually undertaken to allow each company to pursue a new market, product or strategy that they can't manage on their own. Joint ventures are often used to shield the parent companies from the risk of a new venture failing; if the new product flops, the joint venture can go bankrupt without harming the parent company except to the extent of its investment. Some countries require that all companies that do business within their borders be at least partly owned by citizens of that country. In this case, a foreign company can start a joint venture with a domestic company to comply with the law.

Example

In July 2011, Facebook announced a strategic alliance with Skype, which had been recently acquired by Microsoft. This allowed Microsoft to quickly move into the social networking space, Skype received access to a large number of new users and Facebook could leverage Skype's technology to enable video chat without making the investment in building it. By contrast, Dow Chemical formed a joint venture that same month with Japanese firm Ube to create a factory for a particular high-tech battery. They will share the technology and the risk of new product development.

Case study:Jet Airways announces strategic alliance with Etihad Airways

Jet Airways on Wednesday announced a strategic alliance with Etihad Airways, saying it would sell 24% stake to the Abu Dhabi-based carrier for about Rs 2,058 crore, marking the first investment by a foreign carrier in an Indian airline since the change in FDI policy. Bringing curtains down on almost six months of tough negotiations, top officials including Jet promoter Naresh Goyal and Etihad President and CEO James Hogan, announced the strategic equity alliance in Abu Dhabi under which the Indian private carrier would sell 27.26 million shares in a preferential offer to Etihad at Rs 754.74 a piece. "The value of this equity investment is USD 379 million (about Rs 2,058 crore) and will result in Etihad Airways holding 24% of the enlarged share capital of Jet Airways," a joint statement by the two airlines said. The deal is subject to shareholders' nod and conditions precedent including regulatory approvals. The two airlines claimed that their alliance would lead to Indian passengers from 23 cities to gain direct access to an expanded global network. Jet would also enhance its services from its primary hubs of Delhi and Mumbai and introduce new flights from Hyderabad and Bangalore. The new India-Abu Dhabi routes and Jet Airways would "establish a Gulf gateway for flights to the US, Europe, Africa and the Middle East," the statement said, adding that their combined global network would cover over 140 destinations. It said the strategic alliance would bring additional traffic, frequencies and revenues to metro airports, as well as other airports of Airports Authority of India and bring "significant benefits to the Indian economy."

"Substantial ownership and effective control will remain with Indian nationals, with Goyal as non-executive Chairman holding 51 per cent of the company," the statement said. Goyal, who was earlier bitterly opposed to opening up of FDI participation for foreign airlines, was the first to move immediately after the government allowed international carriers to pick up a maximum of 49 per cent stake in domestic airlines last September. Giving details of the deal, the statement said, "This strategic investment with a USD 600 million commitment from Etihad Airways will help further strengthening of Jet Airways' financial position."

Etihad would also inject USD 220 million to create and strengthen a wide-ranging partnership between the two carriers, including a strong codeshare arrangement. As part of the deal, Etihad has already paid USD 70 million in February to purchase Jet's three pairs of Heathrow slots through the sale and lease back agreement. Jet Airways continues to operate flights to London utilising these slots. Etihad would also invest USD 150 million "by way of a majority equity investment in Jet Airways' frequent flyer programme 'Jet Privilege', subject to regulatory and corporate approvals and final commercial agreements. These are expected to be completed within the next six months, it said.

"I have no doubt that this partnership with Etihad Airways is a win-win situation for all our stakeholders, especially our guests, who will now have access to a much expanded global network," Goyal said in the statement. "This transaction further strengthens the balance sheet of Jet Airways and, more importantly, underpins future revenue streams, which will accelerate our return to sustainable profitability and liquidity," the Jet promoter said. Hogan said the deal was "expected to bring immediate revenue growth and cost synergy opportunities, with our initial estimates of a contribution of several hundred million dollars for both airlines over the next five years." "The Indian market is fundamental to our business model of organic growth partnerships and equity investments. This deal will allow us to compete more effectively in one of the largest and fastest-growing markets in the world," the Etihad chief said.

This will be first deal since the government in September last year allowed foreign carriers to buy up to 49 per cent stake in local airlines. A stake in Jet Airways will help Etihad tap into one of the fastest-growing aviation markets in the world, where air travel is forecast to triple by 2021. For Jet, the deal will provide Jet with cash to retire debt that totalled USD 2.3 billion at the end of March. The Indian carrier, which had 116 aircraft, is selling and leasing back planes to free up cash and repay USD 600 million debt. Last month, Malaysia's AirAsia Bhd won approval to start a budget airline in a joint venture with Tata Sons and another local company.

The two deals would help breathe fresh life into India's aviation industry where competition is stiff and operating costs high. Bank of America Merrill Lynch and Credit Suisse advised Jet on the deal, while HSBC was the adviser for Etihad.

Case Analysis and Interpretation:-

It is good news on multiple counts as Abu Dhabi-based Etihad Airways has agreed to inject Rs 2,054 crore ($379 million) into Jet Airways. The massive investment in Indian civil aviation will translate into value for passengers, too. Overseas carriers can offer expertise, connectivity and convenience, besides funds. Simultaneously, it indicates intense competition among Indian carriers, at a time when they show some signs of emerging from the red. Aviation analysts say Jet would benefit from Etihads strategic expertise, cheap financing and possible fuel import benefits in addition to the capital injection. The two airlines claimed that their combined global network would cover over 140 destinations and provide direct foreign connectivity to Indian passengers from 23 metro and non-metro cities.

Etihad has been on an acquisition spree to compete with other Gulf airlines, mainly Dubai-based Emirates and Qatar Airways. It has negotiated stake purchases in four foreign airlines, including Air Berlin, Virgin Australia, Aer Lingus and Air Seychelles.

Last year, Etihad was ranked as one of the best airlines in the world by World Travel Awards. The awards are considered the Oscars of the travel industry.

Bank of America Merrill Lynch and Credit Suisse advised Jet on the deal, while HSBC was the adviser for Etihad.

Deal:Under the agreement, Jet and Etihad will explore joint purchasing opportunities for fuel, spare parts, equipment and catering supplies as well as external services such as insurance and technology support. This will be a major cost-saver for Jet, which has been reeling under high fuel costs.

Impact of such strategic alliance: On Jet Airways; Stake sale to bring much needed fresh capital, help reduce debt marginally Could now offer an alternative route for Indian passengers to fly to other West Asian, African cities and US, as well as Europe, apart from its current hub in Brussels. Can leverage Etihads strong presence in Europe by bringing in Indian passengers through Abu Dhabi. On Etihad; Strategic investment enables Etihad to tap into Indias fast-growing 42 million strong travel markets. Will help it to expand its limited footprint in India and make Abu Dhabi an alternative hub (apart from Dubai) for Indians travelling to US and Europe. Could tap passengers to fly to Abu Dhabi and onwards to the US or Europe now from over 53 cities from where Jet has services.

Comparison between Jet and Etihad:-

Effect of this strategic alliance on Air India and low cost carriers:

Analysts say alliance will have an adverse impact on Air India's business in the Middle East, US and Europe. Domestic LCCs say a code share between the two in domestic skies could have an adverse impact on their business.

Impact on Investors:

Long-term investors should stick to the shares of Jet as the company's more profitable international business will receive a major boost due to the synergies involved in Etihad checking in as a strategic investor.

Shares in Jet Airways were trading up nearly 13% after gaining as much as nearly 20% intraday.

Win-Win situation for passengers:-

Aviation sector experts say the deal will benefit passengers as increased competition will bring down air fares. According to Captain Gopinath, the founder of erstwhile Air Deccan, the increased competition will lead to low air fares, besides bringing about improvement in the passenger amenities.

The agreement will allow Jet passengers from 23 Indian cities to gain access to an expanded global network. The Indian carrier will enhance services from Delhi and Mumbai and introduce flights from Hyderabad and Bangalore. Jet, which serves 125 locations, including Abu Dhabi, Bahrain, Doha, Dubai, Jeddah, Kuwait and Muscat in the Gulf region, agreed in December to expand a code-share pact with Etihad, which operates services to nine Indian locations.

Fuel cost:-

India increased traffic rights for Abu Dhabi to 50,000 weekly seats from around 13,000 seats at present. This will enable Jet to use Abu Dhabi as a hub and connect Indian travellers to Europe and North America where Etihad has a strong presence. Using Abu Dhabi as a hub will also reduce Jets fuel costs since it would get ATF at a cheaper rate in the oil surplus country. Fuel costs account for 42% of its net sales. Governments role:Media reports say the Indian governments involvement, including recent visits to the United Arab Emirates by finance minister P. Chidambaram and others, helped to assuage the worries of Etihad. Not just Chidambarams visit, there has been government-to-government talks at various levels.The UAE wanted some assurances, which the Indian government has given them.

Last year, India decided to allow up to 49% foreign ownership of airlines as part of reforms to help revive a slowing economy.

Future of Aviation :The deal sets a valuation benchmark for further investment in Indian airlines, with budget carrier SpiceJet Ltd frequently the subject of stake sale reports. IndiGo, the biggest carrier by domestic market share, is eventually expected to launch an initial public offering.

Malaysia-based AirAsia, Asia's biggest budget carrier, plans to launch a domestic start-up airline in India later this year through a joint venture with the Tata conglomerate. The planned airline is in the process of seeking permissions from various regulatory bodies for an airline licence. The airline is expected to be set up with an initial investment of $50 million.