How Joint Ventures can be an alternative to M&A?

Introduction

  1. More and more business are focusing on inorganic strategy to increase growth as organic growth is simply difficult to come by.This is because business are in matured phases and most of the offerings provided by them are either commoditized or have low switching cost for customers
  2. When we think about inorganic strategy, the first thing that comes to our mind is acquisitions. The time taken to complete a M&A is long and at the same time there are more chances of failure in a M&A deal.Hence when the acquisitions fail, then the shareholders lose their value.This also places a huge stress on the management as they will get less support from the board to pursue another acquisition in future due to their prior track record.
  3. One alternate way to realize the same benefits to an acquisition is through Joint Ventures.

How are Joint Ventures different to a M&A

  1. In JV, participating companies come together to leverage each other capabilities. Around 20% of the JV are done for scale, where the participating companies come together to optimize their cost structures and gain scale.Remaining 80% of the JV are scope deals where the participating companies come together to leverage their complementary capabilities.
  2. The biggest benefit in a JV is the sharing of reward and risk among the parties.Parties can come together to form a JV to realize their strategic intent, access technology, skilled labor and in some cases to even enter a new market. Few JV are done in technology where one party comes with an IP and owns it where as the other party is responsible for sales and customer relationships .
  3. The percentage of ownership in a JV can also vary among the parties.The revenues are shared based on the ownership.JV can also be closed at any time after one of the partner does not see any benefit for itself and other party.
  4. On the other end, Acquisitions generally emphasizd on negotiations between the buyer and seller, where as JV remains in existence only when all the participating companies see any benefits in it.

Challenges in Joint Ventures

  1. It cannot be assumed that all JV are successful and provides benefits to all its parties.
  2. In case of a JV, even when one party is not happy with the operating model and does not see any benefits, then the entire JV structure can break.JV strategy can also be changed at any point of time.The governance structure of a JV is extremely important and hence the governance model needs to be flexible and change as per the market requirements.
  3. Selecting a right partner for a Joint venture is extremely critical and requires due diligence. With the selection of a wrong partner, the entire JV structure can collapse.

Some of the business that use JV is in texhnology/digital services, Automotive and in Airline space.

  • Due to the increasing protectionism resulting in trade wars, cross border business deals have become more difficult.As companies find difficult to execute cross border transactions, Joint Ventures are commonly used, where an international business leaders has a JV with local business player of that market to sell their services and generate revenues.
  • China is one case where more cross border deals happen through JV.The biggest use case is in Electric vehicles segment where US and European auto companies have partnered with local Chinese companies to manufacture Electric vehicles.More business are structuring JV in each region where they partner with local companies to gain access to the local market and increase revenues.

Conclusion

  1. Joing ventures can be used as an alternative way for participating companies to generate growth by leveraging each other complementary capabilities
  • As Joint Ventures are less costly and risky, compared to acquisitions, a JV done well can really benefit all the participating companies.In businesses trying to enter or strengthen its position in a new market, Joint Ventures by partnering with local companies can be an excellent strategy.
  • Success in JV depends on the co-operation among the participants and how well the strategic rationale benefits all the parties.If even one of the party does not see a value in JV, then it can exit which puts the entire JV construct at risk.
  • An acquisition can end up being successful to either buyer or seller, but JV should address the expectations and benefits of all the parties involved.
  • Strategic intent for which a Joint venture was formed need not be relevant in future due to changes in business and technology environment. Hence JV can be closed at any point of time, when it does not aligh to the changing marketing forces.
  • JV has a far higher success rate compared to acquisition as participants can leverage each other capabilities but at the same time does not lose its identity/its unique culture.


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