Joint Ventures

and Strategic Alliances

Why

are more and more

corporations getting involved in
strategic alliances and joint
ventures?

Growing a Company
Theres 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

Strategic Alliances and Joint Ventures

Strategic alliances and/or joint ventures facilitate
increasing a companys scale, scope, and capabilities,
while minimizing the risk involved in a
merger/acquisition.
Increased numbers of strategic alliances and joint
ventures are being driven by suppliers responding to
corporate requirements tied to strategic sourcing,
contracts getting larger and larger due to industry
consolidations, and global competition.

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.

Business Process Reengineering

Long Term Relationship

Focus on Significant ValueAdded

Open Book

Mutual Dependency

High Level of Trust

Strategic Framework in Place

Win/Win (Mutual Advantage)

High Level of Commitment

Top Management Interchange

Increased
Capabilities/Capacities

Continuous Exchange of
Ideas

Enhanced Business
Opportunities
Improving Shareowner Value

Examples of a Strategic Alliance

Cooperative agreement
McDonalds and HAVI - sourcing, transportation,
distribution
Banking ATM Machines - service, maintenance,
collecting $
Outsourced arrangement
Licensed arrangement
Amoco and Halliburton - Coring tools

Examples of Best Practices for

Strategic Alliances

Cultivating Strategic Alliances

Objective:
To cultivate Strategic Alliances
with selected WBE suppliers.
ALLIANCE

PREFERRED
SUPPLIER
VENDOR
Closed Book
Little Differentiation in
Product/Service
Minimum Contract Life
Contract Drive
Focus on Lowest Price

11

STRATEGIC ALLIANCE

Mutual Dependency
Strategic Framework in Place
High Level of Commitment
Increased Capabilities/Capacities
Enhanced Business Opportunities
Improving Shareowner Value

Long Term Relationship

Open Book
High Level of Trust
Win/Win (Mutual Advantage)
Top Management Interchange
Continuous Exchange of Ideas
Business Process Reengineering
Focus on Significant ValueAdded

Longer Term Relationship

Trust Earned
Some Differentiation in
Products/Services
Quality Programs Implemented
Price & Quality Considered
Begins to Focus on Total Value

Types of Suppliers
Traditional Suppliers
Characterized by multiple sources of supply, emphasis
on price, and short term contracts.
Preferred Suppliers
Characterized by a high level of quality, delivery or
price competitiveness, positive reaction to unforeseen
needs, changes in volume or specifications. Preferred
suppliers take initiative to suggest better services or
products and provide advance notice of factors or
conditions that may affect operations.

12

Types of Suppliers (contd)

Alliance Suppliers
Characterized by longer term contracts for specific
products, services, and performance standards. Large
volume commitments and joint planning efforts are
common. An in-depth analysis of financial strength,
facilities, location, capacity, technology, labor,
management, costs, terms, conditions of performance,
and other factors would be completed for these
suppliers. Relationships with alliance suppliers should
be based on mutual trust, support, information sharing,
and joint continuous improvement efforts.

13

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 lawwhich varies from
state to state.
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.

15

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.
To operate under a JV, all parties have decided to keep core
business separate and limit interaction to joint operations.
16

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

17

Ownership Considerations
Ownership stake
Management allowances/restrictions
Resource sharing
Housekeeping
Quarrels

18

Ownership Considerations
To ensure success, each party should have some equity ownership or stake.
This must be spelled out to avoid disputes.
Parties must determine how each will nurture and care for their offspring. They
have to agree to strong commitment, expressing mutual obligations to each other
and the child. Must agree to avoid competing and act in good faith towards one
another. Must also agree to assist in procuring quality management and staff.
Must determine who or what body will direct operations of the JV and what will
those responsibilities be.
Establish role of parties in management. Voting procedures, authority for
expenditures, restrictions of parties, who can enter into agreements on behalf of
the JV, who can obligate the JV

Once the initial resource outlay is defined, must determine how to value and
assess the contribution. Each party must define extent of contributions and
valuation of those contributions.
Who will be the decision maker and on what matters? Will all parties have an
equal say? Or, will one party have a major say in a specific area?
How will internal/start up expenses be paid? Who will be in charge of accounts?
Who will be the external auditors, bankers, and other professional service
providers. Who will be the signatory on accounts.
Need to provide for disputes and how and where they will be resolved. Will it be
by conciliation or a from of arbitration?

19

Legal Considerations
Structure
Liability sharing and insurance
Rights, duties, and restrictions
Increase or decrease in JV scope
Ownership/licensing of intellectual properties
State/local laws/regulations
Withdrawal from JV

20

Legal Considerations
Most common structure is a LLC. The LLC is taxed as a partnership and pays no
federal income taxes. Profits and losses are passed through to members. Can
also be a corporation. Both arrangements shelter parties from direct liabilities.
Mutual indemnities between parties is critical. Same as 2 on previous page. Who
and how will operations be managed?
What activities can parties carry out exclusively vs. through the JV? What can
they carry out independently? What must they first offer to the JV?
What is the general scope of the JV? How can the JV decide to increase scope?
What is the impact on scope of activities on existing, proposed or potential
activities of parties?

Who will own the intellectual properties? Can parties license for use? Terms
must be defined. Will partys intellectual property be sold or licensed to the JV?
What are terms of each sale/license? Can parties use IP assigned to or created
by the JV for non-JV purposes? Under what terms and conditions?
Determine what applies and the impact on the JV. Sometimes, a constitution or
local articles must be drawn up in accordance with local laws to avoid disputes.

Provisions should be made for parties to exit honorably and amicably with
consequences fully spelled out and limits on what can or cannot be transferred to
an outside party.

21

Financial Considerations
Maintenance of accounting records
Control of bank accounts
Obtaining loans
Allocation of profits
Allocation losses
Withdrawal of funds

22

Financial Considerations
Who will have custody of account books, prepare periodic
financial statements, what statements will be prepared, what
accounting standards will apply?

Provisions must be made for obtaining external loans and to

which party is to source for such loans. Who can obligate the
JV?
Who will be signatories?

How will profits and dividends be distributed, and in what shares.

What % of net earnings will be retained as reserves and plowed
back into the business.
How to split of the proportion of responsibility in event of loss?
Can differ from how profits are split.
Who an withdraw? How much? Under what conditions? Impact
on ownership interests.

23

Tax Considerations
Fiscal year end
Inventory valuation
Capital gains tax
Accounting treatment
What would happen if intellectual property rights are
sold and enormous capital gains are realized? How will
this be handled?

24

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

25

The Separation
JVs usually have a predetermined end. The parties
come to a mutual end at a specific time. The
agreement should detail what would happened if the
union ends sooner than expected.
The agreement should spell out what specific
situations, actions, activities and the like that, if
occurs, will be cause for separation.
Sold, dissolved, adoptedwhat?

26

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

27

Differences Between Joint

Ventures and Strategic Alliances

JV vs. Strategic Alliance

Joint Venture
Contractual
Separate legal entity
Significant matters of
operating and financial
policy are predetermined
and owned by the JV

29

Strategic Alliance
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

JV vs. Strategic Alliance

Joint Venture

Strategic Alliance

Exist for a specific time

Indefinite life or a specific

time

Exist for a specific project

or purpose
Limited with respect to
future expectations

30

Fluid and allows for

greater amounts of
ambiguity

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.

31

JV vs. Strategic Alliance

Joint Venture

Strategic Alliance

A
A

Companies A and B
combine to form a
new company C

32

B
B

Companies remain
independent

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

33

Joint Ventures
and Strategic Alliances