What is Joint Venture (JV)?
Joint venture is a commercial arrangement between the two or more than two parties in which the parties come together to pool their assets with the objective of completing the specific task where each of the parties has joint ownership of the entity and is responsible for the costs, losses or profits that arise out of the venture.
When two or more business entities come together to achieve a common purpose, it’s called a joint venture.
- It can be for a singular purpose or can be an on-going purpose.
- In a JV, the business entities share their resources, assets, equity to make the venture successful. While getting into the JV, they also sign an agreement that binds them to share the results of profit/loss, management, etc.
- Sometimes, two or more business entities come together and form a new entity altogether for their JV. In that case, they call it partnerships, corporations, or limited liability companies.
- Sometimes, these business entities keep their own individual identity and go for a JV agreement.
- In most cases, the JV is initiated to achieve a single purpose like research or production of certain products. But JV can also be formed for an on-going purpose.
In this section, we will look at a few real-life examples of Joint VentureReal-life Examples Of Joint VentureA joint venture is a commercial arrangement between two or more parties in which the parties pool their assets with the goal of performing a specific task, and each party has joint ownership of the entity and is accountable for the costs, losses, or profits that arise out of the venture..
#1 – Google’s Verily Life Sciences – GlaxoSmithKline Example
Google’s parent companyParent CompanyA holding company is a company that owns the majority voting shares of another company (subsidiary company). This company also generally controls the management of that company, as well as directs the subsidiary's directions and policies. Alphabet and GlaxoSmithKline, announced that they would associate themselves with a joint venture in the ratio of 45%-55% to produce bioelectronic medicines. Both of these companies got committed for 7 years and Euro 540 million.
#2 – Volvo Uber Example
Recently, Volvo and Uber have announced that they would form a joint venture to produce self-driving cars. The ratio would be 50%-50%. As per the agreement, they are making a $300 million investment for this JV.
#3 – Bank’s Digital Currency Example
Recently, even banks formed a joint venture to create something new. Four world-class banks – Deutsche Bank, UBS, BNY Melon, and Santander, came together in a JV to produce a new form of digital cash. The purpose of this JV is to create an alternative to the bitcoin using the same blockchain technology.
#4 – Starbucks and Tata Global Beverages
The best example of a Joint venture is between Starbucks Corporation and Tata Global Beverages. Starbucks Corporation, a chain store of the USA serving coffee and such other drinks, pre-packaged foods, and evening drinks. It is famous for its coffee throughout the globe. Tata Global Beverages is the world’s second-largest producer of tea throughout the world and one of the largest producers of coffee in the world.
Tata Global Beverages leveraged the goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price. that Starbucks holds for the coffee serving retail chains and captured the market of India by forming a Joint venture with Starbucks. Both firms came together and created a private limited company named as Tata Starbucks limited in 2012. It is 50:50 owned by both the firms, and presently they have around 140-retail outlets throughout the Indian Territory.
Here, the basic model is that one is having expertise in tea manufacturing and tea production, while the other is having a brand image in the market of serving the coffee at the retail level in the market. And this combination is presently a good success in the market.
As we can see, there’re many advantages of a joint ventureAdvantages Of A Joint VentureFew advantages of the joint venture include the generation of economies of scale, better innovation in the product and services, access to more and better resources, expert staff and latest technologies, competitive advantage and synergies in operations, lower cost of production and efficient price of products.. Let’s have a look at the top advantages of forming a JV –
- Advanced resources: The idea of the JV is to combine the strengths of each unit in such a way that the weaknesses of both of these units get subsided. As a result, every unit is able to use advanced and more specialized resources, staff, and technologies.
- Risks and costs are distributed: In business, every company has to bear its costs and risks. But in the case of a JV, two or more parties share the risks and costs as per the agreement. As a result, the chances of failure get reduced to a large extent.
- Temporary agreement: A company has a perpetual entity. But in the case of JV, two or more companies come together for a temporary joint venture agreement to produce something new. As a result, none of the companies is bound in the commitment for a long period.
- Form long-lasting business relationships: Even if the JV is a temporary arrangement, by associating with a business or two, you’re able to form long-lasting business relationships with other associates.
- You will be able to sell your portion: 80% of all JV end up in a sale. When two or more companies form a JV, it’s for a particular purpose. Once the purpose is served, one company can sell the part of its share to another partner.
- Your potential would be unlimited: Since you would be able to use resources, technologies, staff to an optimum level, the production capacity and the potential of the venture would be almost unlimited. The only thing that is required is proper due diligence.
As there are many advantages of going into a JV, there are also some disadvantages of joint ventures. Let’s have a look at those –
- No equal involvement: It often happens that while running the JV, the involvement of two or more companies isn’t. As a result, there can be discrepancies and commitment issues.
- Cultures are completely different: Since two or more companies would come together in a single setting, a clash among cultures can be predicted. As a result, the singular objective may get affected.
- Lack of direct communications: In a JV, there can be chances of misunderstandings and miscommunication. Since two or more companies come together for a single purpose, it’s difficult to maintain direct communication among the employees of the separate companies.
This article has been a guide to what is Joint Ventures (JV) and its definition. Here we discuss how joint venture work along with examples and detailed explanation. You may also look at the following articles to learn more about M&A