Joint Ventures

and Strategic Alliances

Why…

… are more and more

corporations getting involved in
strategic alliances and joint
ventures?

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Growing a Company
 There’s 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

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Strategic Alliances and Joint Ventures
 Strategic alliances and/or joint ventures facilitate
increasing a company’s 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.

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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.

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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

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Other Characteristics of a Strategic Alliance

 May or may not be a  Business Process Re-

contractual arrangement, but engineering
this is always recommended.
 Focus on Significant Value-
 Long Term Relationship Added
 “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

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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

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Examples of Best Practices for
Strategic Alliances
 Cultivating Strategic Alliances

Objective:
To cultivate Strategic Alliances
with selected WBE suppliers.
VENDOR
• “Closed Book”
• Little Differentiation in
Product/Service
• Minimum Contract Life
• Contract Drive
• Focus on Lowest Price
PREFERRED
SUPPLIER
• Longer Term Relationship
• Trust Earned
• Some Differentiation in
Products/Services
• Quality Programs Implemented
• Price & Quality Considered
• Begins to Focus on Total Value
STRATEGIC ALLIANCE
• Mutual Dependency
• Strategic Framework in Place
• High Level of Commitment
• Increased Capabilities/Capacities
• Enhanced Business Opportunities
ALLIANCE • 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 Re-
engineering
• Focus on Significant Value-
Added

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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.

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Types of Suppliers (cont’d)
 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.

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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 law—which 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.

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 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.

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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

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Ownership Considerations
 Ownership stake

 Management allowances/restrictions

 Resource sharing

 Housekeeping

 Quarrels

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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?

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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

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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 party’s 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.

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Financial Considerations
 Maintenance of accounting records

 Control of bank accounts

 Obtaining loans

 Allocation of profits

 Allocation losses

 Withdrawal of funds

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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.

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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?

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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

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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, adopted…what?

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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

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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
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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
 Exist for a specific project
or purpose
 Limited with respect to
future expectations
 Indefinite life or a specific
time
 Fluid and allows for
greater amounts of
ambiguity

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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.

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JV vs. Strategic Alliance

Joint Venture Strategic Alliance

C A
A B
A B B

Companies A and B
combine to form a Companies remain
new company C independent

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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

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Joint Ventures
and Strategic Alliances