Hi,
I want to know from a point of view of case interviews how a joint venture(JV) works between two companies and under what circumstances should one prefer JV over acquisitions or starting from scratch?
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Joint Venture
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Hi Ashutosh,
A joint venture is a subsidiary, jointly funded by two separate companies. The two companies act as partners and channel both know-how as well as capital into that subsidiary. It is important to note, that the joint venture acts autonomously and in most cases independently. Goals and expectations of both partners should be clearly defined and communicated upfront in order to avoid misunderstandings.
The advantages of a joint venture are as follows:
- Shared risks (it makes sense to enter into a joint venture whenever the risks of operating on your own in a given market are too high)
- Increased synergies through use of resources of both partner-companies (it makes sense to enter into a joint venture whenever you lack certain resources, i.e. skills, experience or capital, to operate sustainably in a given market)
Sometimes you also have legal barriers requiring to set up a joint venture: China is a good example: Until very recently the Chinese government did not allow foreign investors to operate in China independently but only through cooperations with Chinese companies, i.e. through joint ventures in which the foreign investor was not allowed to own more than a 50% stake. However, this rule is now about to be dropped.
Hope this helps!
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Hi Ashutosh,
I agree with Dorothea; I would also consider the following as further elements of advantage of Joint Venture compared to M&A or starting from scratch:
- Time efficiency – setting a JV is generally faster than doing everything from scratch. It could also be faster than M&A, although that depends by the type of merger
- Lower initial investment – since you share both revenues and costs, the initial investment will be lower
On the negative side, gains will be more limited with this option compared to starting from scratch or M&A, since by definition there is a sharing agreement in place. The client will also have less general control over the business activities.
Best,
Francesco
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Agree with both Dorothea and Francesco. Just remember to compare the JV scenario vs the Wholly Owned Company or M&A scenario, if possible with numbers (expected returns of each scenario and estimated CAPEX). While the CAPEX and risks can be shared (which is a positive thing), usually what will make the difference will be the synergy gains since the profits will be also shared.
While skills, know-how, and assets will be the general elements behind the synergies, there are other intangibles that can be considered in certain markets: geographical presence, government relations, company reputation, etc.
There are also some risks inherent in most of the JV's: regulatory changes, asymmetry of power, not having the possibility to exit or expand the business as desired, and dissonance in the long-term (you might have the same goals and expectations today but you cannot assure this will be the same in 5 years).
Hence, the gains of the JV have to be considerable vs the other scenarios, or JV should be the only viable option based on external factors (regulation and market nuisances).
All the best,
Patricio
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