Joint Ventures and International

Joint Ventures
 Joint Venture
• In a joint venture, two or more "parent"
companies agree to share capital, technology,
human resources, risks and rewards in a
formation of a new entity under shared
control.
• Most joint ventures involving fast growing
companies are structured as strategic
corporate partnerships
Important Factors Before a Joint Venture is
Formed
• Screening of prospective partners
• Joint development of a detailed business plan and shortlisting
of prospective partners based on their contribution to
developing the business plan
• Due Diligence- checking the credentials of the other party
– "trust and verify" - trust the information you receive from
the prospective partner, but it's good business practice to
verify the facts through interviews with third parties
• Special allocations of income, gain, loss or deduction to be
made among the partners
 International Joint Venture
• A Joint Venture is considered international if at least one
partner is headquartered outside the country of operation.
or
• if the venture operates significantly in more than one country.
• Hence, an IJV can be defined as inter company collaboration
over a given (international) economic space and time for the
attainment of mutually defined goals.
• Mostly IJVs are formed hence JV and IJV is used
interchangeably.
 Possibilities of International Joint
Ventures
Case Home Place of Home Place of Place of IJV Types of IJV
company A company B
1 India India India Domestic JV
Traditional IJV
2 India USA USA (Two countries
are involved)
Traditional IJV
3 India USA India (Two countries
are involved)

Trinational IJV
4 USA UK India (Three countries
are involved)
 Benefits from IJV
• Source knowledge globally:
– necessary resources not available within national borders,
so collaborative relationships to access the required
knowledge.
• Handle cross-border competition:
– Being located close to the competitors to capture
knowledge spillover.
• Enter in to new markets:
– Expansion into a market through a partner could be
preferable since it probably reduces the costs and risks
compared to expanding through FDI.
 Benefits from IJV
• Deal with technological complexity:
competence is not available domestically
• Seek geographical proximity: location-specific
advantages outside national borders
• Share the costs and risks of innovation:
collaboration and business networking can
allow SMEs to overcome their size constraints.
 Costs of IJVs

Organizational Strategic
Dependence
constraints gridlock
• Demands on • Limited • Loss of control
management's availability of over company
time partners destiny
• Difficulties in • Competition • Limited
rationalizing among appropriability
operations alliances of resources
 Why JVs fail?
• The philosophy governing expectations and objectives
of the joint venture is unclear.
• There's an imbalance in the level of investment and
expertise brought to the joint venture by the two
parent organizations.
• The senior leadership and management teams for the
joint venture receive inadequate identification,
support, and compensation.

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 Why JVs fail?
• The JV partners possess disparate, and often
conflicting, corporate cultures and operational styles.
• The JV's size is modest compared to the two parent
organizations.

• Among the most common causes of failure cited by

CEOs in the Conference Board study were:
– Poor or unclear leadership: 49%
– Different cultures: 49%
– Poor integration process: 46%
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 Model of IJV Survival

Time 1 Time 2

Control Imbalance +
Parental
· Ownership Conflict
· Management
-
IJV
- Survival
Foreign Parent Support + +
IJV
· Technical
Learning
· Management
 Strategy for Survival of IJV
• The philosophy governing expectations and objectives
of the joint venture should be clear.
• The level of investment and expertise brought to the
joint venture by the two parent organizations should
be adequate.
• The senior leadership and management teams for the
joint venture receive adequate identification, support,
and compensation.
• The parents’ culture and operational styles should not
conflict with JV’s culture and style.
Mergers and Acquisitions
 Merger
• Merger: when two or more companies, combine to
become one through exchange of cash or stock or both.
• Also called as amalgamation, consolidation, integration.
• Two ways of merger
– Consolidation: when the two firms dissolve their identities to
create a new organisation.
– Also adopted by large diversified firms to merge SBUs
– E.g. merger of PSBs in India
– Acquisition: one firm buys the assets and liabilities of
another firm
• Acquisition of Parle by Coca Cola
 Acquisition/Takeovers
• The combining of firms may take place either in a friendly
manner or in a hostile manner.
• Friendly
– When one firm is willing to sell out
– negotiated price mutually agreed upon by both the parties
• Hostile acquisition:
• Acquiring partial or whole of the equity capital of another firm
against the wish of that firm.
• Normally bought from the market.

• Also known as takeover.

 Takeovers
• Takeover targets:
– Where promoters’ stakes are very low
– Buying majority stake is easy
– High debt equity ratio
– Small equity may provide controlling stakes
– Shareholders unhappy with the returns
– Willing to sell out shares
 Acquisition Strategies
• Friendly: the firm willing to be acquired may get into
talk with multiple buyers to get the best price
• Hostile: by picking share from open market by making
attractive offers to existing shareholders
– Normally with the tacit help of large stakeholders like
financial institutions
– Political support plays crucial role
– Acquired company tries to forestall the move by legal routes
– May preempt the takeover and increase its stake to avoid a
bid
 Financial issues
• Valuation of the acquired firm is a critical,
detailed and complicated process
– Valuation of tangible as well as intangible assets
– Market value of shares, dividends paid, market
sentiments
– Integrity and quality of management
– Opportunity cost in terms of yields on comparable
investments
– Future prospects
 Financial issues
• Sources of financing the takeover:
– Own funds or borrowed funds
– Leveraged buyout or bootstrap: raising the funds
by pledging the assets of the firm to be taken over
• Taxation :
– capital gains;
– unabsorbed depreciation;
– amortization of expenses
 HR Issues
• Clash of work culture
• Differences in management styles
• Integration process is highly complex
• Resistance from personnel of acquired firm
• Low morale of dissatisfied employees

• A study of 102 companies following an acquisition

shows that, 26% of old employees were asked to
leave within one year and 61% within five years
 Legal aspects
• The Companies Act 1956 has no reference to either
merger or takeover; it only refers to amalgamation
(Sec 394)
• However Section 395 refers to transfer of shares
(takeover bids)
• Takeover code 1997: SEBI introduced a regulatory
framework to check the evil effects of hostile takeovers
by introducing transparency in the takeover process.
• The code was amended in 2002 to bridge the gaps
being misutilised by many predators.
 Benefits and disadvantages
For the acquirer:
• Resources, Synergy, growth, shareholder worth increases
• Shareholders doubt the success and market sentiments affected:
not all M&A could prove successful
For the acquired:
• Good price, funds released , new opportunities
• Loss of identity, diversion of funds to fight the takeover bid
Society :
• Revival of a low/non performing unit
• Benefits of scale
• Monopoly tendencies