alliances
TRANSCRIPT
Joint Venturesand Strategic Alliances
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… are more and more corporations getting involved in
strategic alliances and joint ventures?
Why…
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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.
Basic Components of a Strategic Alliance
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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 contractual arrangement, but this is always recommended.
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
Mutual Dependency
Strategic Framework in Place
High Level of Commitment
Increased Capabilities/Capacities
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
Examples of Best Practices forStrategic Alliances
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STRATEGIC ALLIANCE• Mutual Dependency• Strategic Framework in Place• High Level of Commitment• Increased Capabilities/Capacities• Enhanced Business Opportunities• Improving Shareowner ValueALLIANCE
• 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
PREFERREDSUPPLIER• Longer Term Relationship• Trust Earned• Some Differentiation in
Products/Services• Quality Programs Implemented• Price & Quality Considered• Begins to Focus on Total Value
VENDOR• “Closed Book”• Little Differentiation in
Product/Service• Minimum Contract Life• Contract Drive• Focus on Lowest Price
Objective: To cultivate Strategic Alliances with selected WBE suppliers.
Cultivating Strategic Alliances
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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.
Basic Components of a Joint Venture
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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
Differences Between Joint Ventures and Strategic Alliances
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JV vs. Strategic Alliance
Contractual
Separate legal entity
Significant matters of operating and financial policy are predetermined and “owned” by the JV
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
Joint Venture Strategic Alliance
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JV vs. 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
Joint Venture Strategic Alliance
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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
Companies remain independent
Companies A and B combine to form a new company C
Joint Venture Strategic Alliance
A B
C
A B
A
B
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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
Joint Venturesand Strategic Alliances